What is 'Preferred Provider Organization (PPO)'

A preferred provider organization (PPO) is a medical care arrangement in which medical professionals and facilities provide services to subscribed clients at reduced rates. PPO medical and healthcare providers are called preferred providers. 

BREAKING DOWN 'Preferred Provider Organization (PPO)'

Most health insurance plans are serviced through either a preferred provider organization (PPO) or a health management organization (HMO). PPO participants are free to utilize the services of any provider within their network. Out-of-network care is available but will result in higher costs to the insured. 

In contrast to a PPO, HMO plans require participants to receive medical care services from an assigned provider. Both programs allow for specialist services. However, the designated primary care physician must provide a referral to the specialist under an HMO plan. PPO plans are the oldest and, due to their flexibility and lower out-of-pocket costs, the most popular managed healthcare plan as of 2017. 

How a Preferred Provider Organization Works

A preferred provider organization is a managed-care organization 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 services at an agreed upon reduced rate. In exchange for reduced rates, insurers pay the PPO a fee to access the network of providers.

Providers and insurers negotiate fees and schedules for services. A reasonable and customary fee schedule is used for out-of-network claims. If out-of-network 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 subscribers typically pay a co-payment per provider visit, or they must meet a deductible before insurance covers or pays the claim.

PPO plans tend to charge higher premiums because they are costlier to administer and manage. However, they offer more flexibility compared to alternatives 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. The convenience, accessibility, and freedom that PPO plans offer are trade-offs for the additional premium charged. Plans with the least 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. 

Alternatively, lower premium plans translate into higher out-of-pocket costs for the insured and lower costs for the insurer. PPO plans are also more comprehensive regarding the coverage, including many services that other managed care programs might exclude or for which they would charge an additional premium.

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

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