What is a Health Maintenance Organization (HMO)?

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Definition:

A health maintenance organization (or HMO) is a type of health insurance provider that charges a monthly or annual fee for coverage of visits to doctors and hospitals within a network.

🤔 Understanding an HMO

Under an HMO, the organization, usually an insurance company, contracts with doctors and hospitals who agree to charge a lower rate for their services to anyone covered by the HMO. These doctors and hospitals make up the HMO network. As long as patients — also known as subscribers — visit a doctor who is “in-network,” they will have coverage from the HMO, as long as the services are covered under their insurance plan. If the subscriber visits an out-of-network doctor, they’ll probably have to pay out of pocket. Exceptions to this rule generally include emergency care and out-of-area urgent care.

Example

Let’s say Jan comes down with an illness and needs to see a doctor. She hasn’t been to the doctor since being on her current healthcare plan, an HMO, so she contacts her HMO provider to find a doctor that is in-network. Her HMO directs her to a primary care physician in-network. Say Jan then needs to see a cardiologist. Her primary care doctor acts as a gatekeeper, meaning Jan’s HMO requires her to see them before seeing any kind of specialist. Then that primary doctor can give Jan a referral to a more specialized doctor — in this case, a cardiologist — in the HMO network.

Takeaway

An HMO is like an umbrella...

As an HMO subscriber, you’ll have a certain number of providers you can visit, covered by your umbrella. As long as you visit a doctor or hospital that falls under the umbrella, you’re fine. If you visit anything not covered by the umbrella, you’ll probably have to pay out of pocket — and you may get soaked with high medical bills.

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What is the purpose of an HMO?

The purpose of an HMO is to provide healthcare access to subscribers in exchange for a premium. Because of their place in the market as a more affordable alternative to other plans, HMOs aim to keep healthcare costs low while ensuring their coverage allows subscribers to receive quality care.

HMOs are a generally low-cost option for healthcare coverage, and many employers choose to offer these plans to their employees as one of a number of healthcare options.

But HMOs’ low cost comes with drawbacks in terms of access to quality care. If patients can’t get coverage for out-of-network care that they need — and can’t afford to pay for it out of pocket — they may go without.

HMOs in the United States are regulated at both the state and federal level.

How does an HMO work?

Under an HMO, an insurer provides health coverage to its subscribers in exchange for a monthly or annual premium. These premiums are often lower than those associated with other types of healthcare plans, such as preferred provider organizations (PPOs) or point-of-service (POS) plans, because of the structure of these HMO plans.

As with other types of healthcare plans, HMO providers contract with doctors and hospitals to allow their subscribers to receive care at an agreed-upon discounted rate.

In addition to the monthly or annual premium, subscribers might pay a co-pay (a fixed out-of-pocket amount paid on a per-service basis). HMO plans usually have low deductibles or even no deductible at all.

With an HMO, subscribers have to see doctors and hospitals within the HMO network. There are some exceptions to this rule, such as emergency room and urgent care, which HMOs generally will cover.

A subscriber of an HMO will have to find a primary care physician within their HMO network. An HMO provider can tell the subscriber which primary care physicians are in their network, and the subscriber can choose a doctor. These primary physicians are usually general practitioners or pediatricians.

When a subscriber needs any healthcare services, their primary doctor is their first point of contact and the person who coordinates the individual’s healthcare. So if the subscriber needs to see a specialist, they’ll first go to their primary doctor, who will give them a referral to a specialist who is also in the HMO network.

Because of this structure, HMO plans place a high level of importance on preventative care and a relationship with your primary care doctor. This type of healthcare plan may be ideal for those who don’t expect to need the attention of specialists often, and who expect most of their healthcare service to come from their primary doctor.

HMO vs. PPO vs. POS

HMOs are one popular type of health insurance plan. But they aren’t the only ones on the market. Two other popular health plans are preferred provider organizations (PPOs) and point-of-service (POS) plans. Both have some of the same features as an HMO, but they both have their own unique features as well.

Preferred Provider Organization

A Preferred Provider Organization (PPO) is another type of healthcare plan that provides more flexibility than an HMO.

With an HMO, you have the primary care physician who acts as a gatekeeper, which requires you to get a referral to see a specialist –- even if they are in-network.

With a PPO, no referral is necessary. As long as the doctor you want to see is in your network, you can see them without worrying about your insurance not covering the visit.

Additionally, your PPO might even cover visits to providers outside your network, but you’ll probably have to pay a higher fee and have a separate deductible for those visits. Another thing to keep in mind is that these out-of-network visits might mean that you’ll have to pay for the services yourself and then file a reimbursement claim with your insurer.

While the flexibility makes PPO plans an attractive choice, the benefits are not without an added cost. PPO plans tend to have higher premiums because of the ability to see in-network and out-of-network doctors, all without a referral from a primary care doctor.

PPO plans also usually have deductibles, which HMO plans often don’t have. The deductible is the amount of money you’ll have to pay out-of-pocket before your insurance company begins covering your medical expenses. Keep in mind, some preventative care services like annual checkups or mammograms might be fully covered, regardless of whether you’ve met your deductible amount. PPOs and HMOs both may have co-pays, though generally HMOs are likely to have lower co-pays.

When it comes to choosing between a PPO and an HMO, consider the amount you’re willing to pay for medical care and whether you expect to need access to specialists. If you’re someone who regularly needs to see specialists, it might be worth it to you to pay a higher cost for the freedom to see any doctor you need. If you’re more concerned with affordability than flexibility, then an HMO plan might be what you want.

Point of Service

A Point of Service (POS) health plan is one that resembles an HMO in several ways. First, there is a network of healthcare providers, and your insurer will cover in-network services. Additionally, a POS usually requires that you get a referral from your primary care provider in order to have your services fully covered.

While there are some similarities between the two, there are differences as well. The key thing that differentiates POS plans from other plans is that a POS plan provides some coverage for out-of-network services, though not as much as for an in-network provider.

Coverage for out-of-network services will be lower than for in-network services. This means that you’ll end up paying a greater portion of the expense out-of-pocket. But your POS provider may increase their coverage if you get a referral from your primary care doctor to see the out-of-network doctor.

POS plans can be a good choice for those who travel frequently. These plans usually offer nationwide coverage so that travelers can see a doctor anywhere they are and receive some coverage from their insurer.

Because of their flexibility, POS plans tend to have higher premiums than HMO plans do. So while POS plans have benefits, the benefits must be weighed against the extra costs.

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