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. (https://www.kff.org/report-section/ehbs-2016-section-five-market-shares-of-health-plans/)
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?
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 (https://www.ssa.gov/policy/docs/ssb/v37n3/v37n3p35.pdf). 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.
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?
Are There Quality Metrics for Medicare Advantage Plans?
Quality and Under Age 65 Health Insurance
Consumer Rights if a Medical Claim is Denied
Does Managed Care Lower My Costs?
Buying a Managed Care Health Insurance Plan
Work With a Professional Health Insurance Agent
If you qualify for a premium subsidy on healthcare.gov, consider reading my article on The Affordable Care Act at https://myhealthcare360.org/the-affordable-care-act-obamacare-what-you-need-to-know/
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 https://myhealthcare360.org/what-is-the-best-health-insurance-for-retirees/