What Is a PPO and How Does It Work?

Young couple discussing medical paperwork
A preferred provider organization, or PPO, is a type of managed care plan that allows you to see both in-network and out-of-network providers, albeit with varying costs..

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Are you considering signing up for a PPO health insurance plan? Make sure it will suit your needs by understanding how it works. Are you already enrolled in a PPO? Understanding how it works will help you use your health insurance effectively and avoid expensive mistakes.

Understanding PPOs

PPO stands for preferred provider organization. PPOs got this name because they have lists of healthcare providers that they prefer you to use. If you get your healthcare from these preferred providers, you pay less.

PPOs are a type of managed care health insurance plan like their distant cousins, health maintenance organizations, or HMOs. Other types of managed care plans including POS (point of service) and EPO (exclusive provider organization).

How Managed Health Care Plans Keep Costs Down

All managed care health plans have rules about how you have to get your healthcare. These include things like whether you have to stay in-network, whether you need a referral from a primary care provider, and whether you need prior authorizations for certain services. If you don’t follow a managed care plan’s rules, it either won’t pay for that care, or you’ll be penalized by having to shoulder a greater portion of the cost of the care out of your own pocket.

Managed care health plans have these rules in order to keep healthcare costs in check. The rules generally do this in two main ways:

  • They limit your healthcare services to only things that are medically necessary or that make your healthcare costs lower in the long run, like preventive care.
  • They limit where you can get healthcare services, and they negotiate discounts with providers in their network.

How a PPO Works

PPOs work in the following ways:

Cost-sharing: You pay part; the PPO pays part. A PPO uses cost-sharing to help keep costs in check. When you see the doctor or use healthcare services, you pay for part of the cost of those services yourself in the form of deductibles, coinsurance, and copayments. Cost-sharing is part of a PPO’s system for making sure you really need the healthcare services you’re getting. When you have to pay something for your care, even a small copayment, you’re less likely to use unneeded services frivolously. However, thanks to the Affordable Care Act, non-grandfathered plans can’t require any cost-sharing for certain preventive services.

Cost-sharing helps offset the cost of your care. The more you pay toward the cost of your care, the less your health insurance plan pays, and the lower it can keep monthly premium charges.

Provider networks: If you use a PPO’s network of providers, you pay less. A PPO limits from whom or from where you receive healthcare services by the use of a network of healthcare providers with whom it has negotiated discounts. A PPO’s network includes not just physicians, but every imaginable type of healthcare service like labs, X-ray facilities, physical therapists, medical equipment providers, hospitals, and outpatient surgery centers.

The PPO provides an incentive for you to get your care from its network of providers by charging you a higher deductible and higher copays and/or coinsurance when you get your care out-of-network. For example, you might have a $40 copay to see an in-network physician, but a 50% coinsurance charge for seeing an out-of-network physician. If the out-of-network physician charges $250 for that office visit, you’ll pay $125 rather than the $40 copay you would have been charged if you’d used an in-network physician. And the out-of-pocket maximum is usually at least twice as high if you're receiving care outside the network. In some cases, there's no out-of-pocket maximum at all for out-of-network care, meaning that the patient's charges can continue to grow, without a cap (the ACA's limits on out-of-pocket costs only apply to in-network costs).

Additionally, out-of-network providers can balance bill you after your PPO pays a portion of the claim, even if you're already paid the cost-sharing required by your health plan since the out-of-network provider doesn't have a contract with your insurer and isn't required to accept the insurer's reimbursement rates as payment in full.

Still, although you pay more when you use out-of-network healthcare providers, one of the perks of a PPO is that, when you use out-of-network providers, the PPO at least contributes something toward the cost of those services. This is one of the ways a PPO differs from an HMO. An HMO won’t pay anything if you get your care out-of-network unless it's an emergency situation.

Prior authorization: In many cases, a PPO will require you to get non-emergency services pre-authorized. Prior authorization is a way for a PPO to make sure it’s only paying for healthcare services that are really necessary, so the insurers might require you to get pre-authorization before you have expensive tests, procedures, or treatments. If the PPO requires prior authorization and you don't get it, the PPO can reject your claim. So it's important to read the details of your policy in order to understand whether you need prior authorization before getting certain medical services.

PPOs differ on which tests, procedures, services, and treatments they require pre-authorization for, but you should suspect you’ll need pre-authorization for anything expensive or anything that can be accomplished more cheaply in a different manner. For example, you might be able to get prescriptions for older generic drugs filled without a pre-authorization but have to get your PPO’s permission for an expensive brand-name drug to treat the same condition.

When you or your doctor asks the PPO for pre-authorization, the PPO will probably want to know why you need that test, service, or treatment. It’s basically trying to make sure that you really need that care, and that there isn’t a more frugal way to accomplish the same goal. For example, when your orthopedic surgeon asks for pre-authorization for your knee surgery, your PPO might require you to try physical therapy first. If you try the physical therapy and it doesn’t fix the problem, then the PPO may go ahead and pre-authorize your knee surgery.

No PCP requirement: Unlike HMOs, you don't have to have a primary care physician (PCP) with a PPO. You're free to go directly to a specialist, without a referral from a PCP. Depending on the situation, though, you may need prior authorization from your insurance company, so you'll want to contact your PPO before making a medical appointment, just in case.

The Difference Between a PPO and Other Types of Health Insurance

Managed-care plans like HMOs, exclusive provider organizations (EPOs) and point-of-service (POS) plans differ from PPOs and from each other in several ways. Some pay for out-of-network care; some don't. Some have minimal cost-sharing; others have large deductibles and require significant coinsurance and copays. Some require a primary care physician (PCP) to act as your gatekeeper, only allowing you to get healthcare services with a referral from your PCP; others don’t. In addition, PPOs are generally more expensive because they give you more freedom of choice.

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Article Sources
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