A preferred provider organization (PPO) is a type of health care plan that offers lower out-of-pocket costs to members who use doctors and other providers who are part of the plan’s network.
These preferred providers have signed onto the network at a lower negotiated rate than they might charge outside of the network.
PPOs also offer members the flexibility to see providers outside of the plan’s network, although they will most likely pay more in out-of-pocket costs to do so.
To learn more about PPOs, and how this type of plan compares to other health insurance options, read on.
How Does PPO Insurance Work?
When you join a PPO health plan, you’re joining a managed care network that includes primary care doctors, specialists, hospitals, labs, and other healthcare professionals. PPO networks tend to be large and geographically diverse.
If you see a preferred provider, you will likely pay a copay, or you might be responsible for a coinsurance payment (after you meet the plan’s deductible).
While you are free to see any health care provider whether or not they are in the PPO network, if you see a provider outside of the network, you may pay significantly more in out-of-pocket costs.
In return for flexibility, large networks, and low in-network cost sharing, PPO plans typically charge higher premiums than many other types of plans.
PPOs are a common, and often a popular, choice for employer-sponsored health insurance.
What are the Costs of Going Out of the PPO’s Network?
If you see a provider who is not part of the plan’s network, you will likely be expected to bear more of the cost. PPOs typically use what’s called a “usual, customary and reasonable” (UCR) fee schedule for out-of-network services.
Insurers calculate UCR fees based on what doctors in the area are charging for the same service you were provided.
If your doctor charges more than what your insurance company determines to be usual, customary, and reasonable, you most likely will be charged for the difference between the amount charged for the service and the amount covered by your insurer.
Depending on where you live and the service you received, this difference could be significant. It may also come as a surprise to policyholders who assume their medical costs will be covered and don’t fully understand the distinction between in-network and out-of-network providers.
A good way to avoid surprise charges with a PPO (or any health plan) is to talk to your provider and your insurer before you receive treatment about the total cost and what will be covered.
How PPOs Compare to Other Types of Health Care Plans
PPO plans are most often compared with health maintenance organizations (HMOs), another common type of managed care health plan.
HMOs typically offer lower premiums and out-of-pocket costs than PPOs in exchange for less flexibility.
Unlike a PPO, HMO members typically must choose a primary care physician from the plan’s network of providers. Care from providers out of the HMO network is generally not covered, except in the case of an emergency.
Also unlike a PPO, an HMO’s network of providers is usually confined to a specific local geographic area.
Another key difference between these two types of plans: HMO members typically must first see their primary care doctor to get a referral to a specialist. With PPOs, referrals are not usually required.
PPOs are also often compared to point of service (POS) plans.
POS plans are generally a cross between an HMO and a PPO. As with a PPO, POS members generally pay less for care from network providers, but may also go out of network if they desire (and potentially pay more).
Like an HMO, POS plans require a referral from your primary care doctor to see a specialist.
PPOs (as well as HMOs and POS plans) are very different from high deductible health plans, or HDHPs.
HDHPs charge a high deductible (what you would have to pay for health care costs before insurance coverage kicks in).
This means that you would need to pay for all of your doctor visits and other medical services out of pocket until you meet this high deductible. In return for higher deductibles, these plans usually charge lower premiums then other insurance plans.
You can combine a HDHP with a tax-advantaged health savings account (HSA). Money saved in an HSA can be used to pay for qualified medical expenses.
HDHPs are generally best for relatively healthy people who don’t see doctors frequently or anticipate high medical costs for the coming year.
What are the Pros and Cons of PPO Insurance?
As with all health insurance options. PPOs have both advantages and disadvantages. Here are a few to consider.
Advantages of PPOs
• Flexibility. PPO members typically do not have to see a primary care physician for referrals to other health care providers, and they may see any doctor they choose (though they may pay more for out-of-network providers).
• Lower costs for in-network care. Out-of-pocket costs, such as copays and coinsurance, for care from in-network providers can be lower than some other types of plans.
• Large provider networks. PPOs usually include a large number of doctors, specialists, hospitals, labs, and other providers in their networks, spanning across cities and states. As a result, network coverage while traveling or for college student dependents can be easier to access than with more restricted plans.
Disadvantages of PPOs
• High premiums. In return for flexibility, PPO members can expect to pay higher monthly premiums than they may find with other types of plans.
• High out-of-pocket costs for out-of-network care. Depending on where you live, the treatment you receive, and how your insurer calculates “usual, customary and reasonable” fees, you may find you are responsible for a large portion of the bill when you receive care outside of the PPOs network.
• Might be more insurance than you need. If you rarely see doctors and wouldn’t mind potentially switching doctors, you may be able to save money by going with an HMO or a HDHP.
PPOs are a popular type of health plan because of the flexibility, ease of use, and wide range of provider choices they offer.
Patients with a chronic disease or other illness who have a close relationship with their doctors and specialists may find a PPO is the most appealing choice because they can likely continue to see their current doctors.
PPO networks tend to be large and varied enough to include a patient’s existing doctors. If not, members still have the option of going out-of-network and receiving at least some coverage from a PPO.
PPO members pay for this flexibility, however. PPOs typically come with higher premiums, along with extra costs associated with out-of-network care. That can be prohibitive for many consumers.
Your employer’s benefits department or an experienced insurance agent or broker can help you compare PPOs to other types of health care plans and determine which choice is right for your health care needs and your budget.
Before choosing a plan, it can also be helpful to track your spending for a few months to see how much you are currently spending on medical care. This can help you ballpark costs for the coming year and make it easier to compare plans.
You can do this by saving all of your medical receipts and logging them with pen and paper. Or, you could use a budgeting app, such as SoFi Relay.
SoFi Relay allows you to see all of your accounts on one mobile dashboard and makes it easy to categorize and track your medical (and all your other) monthly spending.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.