What Is a Preferred Provider Organization (PPO)?

Preferred Provider Organization (PPO) Explained

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Updated on January 26, 2023

Fact checked by David Rubin

A patient and doctor talk. — Photo:
JGI/Tom Grill / Getty Images

Definition

A preferred provider organization (PPO) is a type of health insurance plan where a select group of hospitals, doctors, and clinics form a provider network and offer services at a reduced rate.

Key Takeaways

A PPO is one kind of health insurance plan in which a select group of hospitals, doctors, and clinics offer their services at a reduced rate to members.
PPOs have high deductibles and copays but offer more flexibility to choose between providers.
PPOs also offer access to chiropractors, acupuncture therapy, and other health care services not typically covered by insurance.
PPOs don’t require you to choose a primary care doctor or get a referral to see a specialist.

How a PPO Plan Works

With a PPO plan, health insurance companies have an agreement with health care providers such as hospitals, clinics, and physicians. When you sign up for a PPO policy, you can choose between these in-house providers to gain access to a network of qualified providers offering discounted services.

Such a plan creates a win-win situation for both the hospitals and the patient. The insurance provider sends more customers to the in-network hospitals, and the customers receive more affordable treatment.

Note

A PPO plan doesn’t force you to see specific health care providers. You receive a discounted rate when consulting in-network providers, but you are still welcome to consult external providers at regular rates.

Most PPO plans have a deductible, which is a yearly fixed payment you make for health care services covered until your plan starts offering cost-sharing benefits. For example, if you choose a PPO plan with a $1,000 deductible, you pay for medical expenses until the bill reaches $1,000. After this, you begin sharing the costs with your insurer.

This type of cost-sharing is known as coinsurance. Once you’ve reached your deductible amount, your insurer starts paying a fixed percentage of your medical bills depending on your plan. Many insurers pay about 70%-80% of the costs, but this can vary depending on your agreement with the insurance provider.

PPO plans also vary by the copay they offer. Copay refers to the flat fee you pay out of pocket to see a doctor, fill a prescription, or see any other health care provider. It’s the expense covered by you as a policyholder, while the remaining amount is paid by your insurance provider.

Pros and Cons of a PPO

Pros

In-network providers offer discounted rates
Can choose between a wide network of providers
Offers coverage for a broader range of services beyond physician consultations

Cons

Have higher deductibles and copays, making them more expensive
Pay more out of pocket if you visit an out-of-network provider
Spend more time handling paperwork and managing expenses between in-network and external providers

Pros Explained

Discounted treatment: PPOs help you access a wide range of treatment options at discounted rates when you work with their in-network providers.
Flexibility: You can choose between several hospitals, clinics, physicians, and other health care providers within and even beyond the network.
Broader coverage: PPOs offer more than just health checkups and medical treatments. You can get access to chiropractors, acupuncture therapy, and other health care services not typically offered by other insurance plans.

Cons Explained

Expensive: PPOs tend to have larger deductibles and copays, making them more expensive than other types of insurance plans. For example, the average deductible is $1,204, so you have to pay more than $1,000 out of pocket before your insurer offers any benefits.
Higher out-of-network costs: While you can choose to see any health care provider, you will have larger expenses if you pick an out-of-network provider. This can force you to work with in-network doctors if you have a tight budget.
More paperwork and budgeting: As PPOs offer different pricing for in-network and out-of-network providers, you have to handle extra paperwork and budgeting to calculate your medical bill expenses.

PPO vs. HMO: Which Is Better?

PPOs and HMOs (health maintenance organization) are among the most common types of insurance plans. Here’s a breakdown of the differences between the two.

PPO	HMO
Has higher monthly premiums than most other plans	Has higher deductibles but lower monthly premiums
Covers out-of-network providers at a higher cost	Does not cover out-of-network providers
Don’t need to choose a primary care doctor, nor do you need a referral	Choose a primary care doctor and get a referral to see a specialist

PPO

Higher premiums for more choice: A PPO has higher monthly premiums, but this offers you more flexibility and broader coverage.
Work with any provider: PPOs let you work with any health care provider irrespective of whether they’re a part of the insurer’s network. Although, out-of-network care is more expensive.
No primary care doctor or referral: PPOs make seeking care easier as you don’t have to choose a primary care doctor, nor do you need a referral to see any type of specialist.

HMO

Lower premiums: HMOs offer lower monthly premiums but tend to have higher deductibles.
Only in-network coverage: HMOs don’t cover out-of-network care unless it’s an emergency. This means you have to choose an in-network provider if you want to receive benefits.
Require a primary care doctor: HMOs require you to pick a primary care doctor who provides referrals to see a specialist.

Frequently Asked Questions (FAQs)

Which is better, an HMO or a PPO?

An HMO may be the better option if you rarely use the doctor or don’t mind having limited choices in providers. HMOs typically have lower costs than PPOs, in exchange for less flexibility and higher deductibles. On the other hand, if you expect to easily meet your deductible, require frequent visits to the doctor, or will need to see doctors out of network, a PPO plan will likely be the best option.

What does “PPO” stand for?

“PPO” stands for “preferred provider organization.” In a PPO, the health insurance company has an agreement with certain providers—physicians, clinics, hospitals, and specialists—that offer their services at a reduced rate. You can still see providers out of network with a PPO, but it will come at an increased cost.

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Sources

The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.

Healthcare.gov. “Preferred Provider Organization (PPO).”
Aetna. “Explaining Premiums, Deductibles, Coinsurance and Copays.”
SHRM. “Average Worker Paid $5,588 Out of Pocket for Family Health Coverage This Year.”
Healthcare.gov. “Health Maintenance Organization (HMO).”