Preferred Provider Organization (PPO)

Preferred provider organization is a term reserved for one specific model of health insurance run as a managed care organization. Under this model, physicians, hospitals, and other healthcare providers (i.e., dentists, nurses, physical therapists, occupational therapists) have partnered with an insurer or third-party administrator to provide care at low rates to clients who are part of the insurance or administrators network. PPO is one of the main modes of how health insurance can be delivered. The others include health maintenance organizations (HMOs), indemnity insurance, and fee-for-service systems.

In the ideal practice, PPOs operate to mutually benefit all parties involved in the health system including the provider, insured patient, and the insurance company or PPO itself. The insurer benefits by being billed at a reduced rate when using providers within the network. The “preferred” or in-network health provider will benefit from an increase in business. The PPO can financially benefit from charging fees to access the use of their network. Mainly, the PPOs are able to deliver reduced rates to their insured patients by negotiating with providers a set fee schedule. In addition, PPOs often can be found contracting with other PPOs to maintain their business position in a specific geographic location.

PPOs are unique in their operation when compared to other forms of health insurance delivery. PPOs are different than HMOs in that insured individuals under the PPO plan can be reimbursed, although it is likely to be less, for the use of nonpreferred providers outside of the network. In the case of an HMO, insured individuals receive little to no benefit from their health plan for using healthcare providers who do not participate in the HMO's plan. Emergency cases tend to be the exception in both cases, however.

[Page 1411]PPOs bring to healthcare several mechanisms to ensure that costs are kept at bay. Utilization review is one feature that allows the insurance company the ability to review medical records of treatments to ensure their providers are providing an appropriate level of care for the insured patients without any excess treatment. While the utilization review often consists of administrators of the insurance company, providers and insured patients often find this additional layer of administration to be troublesome. Another mechanism PPOs employ to reduce costs is the precertification requirement. Under the precertification requirement, all nonemergency hospital admissions or similar care such as outpatient surgery must be approved by the insurer in advance.

While PPOs provide one method for delivering care, it also contributes to the complex and highly variable environment of healthcare delivery in the United States. Whether PPOs provide a cost-effective mode of delivering care or add additional layers of paperwork to the process of accessing care remains to be seen.