Understanding Preferred Provider Organizations (PPO)


Preferred provider organizations (PPOs) health plans which cover services at one rate for in-network providers and another rate for services procured out-of-network. They are designed to combine the cost controls of a health management organization with the freedom of more traditional insurance policies.

Preferred provider organizations involve a network of health care providers such as hospitals, physicians, pharmacies, and other health care professionals, who agree to provide services to plan members at a discounted rate in exchange for the business they receive from in-network referrals. Service providers may often agree to certain cost-saving measures, such as referring patients to in-network providers, prescribing generic medications, and encouraging low-cost treatment options before pursuing more costly options, whenever practical. In this respect, PPOs are similar to HMOs.

Preferred provider organizations, like HMOs, may also require patients to name an in-network primary care physician to provide wellness and other routine care, as well as referring patients to appropriate specialists as necessary. The PPO, however, allows patients to accept care from out-of-network providers if they feel the care is worth the cost of a lower coverage rate.


Advantages of a Preferred Provider Organization Plan

-- Preferred provider organizations will cover health care expenses incurred at providers not included in the insurance companies’ network. While the PPO will not pay as large a share of these costs as they would for in-network providers, it means that a PPO member who becomes ill while visiting relatives or on vacation will probably still have some coverage.

-- PPO Patients who seek a second opinion from out-of-network providers are still partially covered under a preferred provider organization.


-- Preferred provider patients in isolated areas will be at least partially insured if they must seek treatment from a specialist who is not part of the PPO network. Some PPOs which specialize in covering patients in very isolated areas may even approve in-network coverage rates for specialists if the patient’s primary care physician refers the patient to that health care provider and the patient is able to demonstrate that travel to the nearest in-network specialist in that area would severely interfere with the effectiveness of treatment or the health of the patient.

Disadvantages of a Preferred Provider Organization Plan

-- Premiums for PPO plans are often a little higher than those of HMOs. This is due in part to the fact that the cost controls imposed by an HMO are stricter than those of a PPO and in part to the increased cost of processing and paying claims at different rates and on uncontrolled fees for out-of-network providers.

-- Preferred provider organizations have networks which are usually geographically limited. Patients who live near the border of their network’s market area may find that there are few doctors in that area from which to choose. Consumers who travel often may find themselves seeking care from out-of-network providers often enough that they save little or nothing over traditional insurance plans.