HMO and PPO Managed Care Models

What is the difference between PPO and HMO

Everyone buying health insurance needs to know the difference between an HMO and PPO. That is because virtually every major medical health insurance policy today is either a HMO or PPO health plan.

What is Managed Care?

Managed Care is the broad term used to talk about both Health Maintenance Organizations and Preferred Provider Organizations 

The term itself describes the actions that these organizations take. They are supposed to manage the care that you receive in order to bring down costs. Unfortunately, these organizations do not manage care for the best outcomes at the lowest cost. Instead they focus solely on cost.

How Many Americans Are Enrolled in a PPO and HMO Health Plan?

If you are under the age of 65 and have health insurance, you health insurance is either an HMO or PPO. According to the Kaiser Family Foundation, 72% of Americans who are covered by employer-sponsored health insurance are in a
managed care plan. (

Today, more than 75% of all Americans are covered under a managed care plan. 

Even people age 65 and older who are covered by Medicare are choosing to enroll in Managed Care health plan. These HMO and PPO plans are called Medicare Advantage Plans. These private managed care health insurance plans actually replace traditional Medicare. More than three out of every ten people on Medicare are in a Medicare Advantage Plan today.

What is an HMO?

confused, hands, up

An HMO is a Health Maintenance Organization. An HMO will contract with a network of doctors, hospitals, and other medical service professionals to provide services to their members. Everyone insured under an HMO health plan must use the services of these providers. There are no benefits if you use a doctor or facility that is not in the HMO network. There are several types of Health
Maintenance Organizations which I will discuss later.  

The Health Maintenance Organization came into existence with the passage of the Health Maintenance Organization Act of 1973 ( The goal of this legislation was to bring down the costs of healthcare. You probably do not know this, but the rising cost of health insurance and healthcare has been a problem since the nineteen seventies. 

Legislators were convinced that the Health Maintenance Organization could bring downs costs. They were so convinced that employers with 25 or more employees were mandated under the 1973 law to offer an HMO option when available.

The Network Model HMO Plan

If you are in an HMO health plan it is very likely that you are in a Network Model HMO. In this model the health insurance company contracts with a wide range of doctors, hospitals, urgent care centers, and other medical professionals to provide services to its members.  

Under the Network HMO model, the health insurance company and the providers contractually agree on a set of prices for every medical service that can be delivered. Beyond the contract’s pricing agreements, there may are usually agreed on quality metrics. 

In practice your health insurance will look like an indemnity policy. That means that it may state that after the deductible you pay 20% of the approved charge. Let us say that you have an appendectomy. Your surgeon may charge the insurance company $20,000. When you receive your explanation of benefits you see that insurance company will only allow $9,000. Your 20% of this bill is $1800. The insurance company will pay $7200 to the surgeon.

Other Health Maintenance Models

In addition to the Network Model, there are three other types of Health Maintenance Organizations. 

Under the Staff Model HMO, all the doctors and other medical professionals are employees of the Health Maintenance Organization. In addition, the HMO typically owns their hospitals, urgent care centers, and other facilities.  

Under the Independent Practice Association (IPA) the HMO contracts with independent physicians who agree to provide services to members for a set fee. Each time that a physician treats a member he/she receives a per capita or set fee for service.   

In a Group Model HMO, a physician group contracts with the HMO. The group is paid a per capita fee. The physician group than decides how it will compensate the physicians. 

man, thinking, doubt

What is a PPO?

A PPO is a Preferred Provider Organization. Like an HMO, the PPO will contract with specific doctors to provide medical services. The PPO will also contract with hospitals, and other medical professionals to provide services to members. Like the Group Model HMO, network providers are paid based on contractually agreed upon pricing.  

Unlike the HMO, health insurance policies utilizing a PPO network allow you to use the services of medical professionals who are not contracted with the health plan. The freedom to use out-of-network services will come with increased financial cost.   

Remember the example above about the appendectomy? You can choose to use a surgeon that is not in the PPO network. But, if the surgeon charged the same $20,000, your share might be 50% of the charges or $10,000. Both your deductibles and the maximum out-of-pocket liability are increased.  

Because the insurance company may pay higher benefits under the PPO model, the premiums will also be higher than an HMO plan.

Is the Quality of Your Healthcare Better a PPO or HMO?

The two goals of managed care were to lower healthcare costs (and by extension health insurance premiums) and improve the delivery of healthcare. As a result, the rise of the Health Maintenance Organization did lower the costs of healthcare in the nineteen nineties. But that was a short-lived cessation of increasing health insurance premiums.   

Still, despite that short-lived respite, managed care continued to be viewed as the solution to rising costs. So much so that managed care plans were introduced to both Medicare and Medicaid beneficiaries.  

According to an article on the AHIP website ( “Medicaid managed care plans are making good on the commitment to provide their members with high-quality coverage and health care,” said Matt Eyles, AHIP President and CEO. “The data are clear that continuous quality improvement is a hallmark of Medicaid managed care. Medicaid managed care plans are delivering the high-quality coverage and care their members deserve.” 

