Preferred Provider Organization (PPO)

A preferred provider organization is a health plan that contracts a network of providers but still pays something toward covered care delivered outside it. That single feature is the whole difference from an HMO, and it is what the higher premium buys.

Last reviewed by Steven Fox, CFP®, EA on August 17, 2026

Quick Summary

The defining feature is coverage outside the network, not the network itself. Federal regulation states it directly for Medicare Advantage PPOs: the plan "[p]rovides for reimbursement for all covered benefits regardless of whether the benefits are provided within the network of providers."
The clearest federal definition of the term is scoped to Medicare Advantage at 42 C.F.R. 422.4(a)(1)(v). In the commercial market the label describes a plan design that state insurance codes regulate.
A PPO typically states two of everything: two deductibles, two coinsurance percentages, two annual ceilings. The out-of-network set is the one people do not read.
Out-of-network cost sharing is not required to count toward the ACA annual limitation on cost sharing, so the ceiling that caps an in-network year may not cap an out-of-network one.
Paying something out of network is not the same as capping what you owe. Without a contract there is no agreement not to bill you the difference.

Definition

A preferred provider organization is a health plan that assembles a network of doctors, hospitals and other providers who have agreed to contracted rates, and which pays toward covered care whether or not it is delivered by someone in that network. HealthCare.gov puts the consumer version in three sentences: "[a] type of health plan that contracts with medical providers, such as hospitals and doctors, to create a network of participating providers. You pay less if you use providers that belong to the plan's network. You can use doctors, hospitals, and providers outside of the network for an additional cost."

The clearest federal definition of the term is scoped to a single program. 42 C.F.R. 422.4(a)(1)(v) defines a PPO plan, for Medicare Advantage purposes, as a plan that "(A) Has a network of providers that have agreed to a contractually specified reimbursement for covered benefits with the organization offering the plan; (B) Provides for reimbursement for all covered benefits regardless of whether the benefits are provided within the network of providers; (C) Only for purposes of quality assurance requirements in § 422.152(e), is offered by an organization that is not licensed or organized under State law as an HMO; and (D) Does not permit prior notification for out-of-network services". Outside that program the three letters are a description of plan design rather than a federally defined product, and it is the state insurance code that licenses the entity selling it. Limb (B) is the part worth carrying away: it is the entire structural difference from a health maintenance organization, stated by a regulator in one line.

Advanced Explanation

A network is a purchasing arrangement, and a PPO keeps it optional. The contract that creates the network does two things at once: it fixes the price the plan will pay, and it obliges the provider to accept that price as full payment. A PPO uses those contracts the same way an HMO does, and then declines to make them a condition of coverage. That produces the familiar two-tier design, and also the higher premium, since a plan that must pay for care it did not negotiate has less control over its own costs.

The second tier is a separate set of numbers, not a worse version of the first one. A PPO's summary of benefits typically states an in-network deductible and an out-of-network deductible, an in-network coinsurance percentage and an out-of-network one, and an in-network annual ceiling and an out-of-network ceiling. In most plan designs the two deductibles and the two ceilings accumulate separately, which is the part that surprises people: meeting the in-network deductible in March does nothing for an out-of-network claim in June. The plan document, not a general rule, settles how a given plan accumulates, and the summary of benefits and coverage is where it is stated in a comparable format. On the individual and small-group side there is regulatory support for the asymmetry: 45 C.F.R. 156.130(c) provides that out-of-network cost sharing is not required to count toward the annual limitation on cost sharing. Read that precisely rather than absolutely, as the out-of-pocket maximum page does: a plan is permitted to count it, and some do.

Paying something out of network is not the same as limiting what you owe. Where a provider is in the network, the plan's payment and the provider's promise not to bill you the difference come from the same contract. Where there is no contract, the plan may still pay its share of an amount it determines, and nothing in that arrangement obliges the provider to accept it. The gap between the billed charge and the amount the plan recognizes is the balance bill, and federal law restricts it only in defined situations. So the honest description of PPO out-of-network coverage is that it converts "no coverage" into "partial coverage plus an open-ended exposure", which is better and is not the same as protection.

One drafting detail in the Medicare Advantage definition is worth noticing. Limb (D) provides that a PPO plan "[d]oes not permit prior notification for out-of-network services", and the regulation explains what it means by that: a reduction in the plan's standard cost-sharing levels where the out-of-network provider, or the enrollee, voluntarily notifies the plan before the services are furnished. In other words, a PPO's out-of-network cost sharing is the same whether or not anyone rings ahead. That is a rule about Medicare Advantage plans, and it matters here as a reminder for commercial plans in the opposite direction: where a commercial PPO does offer something for prior notification or prior authorization, obtaining it is a condition rather than a courtesy.

Where a PPO sits among the four letters. An HMO generally pays nothing outside its network except in an emergency. An exclusive provider organization is network-only, like an HMO, and typically differs by letting a member go straight to a specialist; the common description of an EPO as sitting "between an HMO and a PPO" gets the structure backwards. A point of service plan is the genuine hybrid, pairing an HMO-style primary care route with some out-of-network coverage. Within Medicare Advantage, 42 C.F.R. 422.4(a)(1)(iii) treats HMOs, provider-sponsored organizations, regional or local PPOs and other network plans as varieties of one thing, the coordinated care plan, which is a useful reminder that these are points on a spectrum of network tightness rather than four unrelated products.

