Preferred Provider Organization (PPO)

What Is a Preferred Provider Organization (PPO)?

A preferred provider organization (PPO) is a medical care arrangement between medical professionals and health insurance companies. Known as "preferred providers," the healthcare facilities and practitioners offer services to the insurer's plan policyholders at reduced rates. While PPOs provide maximum benefits if you visit an in-network physician or provider, they do offer coverage for out-of-network providers.  

How a Preferred Provider Organization (PPO) Works

A PPO is a managed-care network consisting of medical professionals and facilities such as primary and specialty physicians, hospitals, and other healthcare professionals. These professionals contract with the insurance provider to render subscribed participants — that is, consumers covered by the insurer's healthcare plan — services. They negotiate fees and schedules for services and the agreed-upon rate is typically lower than their usual charges. In exchange for reduced rates, insurers pay the PPO a fee to access the network of providers.

PPOs may be sponsored by a particular insurance company, one or more employers, or some other type of organization.

PPO subscribers — the insured — typically pay a co-payment per provider visit, or they must meet a deductible before insurance covers or pays the claim.

PPO participants are free to use the services of any provider within their network. They are encouraged, but not required, to name a primary care physician, and don't need referrals to visit a specialist.

Usually, they can go out-of-network as well — but it generally costs more. A reasonable and customary fee schedule is used for out-of-network claims. If those claims exceed the reasonable and customary fees for services rendered, coverage may not apply or, most commonly, the excess charge will be the responsibility of the patient.

PPO plans tend to charge higher premiums because they are costlier to administer and manage. However, they offer more options than other plans. PPO networks are large, with providers in many cities and states. The flexibility in choosing a provider or accessing a provider in urgent situations provides value to participants.

PPO vs. HMO

In contrast to PPOs, health maintenance organization (HMO) plans require participants to receive healthcare services from an assigned provider — a primary care doctor who coordinates the insured's care. Both programs allow the insured to seek specialist care. However, under an HMO plan, the designated primary care physician must provide a referral to a specialist.

PPO plans charge higher premiums than HMOs for the convenience, accessibility, and freedom that PPOs offer, such as a wider choice of hospitals and doctors. Plans with the lowest/fewest out-of-pocket expenses, such as those with low deductibles and low co-payments, have higher premiums. The elevated premium cost is due to the insurer absorbing more of the associated costs. Conversely, lower-premium alternatives translate into higher out-of-pocket costs for the insured and lower costs for the insurer.

Most health insurance plans are serviced through either a preferred provider organization (PPO) or a health maintenance organization (HMO). Other arrangements include:

PPO plans are also more comprehensive regarding coverage, including many services that other managed-care programs might exclude or for which they would charge an additional premium.

Historically, PPO plans have been the preferred choice among employer group participants. However, today, participants want more options for managed healthcare. Therefore, many employers offer HMO plans, as well. Because HMO premiums are less expensive, some participants favor HMO plans for their affordability, although services and freedoms typically associated with PPO plans are often restricted.

How Do PPO Deductibles Work?

A health insurance deductible is an amount you must pay out of pocket for medical services each year; after you've met it, your insurance coverage kicks in. PPO plans may have two different annual deductibles. One applies to providers in the PPO network, the other — usually a larger sum — to providers outside the network. The latter is larger because the PPO wants to encourage you to stay in network, using its preferred providers.

What Are Disadvantages of PPO Plans?

PPO plans tend to be more expensive than other managed-care options. They typically have higher monthly premiums and out-of-pocket costs, like deductibles. Often you have both coinsurance and copays. This is the tradeoff for the flexibility PPOs provide, of letting you use providers both within and outside the PPO system, without needing referrals.

Also, the costs for coinsurance and deductibles can be different for in-network and out-of-network providers and services; keeping track of this two-tiered system can be tricky.

Finally, some may find it onerous to have more responsibility for managing and coordinating their own care without a primary care doctor.

What Is the Difference Between a PPO and a POS?

In general, the biggest difference between PPO and POS plans is flexibility. Both plans cover you whether you use providers and facilities in or out of the network. However, a POS requires you to have a primary care physician and get referrals from them if you want to see a specialist or anyone else. PPOs don't.

Costs are another consideration. PPOs tend to be more expensive overall than POS: Their premiums are higher, and they usually come with deductibles that must be met before your coverage begins.