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What are HMO’s?

A stethoscope on a notebook that reads,
Just the essentials...
  • Health Maintenance Organizations are the most popular type of health provider
  • They use a primary care physician to manage each patient’s care
  • The primary care physician directs treatment and referrals to specialists
  • HMO’s require users to use in-network resources
  • Users that use outside resources may get no insurance payments

The Health Maintenance Organization is a form of medical organization. The phrase health maintenance comes from the emphasis these organizations place on prevention and wellness care. They did not focus exclusively on treating illnesses; they also wanted to keep their customers in good health.

Unlike other providers at the time, the early HMO’s offered many maintenance services like annual physicals and immunizations at low or no costs. The idea was to prevent more extensive needs by preventing illnesses and early detection.

Comparison shopping is a tool for finding the right insurance coverage for an individual or family. It can compare important features like out-of-pocket expenses and deductibles.

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The HMO Business Model

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The HMO offers services on an annual flat fee basis to subscribers. A typical HMO consists of a network of doctors, medical facilities, and hospitals in a defined area. HMO’s offer lower premiums and lower out-of-pocket costs than other types of providers.

They do this by controlling the amount of service and limiting patients to in-network resources. HMOs vary in price terms and levels of services.

Comparison shopping can help reveal the best fit for an individual’s health care needs and preferences. This method can use the consumer’s experience and expectations to identify the services that are most important.

HMO Regulations

HMOs are regulated by states and the federal government. The states authorize the business by a certificate of authority. This is similar to an insurance license granted to perform the insurance business in a given state.

The HMO Act of 1972 set the regulatory powers and left control to the states. The federal government issues requirements from time to time in the form of mandates. The National Association of Insurance Commissioners plays a key role in regulatory reform and regulatory policy.

HMO and Obamacare

Obamacare and insurance word cloud

Obamacare added essential health benefits and minimum value requirements to all policies. Available with no dollar limit, the essential benefits were part of the transformation of health insurance. Insurers like HMOs could no longer deny coverage based on poor health, gender or pre-existing conditions.

For most HMOs, Obamacare standards were not a far reach. They have long promoted wellness and prevention as their idea of health maintenance.

Their motive involves more that avoiding human suffering, in dollar terms, prevention is far more effective than treating illnesses and curing disease.

The Individual Mandate

HMO policies sold on the federal marketplace (healthcare.gov) or any state exchange meet the requirements of the Affordable Care Act’s individual mandate. That provision requires coverage by a qualified health insurance policy beginning on the first day of January and continuing for 12 consecutive months.

The health management features of HMO plans are consistent with the vital goals of the Affordable Care Act. Both seek to emphasize wellness and prevention services.

HMO’s were pioneers in offering a range of services for detection of disease and programs to promote wellness. Obamacare includes these as essential health benefits and provides many services such as annual physicals, screenings, tests, vaccinations, and laboratory services at no extra charge to consumers.

Managed Care and Indemnity Insurance

Health insurance application

Before the popularity of the HMO, health insurance was the traditional or indemnity type. The payer, often an employer, got a tax deduction for paying the insurance premium. The benefits were tax-free to the recipient, and this was usually an employee.

The insurance company paid a fixed fee on the policy as agreed, and the beneficiary was free to choose the doctor or health services provider. There was no medical services relationship between the insurance company and the medical services provider.

The medical services provider was free to set prices and accept other patients as it wished. The HMO popularized the concept of managed care. The organization made contracts with doctors and facilities and formed a network.

The doctors and providers would be under contract to the HMO to charge agreed fees and perform agreed types of services. The roles included specialists and primary care doctors. The primary care doctor had authority to refer the patient to specialists.

The Primary Care Physician

Doctor assists senior patient

The HMO works through a primary care physician that undertakes to get and keep an overview of the patient’s health. The primary care physician then provides referrals to other doctors and specialists as he or she determines necessary for the patient’s care.

The primary care physician is an integral part of the HMO service system. The PCP can be an active partner in health decisions by urging or suggesting treatment options. Referrals to specialists can get answers to medical concerns. Referrals can lead to extensive treatment when needed.

In-Network Specialists

HMO’s require subscribers to use in-network resources and specialists. The HMO will pay less or nothing when subscribers use out-of-network resources.

