Health Maintenance Organization (HMO): What It Is, Pros and Cons

What Is a Health Maintenance Organization (HMO)?

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

There are several key differences between HMO plans and preferred provider organization (PPO) plans. With an HMO plan, your primary care physician (PCP) will refer you to specialists, and you must stay within a network of providers to receive coverage. On the other hand, HMO plans typically have lower premiums than PPO plans.

How a Health Maintenance Organization (HMO) Works

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 with the HMO.

These contracts allow for premiums to be lower than for traditional health insurance—since the healthcare providers have the advantage of having patients directed to them. However, they also add additional restrictions to the HMO’s members.

When deciding whether to choose an HMO plan, you should take into consideration:

• the cost of premiums
• out-of-pocket costs
• any requirements you may have for specialized medical care
• whether it’s important to you to have your own primary care physician (PCP)
  

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.

The HMO as it exists today was established under the Health Maintenance Organization Act of 1973. Signed by then-President Richard Nixon, the law clarified the definition of HMOs as “a public or private entity organized to provide basic and supplemental health services to its members.” The law further requires that plans provide insured individuals with basic healthcare in exchange for regular, fixed premiums that are established “under a community rating system.”

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.

Those who are insured under an HMO may have to live or work in the plan’s network area 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 nonemergency, out-of-network care have to pay for it out of pocket.

Role of the Primary Care Physician (PCP)

The insured party must choose a PCP from the network of local healthcare providers under an HMO plan. A PCP 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 may not require a referral. For example, screening mammograms in most cases will not require a doctor’s referral.

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 PCP leaves the network, subscribers are notified and are required to choose another PCP from within the HMO plan.

HMO Regulation

HMOs are regulated by both states and the federal government. The McCarran-Ferguson Act of 1945 established that states regulate the insurance industry, and no federal law overrides state regulation unless it explicitly does so.

As such, regulation of health insurance is left largely to the states, though legislation—such as the HMO Act of 1973 and the Employee Retirement Income Security Act of 1974, among other laws—can bring some aspects of the health insurance business under the purview of the federal government.

That said, the federal government does maintain some oversight of HMOs. The 2010 Dodd-Frank Act created the Federal Insurance Office (FIO), which can monitor all aspects of the insurance industry.

HMO vs. Preferred Provider Organization (PPO)

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 PPO plans, HMO plans require that participants receive healthcare services from an assigned provider. PPO plans usually have deductibles, while HMO plans usually do not.

Both programs allow for specialist services. However, the designated PCP 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.

HMO vs. Point-of-Service (POS)

A point-of-service (POS) plan is like an HMO plan in that it requires a policyholder to choose an in-network PCP and get referrals from that doctor if they want the plan to cover a specialist’s services. A POS plan is also like a PPO plan 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 PCP than if they don’t secure a referral. The premiums for a POS plan fall 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 probably would be better off with an HMO because of its lower premiums.

Advantages and Disadvantages of HMOs

It’s important to weigh the advantages and disadvantages of HMO plans before you choose a plan, just as you would with any other option. We’ve listed some of the most common pros and cons of the program below.

Pros Explained

Lower out-of-pocket costs: You’ll pay fixed premiums on a monthly or annual basis that are lower than traditional forms of health insurance. These plans tend to come with low or no deductibles, and your co-pays are generally lower than other plans. Your out-of-pocket costs will also be lower for your prescription. Billing also tends to be less complicated.

Primary care physician directing your treatment: You'll have a PCP who you choose and who is responsible for managing your treatment and care. This professional will also advocate for services on your behalf. This includes making referrals for specialty services for you.

Higher quality of care: The quality of care is generally higher with an HMO plan. That is because patients are encouraged to get annual physicals and seek out treatment early.

Cons Explained

Must use medical professionals in the plan’s network: You’re restricted on how you can use the plan. You’ll have to designate a doctor, who will be responsible for your healthcare needs, including your primary care and referrals. However, this doctor must be part of the network. This means that you are responsible for any costs incurred if you see someone out of the network, even if there’s no contracted doctor in your area.

No specialist visits without a referral: You’ll need referrals for any specialists if you want your HMO to pay for any visits. If you need to visit a rheumatologist or a dermatologist, for example, your PCP must make a referral before you can see one for the plan to pay for your visit. If not, you’re responsible for the entire cost.

Emergencies must meet certain conditions: There are very specific conditions that you must meet for certain medical claims, such as emergencies. For instance, there are usually very strict definitions of what constitutes an emergency. If your condition doesn’t fit the criteria, then the HMO plan won’t pay.

The Bottom Line

Health insurance is an important consideration for every individual. Choosing the right plan depends on your personal situation, including your health, finances, and quality of life. You can choose from traditional health insurance, such as the PPO, or the HMO. The HMO provides insured individuals with lower out-of-pocket costs, but more restrictive conditions, including the doctor who you see. Make sure that you weigh the benefits and disadvantages of the plan, regardless of what you choose.