How to Remember

An HMO asks where you are going. A PPO asks how much you would like to pay for going somewhere else. The premium difference is the price of that question being available at all.

Used in a Sentence

“Rashida kept the preferred provider organization plan rather than the cheaper option because the surgeon who had treated her knee for a decade had never joined any network.”

How It Works

The plan contracts a network of providers at agreed rates, who also agree not to bill members the difference between their charge and that rate.
You may use anyone. No referral is generally required and no provider is off limits.
In network, you pay the in-network cost share against the contracted rate, and the rest of the charge is written off.
Out of network, the plan pays against an amount it determines, at the out-of-network cost-sharing level, and usually against a separate deductible.
The provider may bill you the remainder, because no contract prevents it, except where federal or state surprise-billing law applies.
The two sets of accumulators generally run separately, and out-of-network spending is not required to count toward the annual limitation on cost sharing.

A hypothetical, showing what the second tier actually costs. Rashida's PPO states an in-network deductible of $1,500 and an out-of-network deductible of $3,000; in-network coinsurance of 20% and out-of-network coinsurance of 30%. The two deductibles accumulate separately.

She meets the $1,500 in-network deductible in March through routine care. In June she has a procedure with an out-of-network surgeon, for which the plan determines an out-of-network allowed amount of $4,200.

Her out-of-network deductible stands at $0 of $3,000, so the first $3,000 of that allowed amount is hers. The remaining $4,200 − $3,000 = $1,200 is shared, and she pays 30% × $1,200 = $360. Her total is $3,000 + $360 = $3,360 — and that is only the part her plan has an opinion about. Whatever the surgeon billed above $4,200 is a separate question, because no contract obliges the surgeon to write it off.

Had the same procedure been done in network at an allowed amount of $2,900, her deductible was already met, so she would have paid 20% × $2,900 = $580 and nothing else. The plan covered her both times. The difference between $580 and $3,360 is what the second tier means in practice.

Pros and Cons

Pros

Covered care is reimbursed whether or not the provider is in the network, which is the one thing an HMO does not do.
A referral is generally not required, so a member can go directly to a specialist.
A member with an established relationship with a doctor outside every local network can keep it at a stated cost rather than losing it.
The network is usually broader than an HMO's, which matters for a household that travels or is split across regions.
The in-network tier works exactly like an HMO's, so the flexibility costs nothing on the care most people actually use.

Cons

The premium is generally higher, and for a household that never leaves the network it buys an option that is never exercised.
The out-of-network deductible and ceiling usually accumulate separately, so progress on one side does nothing for the other.
Out-of-network cost sharing is not required to count toward the annual limitation on cost sharing, so the ceiling may not cap the year.
Partial coverage is not a cap. Without a contract, the provider may bill the difference, and federal law restricts that only in defined situations.
The out-of-network allowed amount is determined by the plan rather than negotiated, so the member cannot see it in advance.
"PPO" on a plan name says less than it used to, since networks vary enormously in breadth between plans carrying the same three letters.

People Also Asked

Answers to the most frequently asked questions.

What is the difference between a PPO and an HMO?

A PPO pays toward covered care delivered outside its network; an HMO generally pays nothing outside its network except in an emergency. Federal regulation states the PPO half of that directly for Medicare Advantage plans: the plan "[p]rovides for reimbursement for all covered benefits regardless of whether the benefits are provided within the network of providers." Everything else people associate with the two labels, including referral rules and premium differences, follows from that structural choice.

Does a PPO protect me from a large out-of-network bill?

Not on its own. The plan will pay its share of an amount it determines, but a provider with no contract has made no promise to accept that amount as full payment, so the difference can be billed to you. Federal surprise-billing law restricts that in defined situations, chiefly emergency care and certain out-of-network clinicians treating you at an in-network facility, and outside those situations the exposure is open-ended.

Do my in-network and out-of-network deductibles combine?

In most PPO designs they do not, and this is the assumption worth checking before you need the answer. Meeting the in-network deductible does not advance the out-of-network one, and the two annual ceilings usually accumulate separately as well. On individual and small-group plans there is regulatory support for the asymmetry, since out-of-network cost sharing is not required to count toward the ACA annual limitation on cost sharing, though a plan is permitted to count it. The summary of benefits and coverage states what your plan does.

Is an EPO a type of PPO?

No, and the usual description of an EPO as sitting between an HMO and a PPO is misleading. An exclusive provider organization is network-only, like an HMO, so the feature that defines a PPO, coverage outside the network, is exactly the one an EPO lacks. Where an EPO commonly differs from an HMO is in letting a member see a specialist without a referral. The plan type that genuinely blends the two is the point of service plan.

Why is there no single federal definition of a PPO?

Because the term describes a plan design rather than a licensed entity, and health insurers are licensed by states. The federal definition that does exist, at 42 C.F.R. 422.4(a)(1)(v), was written to sort Medicare Advantage plan types, and one of its limbs, which applies only to that program's quality assurance requirements, even describes a PPO by what it is not: an organization "not licensed or organized under State law as an HMO". For a plan you can actually buy, the operative rules are in your state's insurance code and in the plan document.

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