Patients need a referral from their primary care physician to use in-network specialists. Managed use of resources is a key difference between HMO and other types of medical care providers.

One variation the traditional HMO permits a limited number of outside visits. The HMO sets terms for coinsurance per outside visit.

Emergency Services

Patients may see in-network doctors and specialists without a referral in emergency situations. The HMO provides insurance coverage for emergency visits and use of specialists. The below-listed items describe emergency care.

  • Out-of-area urgent care.
  • Emergency care.
  • Out-of-area dialysis.

How HMOs Work

A stethoscope on a black keyboard

An insurance company organizes an HMO to serve a particular geographic area. The company recruits doctors, medical care facilities and hospitals to combine into a group that can serve a large part of the foreseeable needs of a significant population. The locality is the base, and the insurer develops resources with the profile of the locality as the guide.

The doctors, medical groups, facilities, and hospitals agree to take patients at an agreed price. By doing this, the medical service providers agree to accept less than their usual fees.

In exchange, they get a steady stream of patients and a firm expectation of a high volume of work. The HMO brings far more patients than the medical providers could get on their own

The HMO guarantees its position by not paying for out-of-network services. Patients can only use out of network services on the extremely limited basis of emergency or urgency. HMO’s charge lower fees and offer lower deductibles than the other major forms including the PPO.

The Primary Care Physician

Doctor holding up finger

For consumers, the HMO focus is the relationship with the primary care physician. The PCP establishes records and the patient’s status. The PCP listens to complaints and attempts to provide a treatment where appropriate.

The PCP then makes referrals to specialists in the network to treat unresolved issues and matters outside of their areas of expertise.

This relationship can help the customer develop confidence that the PCP understands the situation. It can yield effective treatment when the referrals bring the needed expertise. The traditional emphasis on wellness provides.

One exception to the primary care rule. Women don’t need a referral to see an OB/GYN, in their network for well-woman visits and obstetrical care. They are free to get routine services such as Pap tests, and annual exams.

Prevention and Wellness Care

A doctor holding a red stress ball heart

The ACA changed insurance standards to add these valuable categories of services. Wellness care covers the best ideas for keeping good health and acquiring beneficial lifestyles for diet, exercise, and tobacco usage.

These early detection and diagnostic tools provide the best chance to catch an illness while still in early and treatable stages.

HMO’s provide these at no additional costs to subscribers. They include an annual physical examination, screenings, tests, and some vaccines.

Simplicity and Low Fees

Because HMO subscribers rarely go outside of the HMO network, they have few forms to file and reimbursement claims to handle. The copays and other charges are lower than PPO’s because they are in-network resources.

For subscribers with medical care needs that emphasize prevention services like physical exams, screenings, vaccinations, and wellness, the HMO offers a lot of free services at no extra charge. HMO plans work with Obamacare cost reductions assistance.

HMO Differs From PPO

The HMO is different from the PPO or preferred provider organization. Rather than limit the patient to the services of a primary care doctor and in-network referrals, the PPO charges more when patients go outside of the network. Patients can have more freedom of choice and do not have to get referrals.

The trade-off is that they pay more for using outside resources without referrals.

HMO’s use low-cost copays, and they also use drugs and prescriptions to promote savings and economies for their members. They use a wide range of generic drugs in their formularies and promote the lowest cost effective drugs available for their users.

How PPOs Work

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The Preferred Provider Organization offers flexibility to patients to choose particular specialists and out-of-network services. The PPO has no primary care physician and fewer limits. They charge higher rates for out of network services. The greater impact on consumers and savings for the PPO come with out-of-pocket expenses.

The subscriber’s share of payments for outside services does not count towards the annual limit of out-of-pocket expenses. The patient then pays more out-of-pocket for using outside services, and the added sums do not count towards the annual limit.

The below-listed features describe the costs advantages for PPO’s. Patients that use a lot of out-of-network services will spend more for the out-of-pocket expenses. They will not reach the contract maximum as fast as if they paid the same amounts for in-network services.

  • PPO’s have fewer visits (no Primary Care Physician referrals to specialists)
  • PPO’s charge higher premiums on average
  • Patients share of outside services does not count against out-of-pocket annual maximum

Variations on the HMO Model

HMO has many variations as medical services organizations piece together the best combinations of resources to draw the maximum number of customers.

