Health Maintenance Organization (HMO)

What Is a Health Maintenance Organization (HMO)?

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.

How a Health Maintenance Organization (HMO) Works

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 with the HMO. These contracts allow for premiums to be lower than for traditional health insurance — since the health providers have the advantage of having patients directed to them. 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.

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.

The HMO as it exists today was established under the Health Maintenance Organization Act of 1973. Passed by former President Richard Nixon, the Act 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."

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 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 a co-pay 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.

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 a PPO, HMO plans require that participants receive healthcare services from an assigned provider. PPO plans usually have deductibles while 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.

HMO vs. Point-of-Service (POS)

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.

If you don't travel frequently, you'll be better off with an HMO rather than a point-of-service plan because of the lower costs.

Advantages and Disadvantages of HMOs

It's important to weigh the advantages and disadvantages of HMOs 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.

Advantages

The first and most obvious advantage of participating in an HMO is the low cost. 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 for those with an HMO.

There's also a very good likelihood that you'll have to deal with the insurer itself. That's because you have a primary care doctor you must choose from who is responsible to manage your treatment and care. This professional will also advocate for services on your behalf. This includes making referrals for specialty services for you.

The quality of care is generally higher with an HMO. The reason is that patients are encouraged to get annual physicals and to seek out treatment early.

Disadvantages

If you're paying for an HMO, 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. This doctor, though, must be part of the network. This means 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.

You'll need referrals for any specialists if you want your HMO to pay for any visits. So if you need to visit a rheumatologist or a dermatologist, your primary doctor 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.

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.

HMO Questions and Answers

What is HMO Insurance?

HMO or health maintenance organization insurance provides covered individuals with health insurance in exchange for monthly or annual fees. People pay lower premiums than those with other forms of health insurance when they visit doctors and other providers who are part of the HMO's network.

What Are HMO Examples?

Almost every major insurance company provides an HMO plan. For instance, Cigna and Humana provide their own versions of the HMO. Aetna also offers individuals two options, including the Aetna HMO and the Aetna Health Network Only plan.

What Are the Benefits of an HMO?

The main benefits are cost and quality of care. People who purchase HMO plans benefit from lower premiums than traditional forms of health insurance. This allows insured parties to get a higher quality of care from providers who are contracted with the organization. HMOs typically come with low or no deductibles and only charge relatively low co-pays. HMO participants also don't need referrals to get specialty services such as mammograms.

What Is the Difference Between an HMO and Health Insurance?

Coverage under an HMO is generally pretty restrictive and comes at a lower cost to insured parties. Traditional health insurance, on the other hand, charges higher premiums, higher deductibles, and higher co-pays. But health insurance plans are much more flexible. People with health insurance don't need to have a primary care physician to outline treatment. Health insurance also pays some of the costs for out-of-network providers.

Why Do HMOs Have a Bad Reputation?

There are several restrictions for those covered under HMOs, which is why these plans have such a bad reputation. For instance, HMOs only allow insured parties to see individuals in their own network, which means they are responsible for the full amount of a visit to any doctor or specialist outside this group. The plan may also require individuals to live in a certain area, This means someone who receives medical service out of the HMO's network must pay for it themselves. The plans also require individuals to choose a primary doctor who determines the kind of treatment patients need.

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 preferred provider organization, or the HMO, also known as the health maintenance organization. The HMO provides insured individuals with lower out-of-pocket costs, but more restrictive conditions, including the doctor you see. Make sure you weigh out the benefits and disadvantages of the plan, regardless of what you choose.