Preferred Provider Organization (PPO): Definition & Overview

Instructor: Yolanda Williams

Yolanda has taught college Psychology and Ethics, and has a doctorate of philosophy in counselor education and supervision.

A preferred provider organization (PPO) is a specific type of health insurance plan that contracts with medical providers. We'll use an example of a patient with a PPO plan to learn what these plans cover - and what they don't.

Definition

A preferred provider organization (PPO) is a group of doctors, hospitals, and other health care professionals that an insurance company has a contractual agreement with to provide health care services at a reduced rate to policyholders. The health care professionals that make up a PPO are usually called preferred providers and are considered in-network. Health care professionals that are not a part of the PPO are considered out-of-network. A PPO is a type of health insurance that is used to help cover the cost of medical treatment.

Some PPO plans require you to select a primary care physician (PCP) from your list of preferred providers. Your PCP is responsible for coordinating your health care needs. Plans with PCPs also require you to get a referral from your PCP in order to been seen by a specialist. However, most PPO plans do not require you to select a PCP. This means that you have the ability to seek treatment from any of the doctors that are in your network, including specialists.

What Expenses Do PPOs Cover?

Lucas was on a motorcycle when he fell off and hurt his leg. It's a good thing that Lucas has PPO coverage and managed to find an in-network physician close by. Unlike with some other health insurance plans, Lucas does not have to pay for any of his medical care until he receives it (as opposed to having to pay in advance). Lucas is responsible for paying four things with his PPO coverage: a premium, deductible, coinsurance, and copayments.

The premium is a fixed amount of money that the insurance company charges for coverage. The amount of Lucas's premium is $150 a month. His employer pays for his premium, so Lucas doesn't have to worry about paying it.

The copayment is a set fee that you have to pay the medical provider for a covered medical service. Copayments are also referred to as copays. The amount of the copay varies, depending upon the medical service received. Lucas has a $15 copay for each visit to an in-network physician's office. In this scenario, all Lucas has to pay is $15 for his time with the doctor. It is important to note that copays do not count toward your deductible or your coinsurance. This means that if you receive a medical service that only requires a copay, you do not have to worry about paying coinsurance or a deductible.

The deductible is a fixed amount of money you are required to pay out of your own pocket toward certain medical expenses before your PPO plan will start paying your medical expenses. Lucas's plan has a $150 deductible. While Lucas was at his appointment, his doctor took some x-rays, took a sample of Lucas's blood to be sent to a laboratory, and put on a leg cast. These expenses are separate from the time he spends with the doctor, which is covered by the copay. Lucas has to pay for the first $150 of the cost of his x-rays, lab work, and cast; then his PPO plan benefits will start to kick in.

The coinsurance is the percentage of your medical costs that you are responsible for after you've paid your deductible. Lucas's coinsurance is 10 percent. Lucas was charged $950 for his x-rays, lab work, and cast. In addition to his $150 deductible, Lucas also has to pay 10 percent of the remaining balance, which is $80. Lucas leaves his doctor's office with a total bill for $230 (plus an additional $15 for the copay, which he pays at the time of the visit), but feeling tons better!

Lucas also has an out-of-pocket maximum, which is the maximum amount of money Lucas has to spend on medical expenses each calendar year before his PPO plan will pay for all of his remaining medical expenses. Lucas's out-of-pocket maximum is $3,000. Once Lucas has spent $3,000 on his medical expenses in a year, he will not have to pay for any additional medical expenses. His insurance company will pay for any additional medical treatment that Lucas may need.

It is important to note that some PPOs only have copays, while others only have deductibles and coinsurance. All PPOs have an out-of-pocket maximum.

Out-of-Network Providers

If Lucas had received treatment for his injury from a provider that was not in his network, his portion of his expenses would have been higher. Whenever you receive treatment from an out-of-network-provider, your copay, deductible, coinsurance, and out-of-pocket maximum increase substantially.

Suppose Lucas had received treatment from an out-of-network physician. His copayment may have been $50, his deductible $1,000, his co-insurance 30 percent, and his out-of-pocket maximum $10,000. Lucas would have been responsible for the full $950 bill, plus a $50 copay. That's a lot of money!

Advantages and Disadvantages of PPO Plans

The benefits of choosing a PPO plan can include:

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