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What is a Preferred Provider Organization?

In health insurance, a preferred provider organization (or “PPO”, sometimes referred to as a participating provider organization) is a managed care organization of medical doctors, hospitals, and other health care providers who have covenanted with an insurer or a third-party administrator to provide health care at reduced rates to the insurer’s or administrator’s clients.

The idea of a preferred provider organization is that the providers will provide the insured members of the group a substantial discount below their regularly-charged rates. This will be mutually beneficial in theory, 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. Even the insured should benefit, as lower costs to the insurer should result in lower rates of increase in premiums. Preferred provider organizations themselves 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.

Other features of a preferred provider organization generally 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, a procedure that many providers resent as second-guessing. Another near-universal feature is a pre-certification requirement, in which scheduled (non-emergency) hospital admissions and, in some instances outpatient surgery as well, must have prior approval of the insurer and often undergo “utilization review” in advance. The rise of PPOs was credited by some [with a reduction in the rate of medical inflation in the U.S. in the 1990s. However, as most providers have become members of most of the major preferred provider organizations sponsored by major insurers and administrators, the competitive advantages outlined above have largely been reduced or almost entirely eliminated, and medical inflation in the U.S. is again advancing at 150–200% the rate of general inflation. Furthermore, passive PPOs are now a part of the marketplace. These PPOs 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 pre-certification are now widely used even in traditional “indemnity” plans, and are widely regarded as being essentially permanent features of the American health care system.

PPOs can also create inefficiencies and ironies in the health care industry. Though PPOs 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 — and one more opportunity for mistakes and delays — in the already-complex process of paying for health care in the United States. Since PPOs have more power in their relationship with providers, they can still provide a benefit to insured patients. Uninsured patients may, however, be unable to obtain these discounts — even if they pay cash.

What is an Exclusive Provider Organization?

An exclusive provider organization (EPO), is similar to a PPO, but if you seek care from a non-preferred provider you will not receive any coverage at all, unless there is a state mandate preventing the plan from differentiating between preferred and non-preferred provider (for example, emergency room visits if the policy is written in the state of New York). Under the PPO, you would simply pay more for going to a non-preferred provider. EPOs are less common than PPOs.

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