HMO vs. PPO Health Insurance Plans

Health care plans, whether purchased individually or through an employer, most often come in the form of a Health Maintenance Organization (HMO) or a Preferred Provider Organization (PPO). These managed care organizations offer the benefit of scale which enables plan participants to receive a high level of service relative to the premium cost. They differ, however, in their structure, their level of service and their cost. So, whether you buy individual coverage or participate in an employer-sponsored health care plan, it would be important to know the ‘ABCs’ of HMOs and PPOs.

Health Maintenance Organizations (HMO)

HMOs are a type of managed care organization that seeks to control the cost of care and pass on the savings to the insured in the form of lower premium costs. They accomplish this by achieving network efficiencies in their structure. Essentially, they hire or contract with health care providers - doctors, hospitals, specialists, medical centers, pharma companies, medical device companies, and other providers - and negotiate a fixed cost for services based on the large number of patients it can provide. The health care providers benefit because they have a built-in clientele that will provide a secure stream of revenue. HMOs can further reduce costs by exerting control over covered services. All forms of care must be approved by the HMO for the coverage to be effective. If a medical procedure is not deemed to be “medically necessary” an HMO can deny coverage.

For the insured, the costs are generally fixed and known in advance. Patients are usually required to make a small co-payment for services provided “in-network.” If services are provided “out-of-network” patients may be required to pay for them entirely out-of-pocket or with much larger co-pays. HMOs require that patients work through a designated primary care physician (PCP), who acts as a gatekeeper for all services. So, if a patient needs treatment from a specialist, such as a neurologist, the PCP must refer the patient to one who is part of the network. Generally, emergency treatment does not require a referral, and, with many plans, women are given more flexibility in choosing their own obstetrician for pre-natal care.

The primary advantage of an HMO to patients is the affordability of their insurance premiums, which, with tighter budgets and rising health insurance costs, is a significant factor in their favor. But HMOs also have their disadvantages, the biggest of which is their inflexibility. Because you can only receive care from providers inside the network, you may not be able to continue to see your family’s PCP. And, if you like your in-network PCP, you won’t be able to follow him should he leave the network (exceptions for pre-natal treatment). For people who travel extensively, HMOs can be somewhat inconvenient if they require care outside of the coverage area.

Preferred Provider Organization (PPO)

Under a PPO, a managed care organization contracts with various health care providers that form a network of “preferred providers” that, when used by covered individuals, pays for the cost of care. PPOs have deductibles and co-pays, but as compared with HMO plans, they tend to be lower (except in cases of out-of-network care).

When you join a PPO, you can choose from among any provider in the network, or you can choose providers out-of-network, but you pay for a greater portion of the cost of care. Typically, when you go out-of-network, you are required to pay the health care costs up front and file a claim with your PPO for reimbursement. Typical coverage splits for out-of-network services are 70/30 or 80/20 after the deductible has been paid. For people who prefer greater flexibility in choosing their health care providers, that is a reasonable cost to pay.

You need not choose a primary care physician (PCP), and should you need specialized care or treatments, you don’t need a referral from a PCP. That doesn’t mean some specialists won’t require a referral before they will see you. Also, if you require more expensive care, such as an MRI or CAT scan, you may need prior approval from your PPO.

PPO plans tend to charge higher premiums because they are more expensive to set up and manage, and they offer more flexibility. Because you can choose a PPO plan with very low deductibles, the premium payments can be very high. Of course, you can lower your premium payment by choosing a higher deductible. PPO plans are also considered more comprehensive in terms of the coverage, including many services that other managed care programs might exclude or charge additional premiums.

Historically, PPO plans have always been preferred due to their flexibility. But as health care costs and insurance costs increase, more individuals and employers are moving towards HMOs because they are more cost efficient. While PPO plans are offered in the individual market, cost conscious consumers are becoming more willing to forgo flexibility for the lower cost of HMOs.