What is a 'Preferred Provider Organization – PPO'

A preferred provider organization (PPO) is a type of health insurance arrangement that allows plan participants relative freedom to choose the doctors and hospitals they want to visit. Obtaining services from doctors within the health insurance plan's network, called "preferred providers," results in lower fees for policyholders, but the premiums for PPOs are typically higher as a result.

BREAKING DOWN 'Preferred Provider Organization – PPO'

Most health insurance plans are serviced through either a PPO or a health management organization HMO. These plans form a network of doctors, hospitals, medical centers, specialists, labs and pharmacies all under contract with a specific managed care organization. PPO plans have been around the longest, and due to their flexibility and lower out-of-pocket costs, they are still the most popular as of 2016. However the number of HMO plans are increasing at a faster rate due to the fact they tend to charge lower premiums.

How a Preferred Provider Organization Works

Under a PPO, a managed care organization contracts with various health care providers to form a network of preferred providers that, when used by covered individuals, pays for the cost of care. PPOs have deductibles and co-pays, but as compared with HMO plans, they tend to be lower except in cases of out-of-network care.

With some plans, members do not need to choose a primary care physician (PCP). If they need specialized care or treatments, they do not usually need a referral from a PCP. However, for more extensive treatments of expensive care, such as an MRI or CAT scan, they may require prior approval from the PPO.

PPO plans tend to charge higher premiums because they are more expensive to set up and manage, and they offer more in terms of flexibility. They tend to be favored by individuals who are willing to pay a higher premium for the freedom of choosing their providers. For PPO plans with little or no deductibles, the premium payments can be very high. Members who prefer to pay lower premiums can choose a plan with higher deductibles. PPO plans are also considered more comprehensive in terms of the coverage, including many services that other managed care programs might exclude or charge additional premiums.

Historically, PPO plans have always been preferred due to their flexibility, but as health care costs and insurance costs increase, more employers are moving toward HMOs because they are more cost efficient. While PPO plans are offered in the individual market, cost-conscious consumers are increasingly willing to forgo flexibility for the lower premium cost of HMOs.

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