Health Maintenance Organization (HMO)

What Is a Health Maintenance Organization?

An individual who needs to secure health insurance may find a variety of health insurance providers with unique features. One type of insurance provider that is popular in the health insurance marketplace is a health maintenance organization (HMO), an insurance structure that provides coverage through a network of physicians.

Health maintenance organizations (HMOs) provide health insurance coverage for a monthly or annual fee. An HMO limits member coverage to medical care provided through a network of doctors and other healthcare providers who are under contract to the HMO. These contracts both allow for premiums to be lower than for traditional health insurance—since the health providers have the advantage of having patients directed to them—but they also add additional restrictions to the HMO's members.

When deciding whether to choose an HMO insurance plan, you should take into consideration the cost of premiums, out-of-pocket costs, any requirements you may have for specialized medical care, and whether it's important to you to have your own primary care provider.

KEY TAKEAWAYS

• A health maintenance organization (HMO) is a network or organization that provides health insurance coverage for a monthly or annual fee.
• An HMO is made up of a group of medical insurance providers that limit coverage to medical care provided through doctors and other providers who are under contract to the HMO.
• These contracts allow for premiums to be lower—since the healthcare providers have the advantage of having patients directed to —but they also add additional restrictions to HMO members.
• HMO plans require that participants first receive medical care services from an assigned provider known as the primary care physician (PCP).
• Preferred provider organizations (PPOs) and point-of-service plans (POS) are two types of healthcare plans that are alternatives to HMOs.

How an HMO Works

An HMO is an organized public or private entity that provides basic and supplemental health services to its subscribers. The organization secures its network of health providers by entering into contracts with primary care physicians, clinical facilities, and specialists. The medical entities that enter into contracts with the HMO are paid an agreed-upon fee to offer a range of services to the HMO’s subscribers. The agreed payment allows an HMO to offer lower premiums than other types of health insurance plans while retaining a high quality of care from its network.

Rules for HMO subscribers

HMO subscribers pay a monthly or annual premium to access medical services in the organization’s network of providers, but they are limited to receiving their care and services from doctors within the HMO network. However, some out-of-network services, including emergency care and dialysis, can be covered under the HMO.

Furthermore, those who are insured under an HMO may have to live or work in the plan's network area in order to be eligible for coverage. In cases where a subscriber receives urgent care while out of the HMO network region, the HMO may cover the expenses. But HMO subscribers who receive non-emergency, out-of-network care have to pay for it out-of-pocket.

In addition to low premiums, there are typically low or no deductibles with an HMO. Instead, the organization charges an amount, known as a co-pay (co-payment), for each clinical visit, test, or prescription. Co-pays in HMOs are typically low—usually, $5, $10, or $20 per service—thereby minimizing out-of-pocket expenses and making HMO plans affordable for families and employers.

The role of the primary care physician

The insured party must choose a primary care physician (PCP) from the network of local healthcare providers under an HMO plan. A primary care physician is typically an individual’s first point of contact for all health-related issues. This means that an insured person cannot see a specialist without first receiving a referral from their PCP.

However, certain specialized services, such as screening mammograms, do not require referrals. Specialists to whom PCPs typically refer insured members are within the HMO coverage, so their services are covered under the HMO plan after co-pays are made. If a primary care physician leaves the network, subscribers are notified and are required to choose another PCP from within the HMO plan.

Preferred Provider Organization (PPO) vs. HMO

A preferred provider organization (PPO) is a medical care plan in which health professionals and facilities provide services to subscribed clients at reduced rates. PPO medical and healthcare providers are called preferred providers.

PPO participants are free to use the services of any provider within their network. Out-of-network care is available, but it costs more to the insured. In contrast to a PPO, HMO plans require that participants receive healthcare services from an assigned provider. PPO plans usually have deductibles; HMOs usually do not.

Both programs allow for specialist services. However, the designated primary care physician must provide a referral to a specialist under an HMO plan. PPO plans are the oldest and—due to their flexibility and relatively low out-of-pocket costs—have been the most popular managed healthcare plans. That has been changing, however, as plans have reduced the size of their provider networks and taken other steps to control costs.

Point-of-Service (POS) vs. HMO

A point-of-service (POS) plan is like an HMO in that it requires a policyholder to choose an in-network primary care doctor and get referrals from that doctor if they want the plan to cover a specialist’s services. A point-of-service plan is also like a PPO in that it still provides coverage for out-of-network services, but the policyholder has to pay more for those services than if they used in-network providers.

However, a POS plan will pay more toward an out-of-network service if the policyholder gets a referral from their primary care physician than if they don't secure a referral. The premiums for a POS plan fall in between the lower premiums offered by an HMO and the higher premiums of a PPO.

POS plans require the policyholder to make co-pays, but in-network co-pays are often just $10 to $25 per appointment. POS plans also do not have deductibles for in-network services, which is a significant advantage over PPOs.

Also, POS plans offer nationwide coverage, which benefits patients who travel frequently. A disadvantage is that out-of-network deductibles tend to be high for POS plans, so patients who use out-of-network services will pay the full cost of care out of pocket until they reach the plan’s deductible. However, a patient who never uses a POS plan’s out-of-network services would probably be better off with an HMO because of its lower premiums.