| Definition: |
A preferred provider organization (PPO), also sometimes known as a participating provider organization, is a managed care organization of medical doctors, hospitals, and other health care providers who have contracted with an insurer or a third party administrator to provide health care at reduced rates to the insurer's or administrator's clients. |
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| Overview: |
The concept behind a PPO is that the providers will provide the insured members of the group a substantial discount below their regularly charged rates. In theory, this will be mutually beneficial as the insurer will be billed at a reduced rate when its insured utilize the services of the "preferred" provider and the provider will see an increase in its business as almost all insureds in the organization will use only providers who are members. |
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| The insured should also benefit, as lower costs to the insurer should result in lower rates of increase in premiums. PPOs earn money by charging an access fee to the insurance company for the use of their network. They negotiate with providers to set fee schedules, and handle disputes between insurers and providers. PPOs can also contract with one another to strengthen their position in certain geographic areas without forming new relationships directly with providers. |
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| Members may seek care form nonparticipating providers, but generally are financially penalized for doing so by the loss of the discount and subjection to copayments and deductibles. The services may be furnished at discounted rates and the insured population may incur out of pocket expenses for covered services received outside the PPO if the outside charge exceeds the PPO payment rate. |
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| A PPO can also be a legal entity or it may be a function of an already formed health plan. The entity may have a health benefit plan that is also referred to as a PPO. PPOs are a common method of managing care while still paying for services through an indemnity plan. Most PPO plans are POS plans, in that they will pay a higher percentage for care provided by providers in the network. Many insurers will offer PPOs as well as HMOs. PPOs generally will offer more choices for the patient and will provide higher reimbursement to the providers. |
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| Other Features: |
PPOs normally include utilization review, where representatives of the insurer or administrator review the records of treatments provided to verify that they are appropriate for the condition being treated rather than largely or solely being performed to increase the amount of reimbursement due. Many providers view this procedure second guessing and resent it. |
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| Another almost universal feature is a precertification requirement where scheduled (nonemergency) hospital admissions and, in some cases outpatient surgery, must have prior approval of the insurer and often undergo "utilization review" in advance. |
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| Popularity of PPOs: |
The rise of PPOs was credited by some with a reduction in the rate of medical inflation in the U.S. in the 1990s. Most providers have become members of the major PPO organizations which are sponsored by major insurers and administrators. Many of the competitive advantages of the PPO have largely been reduced or almost entirely eliminated; arguably, as a result of medical inflation in the U.S. advancing at 150 to 200% the rate of general inflation. |
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| There are now passive PPOs which obtain discounts for insurance companies on indemnity and out of network claims and often take as their fee a portion of the discount obtained. The aspects of utilization review and precertification are now widely used even in traditional indemnity plans, and are widely regarded as being essentially permanent features of the American Health Care System. |
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| PPOs can also create inefficiencies and ironies in the health care industry. They often require insurers to pay a claim within a certain timeframe in order to take the PPO discount, calculating the PPO discount, and having the insurer pay the PPO's access fee is still one more step. Another opportunity for mistakes and delays in the already complex process of paying for health care in the United States. |
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Typically PPOs have more power in their relationship with providers, so they can still provide a benefit to insured patients. |
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| Related Links: |
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| American Association for Preferred Provider Organizations |
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| Kiplinger: Preferred Provider Organizations |
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| Wikipedia: PPO |
