What Is a PPO and How Does It Work?

You've probably heard the term "PPO" with regards to health insurance. Maybe you're considering enrolling in one, either through your employer, through the 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 management, and whether a PPO will best fit your needs.

Understanding PPOs

PPO stands for preferred provider organization. PPOs got this name because they have lists of healthcare providers that they prefer you to use. If you get your health care from these preferred providers, you pay less.

PPOs are a type of managed care health insurance plan. Other types of managed care plans include health maintenance organizations, or HMOs, POS (point of service), and EPO (exclusive provider organization).

How Managed Health Care Plans Keep Costs Down

All managed care health plans have rules about how you have to get your health care. These include things like whether you have to stay in-network, whether you need a referral from a primary care provider, and whether you need prior authorizations for certain services.

If you don’t follow a managed care plan’s rules, it generally won't pay for that care. And if your managed care plan includes out-of-network coverage (like a PPO), you'll find that your out-of-pocket costs are higher if you choose to receive care outside the plan's provider network.

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 healthcare services to only things that are medically necessary or that make your healthcare costs lower in the long run, like preventive care.
• They limit where you can get healthcare services, and they negotiate discounts with providers in their network.

How a PPO Works

PPOs work in the following ways:

Cost-sharing: You pay part; the PPO pays part. Like virtually all types of health coverage, a PPO uses cost-sharing to help keep costs in check. When you see the healthcare provider or use healthcare 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 healthcare 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.

There are concerns, however, that even small cost-sharing can also be an obstacle that keeps some plan members from receiving necessary care. Some healthcare reform proponents have proposed transitioning to a system that does not have cost-sharing when medical care is received.

Thanks to the Affordable Care Act, non-grandfathered plans can’t require any cost-sharing for certain preventive services. This is true regardless of any other managed care rules or benefit design the plan might have.

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

No matter what type of managed care plan you have (as long as it's a non-grandfathered major medical health plan), your total cost-sharing for the year cannot be more than $9,450 in 2024 (or more than $9,200 in 2025). That's for a single person, and it assumes you stay in-network and follow the plan's rules for things like prior authorization, step therapy, etc.

(Note that out-of-pocket rules are different for Medicare. Original Medicare does not have a cap on out-of-pocket costs, but Medicare Advantage plans do. For services that would otherwise be covered by Medicare Part A and Part B, a Medicare Advantage plan's in-network out-of-pocket limit can't be more than $8,850 in 2024.)

Provider networks: If you use a PPO’s network of providers, you pay less. A PPO limits from whom or from where you receive healthcare services by using a network of healthcare providers with whom it has negotiated discounts.

A PPO’s network includes not just physicians and other healthcare providers, but every imaginable type of healthcare service like labs, X-ray facilities, physical therapists, medical equipment providers, hospitals, and outpatient surgery centers.

It's important to understand that a PPO can have a broad network or a narrow network. If you pick a broad-network PPO, it should be fairly easy to stay in-network and get the lowest possible out-of-pocket costs. But if your PPO has a narrow network, you might find yourself going outside the network more often than you had planned.

The PPO provides an incentive for you to get your care from its network of providers by charging you a higher deductible and higher copays and/or coinsurance when you get your care out-of-network.

For example, you might have a $40 copay to see an in-network healthcare provider, but a 50% coinsurance charge for seeing an out-of-network healthcare provider. If the out-of-network practitioner 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 healthcare provider.

(And that's assuming your health plan agrees that the provider's charge is reasonable and customary. It's common to see a charge that's higher than the health plan's reasonable and customary amount. In that case, the health plan would pay 50% of what they consider a reasonable charge, and the patient would be left with the entire rest of the provider's bill.)

It's also common to see PPOs that require a deductible for all out-of-network services, meaning that the health plan won't start paying anything until you've met that deductible, which can be many thousands of dollars, depending on the plan. And the deductible for out-of-network care is typically at least two or three times as high as the deductible for in-network care.

The out-of-pocket maximum is usually at least twice as high if you're receiving care outside the network. In some cases, there's no out-of-pocket maximum at all for out-of-network care, meaning that the patient's charges can continue to grow, without a cap (the ACA's limits on out-of-pocket costs only apply to in-network costs).

Additionally, out-of-network providers can balance bill you after your PPO pays a portion of the claim, even if you've already paid the cost-sharing required by your health plan. This is because the out-of-network provider doesn't have a contract with your insurer and isn't required to accept the insurer's reimbursement rates as payment in full. As described above, this is what happens when the health plan's reasonable and customary amount is lower than the out-of-network provider's charges.

(Note that since 2022, the No Surprises Act has prohibited surprise balance billing in emergency situations, and in situations in which the patient seeks care at an in-network hospital but unknowingly receives services from an out-of-network provider while at the facility. However, balance billing is still allowed if the patient simply chooses to use an out-of-network provider. Balance billing is also allowed if the patient waives their protections under the No Surprises Act, which is allowed in some circumstances.)

Still, although you pay more when you use out-of-network healthcare providers, one of the perks of a PPO is that, when you use out-of-network providers, the PPO does contribute something toward the cost of those services (on some plans, this will only be the case if you've already met your out-of-network deductible). 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 unless it's an emergency situation.

Prior authorization: In many cases, a PPO will require you to get non-emergency services pre-authorized. Prior authorization is a way for a PPO to make sure it’s only paying for healthcare services that are really necessary, so the insurers might require you to get pre-authorization before you have expensive tests, procedures, or treatments.

If the PPO requires prior authorization and you don't get it, the PPO can reject your claim—even if the plan would otherwise have covered the service. So it's important to read your policy details to understand whether you need prior authorization before getting certain medical services.

PPOs differ on which tests, procedures, services, and treatments require pre-authorization. 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 healthcare provider 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 ensure 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.

No PCP requirement: Unlike HMOs, you aren't required to have a primary care physician (PCP) with a PPO. You're free to go directly to a specialist, without a referral from a PCP. Depending on the situation, though, 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.

A primary care physician can be a great resource for coordinating your medical care. So having one can be a good idea even if your health plan doesn't require it.

The Difference Between a PPO and Other Types of Health Insurance

Managed-care plans like HMOs, exclusive provider organizations (EPOs), and point-of-service (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 (PCP) to act as your gatekeeper, only allowing you to get healthcare services with a referral from your PCP; others don’t.

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

Prevalence of PPOs in Modern Insurance

In the individual/family Marketplace (health plans that people purchase for themselves, through the exchange/Marketplace), PPOs are much less common than they used to be. As of 2022, only about 14% of all Marketplace plans nationwide were PPOs.

But for employer-sponsored health plans, PPOs are still the most common option, and nearly half of workers with employer-sponsored health coverage were enrolled in PPOs as of 2023.

Among Medicare Advantage plans, 42% of all available plans in 2024 were local PPOs, while 1% were in regional PPOs (more than half of all available Medicare Advantage plans are HMOs).

Summary

A preferred provider organization, or PPO, is a type of managed health insurance plan. These plans do not require a member to get referrals from a primary care physician in order to see a specialist. And they will cover some of the cost of out-of-network care, assuming the member has met their out-of-network deductible (most out-of-network care will be subject to a deductible).

A PPO will generally give you the most flexibility in terms of the doctors, hospitals, and other medical providers you can use for your medical care. But the monthly premiums will tend to be higher than an HMO 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.