What Is a Preferred Provider Organization (PPO)?
A preferred provider organization (PPO) is a health insurance plan for individuals and families. PPOs involve networks that are made up of contracted medical professionals and health insurance companies. Healthcare facilities and practitioners, known as preferred providers, offer services to the insurer's plan policyholders at reduced rates. Plan participants receive the maximum PPO benefit when they visit in-network healthcare professionals and are also offered coverage when they see out-of-network providers.
Key Takeaways
- A preferred provider organization is a type of managed-care health insurance plan
- PPO medical and healthcare providers are called preferred providers
- The costs associated with PPOs include higher insurance premiums, copays, and deductibles
- Choosing between a PPO and an HMO generally involves weighing one's desire for greater accessibility to doctors and services versus the cost of the plan
- PPO plans are more comprehensive in coverage and offer a wider range of providers and services than HMOs
How Preferred Provider Organizations (PPOs) Work
A preferred provider organization is a managed-care network consisting of medical professionals and facilities—such as primary and specialty physicians, hospitals, and other healthcare professionals—who contract with insurance providers to render services to subscribed participants. These are plan participants or consumers who are covered by the insurer's healthcare plan.
Plans negotiate fees and schedules for services with healthcare professionals and facilities. As such, 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.
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. Subscribers may go out of network for coverage but it often comes at a higher cost.
PPOs may be sponsored by a particular insurance company, one or more employers, or some other type of organization.
The Costs of a PPO Plan
There are a number of costs associated with PPOs, and premiums tend to be higher than other types of insurance plans. PPO plans tend to charge higher premiums because they are costlier to administer and manage. Participants are generally responsible for copayments, which are paid directly to the provider at each visit. There are also deductibles that patients must meet before the plans start kicking in and paying claims in full.
As noted above, plan participants are also allowed to visit out-of-network facilities, usually at a higher cost. These charges are based on a reasonable and customary fee schedule. If those claims made by these healthcare providers exceed the reasonable and customary fees for services rendered, coverage may not apply or, most commonly, the excess charge is passed on to the patient.
One important point to note is the degree of flexibility associated with the higher cost of PPOs. These plans offer more options than others available on the market. PPO networks are typically large, with providers in many cities and states. Choosing a provider or accessing one in urgent situations provides value to participants.
Most health insurance plans are serviced through a PPO or an HMO. Other arrangements include exclusive provider organization (EPOs), which are a managed-care plan where services are covered only if you use doctors, specialists, or hospitals in the plan’s network (except in an emergency). Point of service (POS) plans involve lower fees for using providers that belong to the plan’s network. POS participants can go out of network but need referrals to see a specialist.
Preferred Provider Organization (PPO) vs. Health Maintenance Organization (HMO)
In contrast to PPOs, health maintenance organization (HMO) plans require participants to receive healthcare services from an assigned provider. This is a primary care doctor who coordinates the insured's care. Both programs allow the insured to seek specialist care but under an HMO plan, the designated primary care physician must provide a referral to a specialist.
As noted above, PPO plans charge higher premiums than almost every other plan for the convenience, accessibility, and freedom they offer. This includes a wider choice of hospitals and doctors. Plans with the lowest/fewest out-of-pocket expenses, such as those with low deductibles and low copayments, 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.
PPO plans come with more comprehensive coverage, including many services that other managed-care programs might exclude or for which they would charge an additional premium.
PPO plans have historically been the preferred choice among employer group participants. However, today, participants want more options for managed healthcare. Therefore, many employers offer HMO plansas 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. You often 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.
The costs for coinsurance and deductibles can be different for in-network and out-of-network providers and services. 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?
The biggest difference between PPO and POS plans is generally 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 than POS plans—the premiums are higher and they usually come with deductibles that must be met before your coverage begins.
The Bottom Line
A preferred provider organization (PPO) is a type of managed-care health insurance plan. PPO plan 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.
PPO plans are more comprehensive in their coverage and offer a wider range of providers and services than HMOs. However, the costs associated with PPOs include higher insurance premiums, copays, and deductibles. Choosing between a PPO and an HMO generally involves weighing one's desire for greater accessibility to doctors and services versus the cost of the plan.
