Definition
The term preferred provider organization, or PPO, is used to describe a medical plan that offers the insured the ability to choose their physician from a list of network providers. Unlike a point of service (POS) or health maintenance organization (HMO), a preferred provider organization does not require the insured to select a primary care physician.
Explanation
Preferred provider organizations offer the same level of services as other managed care plans, including general and preventative care, as well as wellness programs. Preferred provider organizations offer plan participants the flexibility of seeking medical assistance outside the PPO network of physicians.
The added flexibility of not choosing a primary care physician, and the ability to go out-of-network, makes the cost of a PPO higher relative to a POS or HMO.
In-network care typically requires a small copayment when medical services are rendered. When going out-of-network, the insured is usually responsible for paying both a deductible and a larger percentage of the medical services rendered, which is known as a coinsurance payment.
Example
Cynthia participates in a preferred provider organization through her employer. Cynthia tore the meniscus in her knee and decided she wanted to seek medical care out of network. The conditions of her plan state that she must first satisfy a $1,000 deductible. Her insurance company will then pay 70% of fees, leaving Cynthia with a 30% coinsurance payment.
The cost of the medical procedure was $10,000. Cynthia's out-of-pocket costs would be calculated as:
| $10,000 | Total Invoice |
| -$1,000 | Less: Deductible |
| $9,000 | Amount Subject to Coinsurance |
| -$2,700 | Less: Cynthia’s Obligation at 30% |
| -$6,300 | Less: Insurance Company’s Obligation |
| $0 | Remaining Balance |
In the above example, Cynthia's total out-of-pocket expense would be the $1,000 deductible plus the $2,700 coinsurance payment, or $3,700.
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