Financial Literacy

In a Preferred Provider Organization (PPO) or Point-of-Service (POS) plan, rather than reimbursing you like an indemnity plan, the insurance company contracts with various hospitals and private physicians in a particular geographic location. Physicians and hospitals are paid on a fee-for-service basis. In order for a physician or hospital to be eligible to join the provider network, the service provider agrees to undergo a screening process and agrees to a predetermined set of prices.

The extensive screening process looks at things such as education and ethics, career and personal history, and medical facilities used by the provider. PPO hospitals and other care providers, such as labs, must also meet continuing standards to remain a part of the PPO network.

These plans typically have deductibles, coinsurance, and out-of-pocket maximums for medical, hospital, and outpatient services. But the key feature is that you typically are only asked to make a small copayment for doctor's visits, as long as you use a provider who is part of the network. Some plans require no copayment. And deductibles are usually waived for doctor visits other than for surgery or pregnancy.

Some PPOs act more like Health Maintenance Organizations (HMOs) and restrict the choice of physicians you can select from their network. Known as the "gatekeeper" concept, this requires you to have a primary physician, who is responsible for monitoring your medical care and making referrals to specialists within the network.

PPOs that offer you the option of going outside the network are referred to as point-of-service plans, also called freedom-of-choice plans. They are hybrids between PPOs and traditional group indemnity plans. If you choose to go outside the network for medical care, the plan will typically reimburse you for certain covered expenses. While your out-of-pocket expenses will be higher out-of-network than if you used a network service provider, you maintain control of where you choose to seek health care services.

While so-called freedom of choice sounds attractive, there are many advantages to using the services in the PPO network. Benefits are paid at a higher percentage, certain preventive care procedures may be covered, deductibles are usually waived for admissions for outpatient surgery, and fees are fixed at a pre-negotiated rate, so you won't have to pay any charges that exceed "reasonable and customary."