What Is a Health Maintenance Organization?

An individual that needs to secure his or her own health insurance plan 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 the health maintenance organization (HMO), which includes a network of physicians under its coverage.

A health maintenance organization (HMO) is a network or organization that provides health insurance coverage for a monthly or annual fee. An HMO is made up of a group of medical insurance providers that limit coverage to medical aid provided from doctors that are under the contract of the HMO. These contracts allow for premiums to be lower since the health providers have the advantage of having patients directed to them, but these contracts also add additional restrictions to the HMO's members.

When deciding whether to opt for an HMO plan, you should consider the cost of premiums, out-of-pocket costs, if your medical condition requires specialized care, and whether having your own primary healthcare provider is important.

How an HMO Works

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 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.

HMO subscribers pay a monthly or annual premium to access medical services in the organization’s network of providers but are also limited to receiving healthcare from these contracted medical providers. An insured person must get his care and services from doctors under the HMO network, however, some out-of-network medical care can be covered under the HMO. These types of services include emergency care and dialysis.

Furthermore, coverage under a health maintenance organization may require the insured to live or work in the plan's area of network in order 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. Any non-emergency out-of-network care received will be paid out-of-pocket.

In addition to the low premiums, there are typically low or no deductibles with an HMO. Instead, the organization charges an amount, known as a copayment (co-pay), for each clinical visit, test, or prescriptions. Copayments in HMOs are typically low and amount to $5, $10, or $20 per care, thereby minimizing out-of-pocket expenses and making HMO plans affordable for families and employers.

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 unless the PCP refers them to a specialist.

However, certain specialized services, such as screening mammograms, do not require referrals. A specialist that an insured person is referred to typically falls within the HMO coverage, and so the services provided by the specialist will be covered under the HMO plan after copayments are made. A subscriber will be notified if his primary care physician leaves the network, in which case, he will have to choose another physician from within the HMO plan.

Key Takeaways

  • A health maintenance organization (HMO) is a network or organization that provides health insurance coverage for a monthly or annual fee, made up of a group of medical insurance providers that limit coverage to medical aid provided from doctors that are under the contract of the HMO.
  • These contracts allow for premiums to be lower since the health providers have the advantage of having patients directed to them, but these contracts also add additional restrictions to the HMO members.
  • HMO plans require participants to receive medical care services from an assigned provider known as the primary care physician (PCP).

Preferred Provider Organization (PPO) Versus HMO Plans

HMO plans require participants to receive medical care services from an assigned provider. A preferred provider organization (PPO) is similarly a medical care arrangement in which medical 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 utilize the services of any provider within their network. Out-of-network care is available but will result in higher costs to the insured. In contrast to a PPO, HMO plans require participants to receive medical care services from an assigned provider.

Both programs allow for specialist services. However, the designated primary care physician must provide a referral to the specialist under an HMO plan. PPO plans are the oldest and, due to their flexibility and lower out-of-pocket costs, the most popular managed healthcare plan as of 2018.

Point-of-Service (POS) Versus HMO Plans

A point-of-service (POS) plan is like an HMO in that it requires the policyholder to choose an in-network primary care doctor and to get referrals from that doctor if they want the plan to cover a specialist’s services. And a point-of-service plan is like a PPO in that it still provides coverage for out-of-network services, but the policyholder will have to pay more than if they used in-network services.

However, the POS plan will pay more toward an out-of-network service if it is referred by the primary care physician than if the policyholder goes outside the network without 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-payments, but in-network co-payments 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. In addition, 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.