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Understanding HMOs: A Comprehensive Guide
Just the essentials...
Health Maintenance Organizations (HMOs) are the most popular type of healthcare plan
HMOs use a primary care physician to manage each patient’s care
In an HMO, the primary care physician directs treatment and referrals to specialists
HMO’s require members to use in-network resources
Members of HMOs that use resources outside the network may not have medical services covered, while members of PPOs would be covered but pay a higher cost out-of-pocket
What are HMOs?
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.
While fully equipped for treating illnesses, HMOs are modeled with the focused goal of keeping their customers in good health. This idea aims 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
The HMO offers services on an annual flat fee basis to subscribers. These fees are set annually.
Typically, an HMO consists of a network of doctors, medical facilities, and hospitals in a defined area.
Usually, HMO’s offers lower premiums and lower out-of-pocket costs than other types of healthcare plans.
Comparison shopping can help reveal the best fit for an individual’s health care needs and preferences. This method can use the consumer’s health experience and expectations to identify the services that are most important.
HMO Regulations
HMOs are regulated by states and the federal government. With a certificate of authority, the states authorize insurance carriers to offer a selection of plans like HMOs.
The HMO Act of 1973 set enrollment and service standards, regulatory powers, as well guidelines for evaluating the effectiveness of HMO type plans.
From time to time, the federal government issues requirements in the form of mandates. The National Association of Insurance Commissioners plays a key role in reform and policy.
Furthermore, the ten essential health benefits bolstered the standards for health insurance plans, becoming a milestone in the transformation of health insurance.
In light of this, insurers offering 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.
Ideally, this involves more than just avoiding human suffering. In terms of cost, prevention and early detection are far more effective than waiting to treat illnesses until symptoms are full-blown.
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.
In it, the provision requires coverage by a qualified health insurance policy beginning on the first day of January and continuing for 12 consecutive months.
As of 2019, the fee for not having health insurance under the individual mandate was reduced to $0. This decision was made on the federal level, however, some states have their own individual mandate.
The health management features of HMO plans are consistent with the goals of the Affordable Care Act. Both seek to emphasize wellness and prevention services.
From the beginning, 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
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.
Likewise, the health benefits were tax-free to the recipient, and this was usually an employee.
By the same token, 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.
Before HMOs, 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.
HMO popularized the concept of managed care. These organizations made contracts with doctors and facilities and formed a network.
Likewise, the doctors and facilities would be under contract with the HMO network to charge agreed-upon fees and perform agreed types of services.
The provider roles defined primary care doctors and specialists, giving primary care doctors authority to refer patients to specialists.
The Primary Care Physician
When we ask, “What are HMOs?”, the answer boils down to the primary care doctor.
The HMO works through a primary care physician that keeps an overview of the patient’s health. A primary care physician then provides referrals to other doctors and specialists determined as necessary for the patient’s care.
The primary care physician (PCP) is an integral part of the HMO service system. The PCP functions as an active partner in promoting good health by prescribing treatments and directing patients to doctors with greater expertise.
For consumers, the HMO focus is the relationship with the primary care physician. The PCP establishes records of the patient’s health, listens to complaints and attempts to provide a treatment where appropriate.
The PCP can then make referrals to specialists in the network to treat unresolved issues and matters outside of their areas of expertise. This relationship can help patients develop confidence that the PCP understands their situation and will act in their best interest.
A good relationship with a primary care physician can yield more effective treatment when the referrals bring the needed expertise from a specialist.
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.
Conversely, one exception to the primary care rule states that 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.
Additionally, certain variations of HMOs permit a limited number of outside doctor visits. The HMO sets the percentage of cost the member must pay per outside visit. This is called co-insurance.
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
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 local area is the basis, 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
Patients can only use out of network services on the extremely limited basis of emergency or urgency. HMO’s usually charge lower fees and deductibles than the other major forms including the PPO.
Prevention and Wellness Care
The ACA changed health insurance standards to add valuable categories of services to maintain wellness and prevent or detect negative changes to health.
Wellness care involves maintaining good health and promoting beneficial lifestyle choices for diet, exercise, and tobacco usage.
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 have the ability go outside of the HMO network, they have fewer forms and reimbursement claims to handle.
HMO copays and other expenses are lower than PPO’s because they are in-network doctors and facilities that have agreed to charge less than normal.
Subscribers with medical needs that emphasize prevention services like physical exams, screenings, vaccinations, and wellness checks will find that the HMO offers a lot of free services at no extra charge.
HMO Differs From PPO
The HMO is different from the PPO, which stands for preferred provider organization.
Rather than limit the patient to the services of a primary care doctor and in-network referrals, the PPO allows patients to go outside of the network, but charges more when they do.