The Affordable Care Act has reinforced their basic theory that prevention and early detection are the best ways to keep people healthy and reduce the costs of medical care in the United States.

The EPO and POS are hybrid forms that have gained some wide use. Combining features of HMOs and PPOs, these small networks promise low prices and greater flexibility than HMOs.

The EPO Plan

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Exclusive Provider Organizations are similar to HMOs. They are the low-cost provider with the flexibility of a PPO. They are managed care networks that limit subscribers to the services available from within the network providers. Subscribers must use in-network resources.

The EPO does not cover out-of-network services at all. Unlike the HMO there is no primary care physician, and subscribers do not have to go through two layers to get to a specialist. Subscriber will not need referrals to see specialists in the EPO network.

Subscribers save by using in-network services. Subscribers that go outside of the network will have to pay all of the costs.

The EPO offers low costs, a limited number of doctors, and flexibility to use them without referrals. Except for emergencies, EPO systems don’t cover outside services. Subscribers using EPO providers must know the doctors and resources in the network. EPO’s are generally small networks that offer savings based on high volume of patient care.

Point-of-Service Plans

Health written on a keyboard

This form of managed care organization has traits of the HMO and the PPO. A point-of-service organization provides in-network services at the lowest rate like the HMO. It offers low copays and no deductibles for many services. The POS model requires a primary care physician.

The primary care physician is the first line of care. He or she makes referrals to in-network resources.

Patients may go outside of the network and pay most of the costs. However, when the primary care physician makes out-of-network referrals, the POS pays its agreed share. This is a variation if the basic HMO that permits outside referrals with insurance payment.

The primary care physician is the important relationship for the subscriber. He or she has the power to determine the extent of coverage of outside resources.

Which is Best for the Consumer?

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The differences between the organizational forms have become less clear over time. The trends are that they are getting closer. HMO’s have added some flexibility and PPO’s have become more controlled and limited. The remaining issue of greater meaning is the tendency of PPOs to use significantly more of the subscriber’s funds in out-of-pocket expenses.

The fact that these additional funds do not reduce the out-of-pocket limit for PPO subscribers means that they can get into situations that require a large unplanned expense.

For subscribers that require easy access to a wide variety of specialists or prefer to choose the doctors that treat them, the PPO may have advantages. The HMO may be better for those who can tolerate more limited choices in favor of controlled out-of-pocket expense and lower premiums.

HMO — A Choice Among Many

Traditional indemnity insurance provided a fixed payment to a medical care provider on behalf of an insured person. The insurance company usually had an agreement with an employer to insure the employees. The beneficiary, often an employee, chose the job and the doctor but not the insurer.

In the circle, there were disconnected lines. The HMO brought a new sense of order to the arrangement. It organized the doctors and got contracts with employers and individual subscribers. It sends many subscribers to a few doctors and hospitals in the network, and they treat the patient within the network’s resources.

The result is the subscriber pays less than he or she would have for traditional medical insurance. The network has a busy stream of patients, and the insurer manages the system a makes a profit.

National Trends Favor HMO

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Employers lean towards the costs savings, and many consumers think most about the costs impact on their family budgets. Both these trends point to HMO type providers that offer flat fee pricing, low premiums, and reduced out-of-pocket expenses. They tend to be lower in costs and more predictable than PPOs.

The flexibility of PPO’s come at a price. PPOs offer freedom of choice that many users value highly. People that use a lot of services are those most likely to become inured to one or more doctors or facilities.

PPOs do not limit out of pocket expenses for outside services. Those same frequent users would encounter the greatest risks of out-of-pocket costs without a policy limit.

The Consumer Picks the Best Fit

Health insurance application with stethoscope

Most Obamacare plans are HMO or PPO. There are more HMOs than PPOs. Consumers seek the best plan, and that depends on their circumstances and preferences. Many people assume that having a choice in care providers is important, yet when using an HMO they find the savings very appealing and the lack of choice not to be a difficulty.

Others may assume that lack of choice is not a difficulty only to find that they cannot use a doctor they prefer. There is little in the label HMO or PPO that matters more than customer satisfaction.

Healthcare is ultimately a persona matter and preferences play some role. The best result for consumers is to find a good fit for their needs and preferences. Comparison shopping can help focus on the features that matter more than others.

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MULTIPLAN_GHHK5LLEN_Accepted Last Updated 3/18/2018