What Is a PPO & How Does It Work?

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Considering buying a PPO health insurance plan? Make sure it will suit your needs by understanding how it works. Already enrolled in a PPO? Understanding how it works will help you use your health insurance effectively and avoid expensive mistakes.

What’s a PPO?

PPO stands for preferred provider organization. PPOs got this name because they have lists of health care providers they prefer you get your health care from.

If you get your health care from these preferred providers, you pay less.

PPOs are a type of managed care health insurance plan like their distant cousins, HMOs. All  managed care health plans have rules about how you must get your health care. If you don’t follow a managed care plan’s rules about how to get your health care, 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.

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

  • They limit your health care services to only things that are medically necessary or that make your health care costs lower in the long run, like preventive care.
  • They limit who or where you can get health care services, and they negotiate discounts from the health care providers you’re allowed to receive health care from.

    How Does a PPO Work?

    • 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 health care 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 health care 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, PPOs can’t require any cost-sharing for preventive services.

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

    • If you use a PPO’s network of providers, you pay less.

      A PPO limits who or where you can get health care services by the use of a network of health care providers with whom it has negotiated discounts. A PPO’s network includes not just physicians, but every imaginable type of health care service like labs, x-ray facilities, physical therapists, medical equipment providers, hospitals, and out-patient surgery centers.

      The PPO provides an incentive for you to get your care from its network of providers by charging you higher copays 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 percent 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.

      Still, although you pay more when you use out-of-network health care 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.

    • You have to get services pre-authorized by the PPO.

       One of the ways a PPO makes sure it’s only paying for health care services that are really necessary is by requiring you to get pre-authorization before you have expensive tests, procedures, or treatments. If you don’t get permission from your PPO before you have these services done, the PPO won’t pay.

      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.

      Prior Authorization—Why to Beware

      What’s the Difference Between a PPO & Other Types of Health Insurance?

      Managed care plans like HMOs, EPOs and 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 to act as your gatekeeper, only allowing you to get health care services with a referral from your PCP; others don’t.

      Learn more about the differences between health plan types in, “HMO, PPO, EPO & POS—What’s the Difference & Which Is Best?

      Learn how to use your PPO wisely and get the most bang for your buck in "How To Get the Most From Your PPO."

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