PPOs offer more freedom of choice and do not require referrals. The trade-off here means paying more for using outside providers and facilities.
By contrast, HMOs use low-cost copays, and promote savings for their members’ prescription drugs.
Both PPOs and HMOs cover a wide range of generic drugs in their formularies and promote the lowest cost effective drugs available for their users.
How PPOs Work
The Preferred Provider Organization offers flexibility to patients to choose particular specialists and out-of-network services.
The PPO requires no primary care physician and sets fewer limits. They charge higher rates for out of network services.
The member’s share of payments for outside services does not count towards reaching the yearly out-of-pocket limit they could be required to pay. Reaching the annual maximum out of pocket means covered medical expenses are $0 for the remainder of the year.
Patient typically pay more for using outside services, yet the higher sums do not count towards their PPO policy’s annual maximum-out-of-pocket limit.
In the same way, members will not reach the contract maximum to stop financial loss if only out-of-network providers are used.
PPO’s require fewer visits overall, given that no Primary Care Physician referrals to specialists are needed. Eliminating the extra office visit to get a referral means the advantage of time saved.
Variations on the HMO Model
HMOs now come in many variations as medical services organizations piece together more effective 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 Exclusive Provider Organization (EPO) and Point-of-Service (POS) plans are hybrid forms that have gained widening usage.
Combining features of HMOs and PPOs, these small networks promise low prices and greater flexibility than HMOs.
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 except in a medical emergency.
To boot, subscribers will not need referrals to see specialists in the EPO network. Like the PPO, there is no primary care physician, and subscribers do not have to go through the extra office visit to get to a specialist.
As with the HMO, subscribers save when using in-network services. Going outside of the network means having to pay all of the costs.
The EPO offers low out-of-pocket costs, a limited number of doctors, and flexibility to use them without referrals.
Subscribers using EPO providers must be aware of the doctors and resources in the network. EPO’s are generally smaller networks that offer savings based on high volume of patient care in a local area.
A point-of-service (POS) organization provides in-network services at low copays and no deductibles for many services.
The POS model requires a primary care physician. However, when the primary care physician makes out-of-network referrals, the POS pays its agreed share.
This is a variation of the basic HMO that permits outside referrals.
The primary care physician holds an important relationship with the subscriber. Through referrals, a primary care doctor has the power to determine the extent of coverage for outside providers and facilities.
Which is Best for the Consumer?
The differences between the organizational forms have become less clear-cut over time. The trends suggest that they are getting closer.
Likewise, certain HMO’s have added some flexibility and other PPO’s have become more controlled and limited.
Overall, the greater remaining issue is the tendency of PPOs to use significantly more of the subscriber’s funds for out-of-pocket expenses.
The fact that additional out-of-network expenses do not reduce the annual out-of-pocket maximum for PPO members 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 which doctors treat them, the PPO may have advantages.
The HMO may be more ideal for those who can tolerate more limited provider 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 their employees. The beneficiary, often an employee, does not choose the insurer.
The HMO brought a new sense of order to the arrangement of health insurance.
HMOs organized multitudes of doctors and initiated contracts with employers to reach the work force. It sent members to select doctors and hospitals in the network, where they more affordably treated the patient within the network’s resources.
Accordingly, subscribers pay less out-of-pocket than they would for traditional medical insurance. The network model directs a stream of patients to providers, and the insurer manages the network system in order to make a profit.
National Trends Favor HMO
Employers lean towards HMO’s tax savings, while many consumers think most about reducing the cost impact of healthcare on their family budget.
Together, these trends point to a recent preference for HMO type plans 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 in terms of what is covered.
The flexibility of PPOs comes at a price. PPOs offer freedom of choice that many users value highly, but they do not set a limit on out-of-pocket expenses for services outside the network.
Without a policy limit to protect against those costs, frequent users of out-of-network services would face the highest potential risk for large out-of-pocket expenses.
This is especially true for those with complicated medical needs who may need various specialists.
The Consumer Picks the Best Fit
There are more HMOs than PPOs. Consumers seek the best plan suited to their circumstances and preferences.
Many people consider a wide choice of care providers to be ideal, yet when using an HMO they find the savings very appealing while the lack of choices provides little to no difficulty.
By contrast, others may assume that lack of choice is not a difficulty only to find that they cannot use the ideal doctor they prefer. There is little in the label HMO or PPO that matters more than satisfaction based on needs and preferences.
Your desire for flexibility and low cost become pivotal when ultimately deciding between different health plan options.
A helpful guideline for consumers involves identifying health needs and preferences and finding a network that most closely matches them together.
Of course, everyone’s health is different. Comparison shopping can help focus on the features that matter more than others.
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