But what about Medicare Advantage Plans and health insurance plans for people under age 65?

Are There Quality Metrics for Medicare Advantage Plans?

We know that enrollment in Medicare Advantage Plans (Medicare Managed Care) has skyrocketed. Today one out of three Medicare Beneficiaries are enrolled in an Advantage Plan. It is perhaps even more important to know the difference between a PPO and a HMO as a Medicare beneficiary. But has managed care improved the qualify to healthcare? According to the article Medicare Beneficiaries More Likely To Receive Appropriate Ambulatory Services In HMOs Than In Traditional Medicare ( the answer is “yes”.   

And there is a lot of incentive for Advantage Plans to deliver high quality healthcare at a lower cost. The Department of Medicare and Medicaid has set up a bonus arrangement for plans that are successful.

Quality and Under Age 65 Health Insurance

Finally, has the use of managed care networks improved care for individuals under age 65 that are covered by traditional health insurance? When I began this article, I thought that I would find a lot of data on managed care plans and the quality of healthcare. As it turned out, there is very little written about the impact of managed care on health insurance for people under the age of 65 or not on Medicaid. 

The most recent article that I found was dated July 2001 and titled Quality in Managed Care: Promise Versus Reality in the American Journal of Medicine. The most telling paragraph says: In general, simple preventive services, such as immunizations and mammograms, are delivered at higher rates in a managed care environment. Enrollees in managed care plans report less satisfaction with care, however, and experience more difficulty in accessing specialized services. Elderly, poor, and chronically ill enrollees are more likely to experience functional decline.”  

The biggest managed care issue for many Americans is the feeling that decisions about approving medical care are made by nameless, faceless bureaucrats at the health insurance company. You have probably read the stories of a doctor recommending a treatment but the managed care organization refusing to approve it. Maybe you have read articles about someone who received a necessary treatment only to have the health insurance company deny payment.  

So, has managed care improved the quality of healthcare? There does not seem to any consensus.

Consumer Rights if a Medical Claim is Denied

Every HMO or PPO health insurance policy provides a system in for grievances. In addition many states have a Department of Insurance where consumers can turn for an appeal.  

Medicare and Medicaid beneficiaries have rights to an independent appeal beyond a health plan’s own internal grievance and appeals system. 

And finally, every consumer enrolled in a managed care plan should have the right to an independent, external appeal of benefit and service denials with an expedited time frame for dispute resolution.

Does Managed Care Lower My Costs?

In the early days of managed care when the Health Maintenance Organization was the dominant managed care model, and increasing costs were slowed. But over the ensuing decades, managed care has been less effective in controlling costs. 

After every medical claim you will receive an Explanation of Benefits. Your “Explanation of Benefits” (EOB)  will show the cost that the physician charged followed by the contractually agreed upon charge (which is way lower). To convince you that your HMO or PPO is saving you money the EOB will display the amount saved. But the truth is that managed care did not save you money. In fact, you often pay significantly more under managed care than if you were a cash-pay patient. 

Here is an example. Recently my wife needed to fill a prescription. The local pharmacist filled her prescription and told her that she owed $76. My wife left the pharmacy, checked on and returned. After showing the GoodRx price, she received the same prescription at the same pharmacy for $16. That is the power of cash-payment!  

Anytime that you are required to pay for a non-emergency medical service, whether it is just a copay or subject to your deductible, always ask for the cash-pay price. Often that price is 20% to 30% lower than the cost negotiated by your managed care health plan.

Buying a Managed Care Health Insurance Plan

Knowing the difference between a PPO and an HMO is very important when shopping for health insurance. It is not unusual for an insurance company to have two or three different health plans, all with the same deductible, same copays, and the same out-of-pocket maximums, yet different prices. The difference in premium is driven by the choice of a network. One network may be extremely narrow, consisting of one hospital and a short list of doctors. This would be the lowest premium. On the other end of the spectrum is a plan that includes every hospital within 25 miles and almost every doctor. This plan is the most expensive. Yet the healthcare will be the same! 

You may also find health plans that utilize a national network. In these plans you can use any provider, anywhere in the United States as long as the doctor is in their network.  

Your choice is ultimately a personal one based on affordability and your objectives.

Work With a Professional Health Insurance Agent

I usually end every article with this suggestion. A good health insurance agent will be able to guide you in choosing a plan with the best managed care network. Even better, the agent might be aware of plans that do not utilize managed care networks. 

Most importantly, a professional health insurance will work with most, if not all of the available health insurance companies.  

Have Questions? Schedule a call with me Or send me an email at

Important Links

If you qualify for a premium subsidy on, consider reading my article on The Affordable Care Act at

If you are nearing retirement and need to purchase a health insurance policy I suggest that you check out my article on Health Insurance for Retirees at

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