What is a PPO and how does it work?

You may have heard the term “PPO” in reference to health insurance. Maybe you are considering enrolling through your employer, through a health insurance marketplace/exchange, or through Medicare Advantage. This article will help you understand what PPOs are, how they differ from other types of health plan administration, and whether a PPO is best for your needs.

Learn about PPOs

PPO stands for Preferred Provider Organization. PPOs get this name because they have a list of health care providers they want you to use. You’ll pay less if you get your health care from these preferred providers.

A PPO is a managed care health insurance plan, just like their distant relatives, health maintenance organizations, or HMOs. Other types of managed care plans include POS (Point of Service) and EPO (Exclusive Provider Organization).

How Managed Healthcare Plans Can Reduce Costs

All managed care plans have rules about how you must get your health care. These include whether you must stay in the network, whether you need a referral from your primary care provider, and whether you need prior authorization for certain services. If you don’t follow the rules of a managed care plan, it will either not pay for that care, or you’ll be penalized for having to pay for most of the care out of your own pocket.

Managed health care plans have these rules to keep health care costs in check. Rules generally do this in two main ways:

  • They limit your health care services to things that are medically necessary or can reduce your health care costs in the long run, such as preventive care.
  • They limit where you can get health care, and they negotiate discounts with providers in their network.

How PPOs work

PPO works in the following ways:

Cost-sharing: You pay a portion; the PPO pays a portion. Like almost all types of health insurance, PPOs use cost sharing to help control costs. When you see a health care provider or use health care services, you pay for some of the cost of those services yourself in the form of deductibles, coinsurance, and copays.

Cost-sharing is part of the PPO system to make sure you really need the health care you get. When you have to pay something for your care, even a small co-payment makes you less likely to use services you don’t need lightly (however, there are concerns that even a small cost-sharing could be a deterrent to some Barriers to plan members receiving services necessary for care; some health care reform proponents suggest transitioning to a system that does not share costs when they receive care).

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Due to the Affordable Care Act, non-grandfather plans cannot claim any cost-sharing for certain preventive services.

Cost-sharing helps offset the cost of your care. The more you pay for care, the less your health insurance plan pays and the lower your monthly premium costs.

Provider Network: You will pay less if you use the PPO’s provider network. A PPO restricts who or where you receive health care services by using a network of health care providers with which discounts are negotiated. The PPO’s network includes not only doctors and other healthcare providers, but every type of healthcare service imaginable, such as laboratories, X-ray facilities, physical therapists, medical equipment suppliers, hospitals, and ambulatory surgery centers.

It is important to understand that a PPO can have a broad network or a narrow network. If you choose a network-wide PPO, it should be fairly easy to stay within the network and get the lowest possible out-of-pocket costs. However, if you have a narrow PPO network, you may find yourself leaving the network more often than you planned.

PPOs charge you higher deductibles and higher copays and/or coinsurance when you get care out of network, thereby incentivizing you to get care from their network of providers.

For example, you might pay a $40 copay to see an in-network healthcare provider, but a 50% coinsurance to see an out-of-network healthcare provider. If an out-of-network practitioner charges $250 for the office visit, you’ll pay $125 instead of the $40 copay if you use an in-network health care provider. If you receive care out-of-network, the maximum out-of-pocket cost is usually at least double that. In some cases, out-of-network care has no cap on out-of-pocket costs at all, meaning that a patient’s costs can continue to grow without a cap (ACA’s limit on out-of-pocket costs applies only to -network costs).

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Also, out-of-network providers can bill you after your PPO pays part of your claim, even if you’ve already paid your health plan’s required share of the cost. This is because the out-of-network provider does not have a contract with your insurance company and is not required to accept the insurance company’s reimbursement rate as full payment.

(Please note that starting in 2022, the No Contingencies Act prohibits balance billing in emergencies and when a patient seeks care at an in-network hospital but unknowingly receives services from an out-of-network provider while in the hospital . However, if the patient simply chooses to use an out-of-network provider, balance billing is still allowed.)

Still, even though you pay more when you use an out-of-network healthcare provider, one of the benefits of a PPO is that it does contribute to the cost of those services when you use an out-of-network provider. This is one of the differences between PPO and HMO. If you get care out of network, HMO will not pay anything, except in an emergency.

Pre-authorization: In many cases, the PPO will require you to obtain pre-authorization for non-emergency services. Prior authorization is a way for a PPO to ensure that it only pays for health care services that are truly necessary, so insurance companies may ask you to get pre-authorization before expensive tests, procedures, or treatments. If the PPO requires prior authorization and you do not have it, the PPO can deny your claim. Therefore, it is important to read your policy details to find out if you need prior authorization before getting certain medical services.

PPOs vary in the tests, procedures, services, and treatments that require pre-authorization, but you should suspect that pre-authorization is required for anything that is expensive or that can be done more cheaply in a different way. For example, you can prescribe an older generic drug without prior authorization, but must get permission from your PPO to use an expensive brand-name drug for the same condition.

When you or your healthcare provider asks the PPO for preauthorization, the PPO may want to know why you need the test, service, or treatment. It’s basically trying to make sure you really need this kind of care, and there’s no more frugal way to achieve the same.

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For example, when your orthopedic surgeon asks for preauthorization for your knee surgery, your PPO may ask you to try physical therapy first. If your attempts at physical therapy do not resolve the problem, the PPO may go ahead and pre-authorize your knee surgery.

No PCP requirement: Unlike an HMO, you do not need a Primary Care Physician (PCP) for a PPO. You can go straight to a specialist without a PCP’s referral. However, depending on the situation, you may need prior authorization from your insurance company, so you’ll want to contact your PPO before making a medical appointment, just in case.

Differences between PPO and other types of health insurance

Managed care plans such as HMOs, exclusive provider organizations (EPOs), and point-of-service (POS) plans differ from PPOs and differ from each other in several ways. Some pay for out-of-network care; some don’t. Some share the lowest cost; others have large deductibles and require significant coinsurance and co-payments. Some require a Primary Care Physician (PCP) to act as your gatekeeper and only allow you to get health care through a PCP’s referral; others do not.

Also, PPOs are generally more expensive (for plans with comparable cost-sharing) because they give you more freedom of choice in the medical providers you can use.


A Preferred Provider Organization or PPO is a managed health insurance plan. These plans do not require members to obtain a referral from a primary care physician to see a specialist. And they will cover a portion of the cost of out-of-network care, assuming the member has reached the out-of-network deductible (most out-of-network care will be subject to the deductible).

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A PPO usually gives you the most flexibility in the doctors, hospitals, and other medical providers available to you for your medical care. But monthly premiums tend to be more restrictive than HMOs with similar cost-sharing. Depending on your circumstances, including medical needs and how often you travel outside your local area, a PPO may or may not make sense for you.