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

What Is a Health Maintenance Organization (HMO)?

An individual shopping for health insurance may find a variety of insurance providers with unique features. One popular type of insurance provider is the health maintenance organization (HMO), which provides coverage through a network of physicians.

There are several key differences between HMO plans and the more widely used preferred provider organization (PPO) plans. With an HMO plan, your primary care physician will refer you to specialists and you must stay within a network of providers to receive coverage. 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 typically limits member coverage to medical care provided by doctors, hospitals, and other healthcare providers within its network, except for emergencies and out-of-area urgent care.

With guaranteed patient volume, providers enter into contracts at discounted rates, enabling HMOs to reduce costs and offer lower premiums than other health plans. However, this system may narrow the care options available to HMO members.

When deciding whether to choose an HMO plan, you should consider:

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

In addition to cost savings, the agreed-upon contracts with providers help ensure consistent and structured care standards across HMO networks. With a coordinated system of referrals and communication between primary care physicians and specialists, HMOs are known for providing subscribers with integrated care that focuses on prevention and wellness.

The HMO as it exists today was established under the Health Maintenance Organization Act of 1973. 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 from healthcare providers within the HMO's network. Although subscribers are typically limited to in-network care, if they require emergency care—sudden illnesses or injuries that are life-threatening—and certain urgent treatments, such as dialysis, most HMOs will cover these from out-of-network providers.

Those insured under an HMO may need to live or work within the plan's geographic area to be eligible for coverage. However, if a subscriber requires urgent care—an illness or injury that needs prompt treatment, typically within 24 to 48 hours—most HMOs will cover out-of-network providers if the subscriber is outside the plan’s geographic area. Subscribers who receive other nonemergency, out-of-network care, including routine urgent care, will 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, annual mammograms for women over the age of 40 will not require doctor referrals.

Specialists to whom PCPs typically refer insured members are within the HMO coverage network, so their services are covered under the HMO plan after co-pays are paid. If a PCP leaves the network, subscribers are notified so they can choose another PCP from within the HMO plan.

HMO Regulation

Historically, the regulation of health insurance—including HMOs—has fallen under state jurisdiction; however, since the passage of the Patient Protection and Affordable Care Act (PPACA) in 2010, federal laws have also played a significant role.

However, the dominant role of state regulation in health insurance has continued, largely due to the impact of the McCarran-Ferguson Act of 1945, which established that states regulate the insurance industry and that no federal law can override state regulation unless it explicitly states otherwise.

Other legislation, such as the HMO Act of 1973 and the Employee Retirement Income Security Act (ERISA) of 1974, has also brought certain aspects of the health insurance business under the federal government's purview.

The federal government's role in the insurance sector at large has expanded through acts like the 2010 Dodd-Frank Act, which established the Federal Insurance Office (FIO). Although the FIO's authority does not extend to health insurance, it reflects the broader expansion of federal regulation and oversight across the insurance industry.

HMO vs. Preferred Provider Organization (PPO)

Preferred provider organization (PPO) plans are the most common type of plan among U.S. workers who are covered through their employers, according to research firm KFF. Approximately 47% of covered workers are enrolled in a PPO in the most recent survey, versus 13% enrolled in an HMO. Another 29% were covered by a high-deductible health plan and 10% by point-of-service plans. Just one percent of workers are still covered by traditional indemnity plans.

A preferred provider organization is a type of managed-care health insurance plan. PPO medical and healthcare providers are called preferred providers. Medical and healthcare personnel who are part of the PPO network 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 participants to receive healthcare services within an assigned network. Medical and dental PPO plans usually have deductibles, while HMO plans typically do not.

Both programs allow for specialist services. However, in an HMO, the designated PCP must provide a referral to a specialist. Although HMOs are the oldest type of managed healthcare plan currently in use, PPO plans have long been popular due to their flexibility, including the option to see out-of-network providers and visit specialists without referrals.

However, compared to HMOs, PPOs often come with higher premiums and out-of-pocket costs. Over time, the advantages of PPOs have narrowed as insurers reduce provider networks and take additional measures 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: 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.

A POS plan may offer better cost-sharing for out-of-network services if the policyholder obtains a referral from their PCP, compared to going without a referral. However, without a referral, some POS plans may not cover the costs at all. 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.

Some POS plans may offer out-of-network coverage, which can benefit patients who travel frequently. A disadvantage is that out-of-network deductibles tend to be high for POS plans. 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 monthly or annual premiums 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 those found in other plans. Your out-of-pocket costs will also be lower for your prescriptions. Billing tends to be less complicated.

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

Higher quality of care: The quality of care is generally higher with an HMO plan because patients are encouraged to prioritize preventive care, such as annual physicals, and to seek treatment early.

Cons Explained

Must use medical professionals in the plan’s network: You’re restricted on how you can use the plan. You must designate a doctor within the network who will be responsible for your healthcare needs, including primary care and referrals. If you see someone out of network, you are typically responsible for all costs incurred, although some HMOs may cover certain out-of-network services in emergencies or if no network providers are available."

No specialist visits without a referral: You’ll need referrals for any specialists if you want your HMO to pay for those 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 usually very strict definitions of what constitutes an emergency. If your condition doesn’t fit the criteria, the HMO plan won’t pay.

FAQs

The Bottom Line

Health insurance is an important consideration for every individual and family. 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 a PPO or an HMO. The HMO provides lower out-of-pocket costs but carries more restrictive conditions. Make sure you weigh the benefits and disadvantages of each plan before you choose your coverage.