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.

Key Takeaways

A health maintenance organization (HMO) is a network or organization that provides health insurance coverage for a monthly or annual fee.
An HMO limits coverage to certain providers.
HMO contracts allow for premiums to be lower, but they also add additional restrictions to their members.
An HMO plan requires you first receive medical care services from your designated primary care physician (PCP).
Preferred provider organizations (PPOs) and point-of-service (POS) plans are two types of healthcare plans that are alternatives to HMOs.

How a Health Maintenance Organization (HMO) Works

HMOs provide health insurance coverage for a monthly or annual fee. An HMO limits member coverage to medical care provided through a network of doctors and other healthcare providers who are under contract with the HMO.

These contracts allow for premiums to be lower than for traditional health insurance—since the healthcare providers have the advantage of having patients directed to them. However, they also restrict HMO members' choices for care.

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)

Note

An HMO is a health insurance provider network that provides basic and supplemental health services to its subscribers. The organization secures its network of health providers contracting with PCPs, clinical facilities, and specialists.

The medical entities that enter into contracts with the HMO are paid an agreed-upon fee to offer a range of services to HMO members or 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.

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 in the organization’s network of providers, but they are largely limited to receiving their care and services only from doctors within the HMO network. However, some out-of-network services, including emergency care and dialysis, can be covered under the HMO.

Those who are insured under an HMO may have to live or work in the plan’s network area 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. However, HMO subscribers who receive nonemergency, out-of-network care have to pay for it out of pocket.

In addition to low premiums, there are typically low or no deductibles with an HMO. Instead, the organization charges a co-pay for each clinical visit, test, or prescription.

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, screening mammograms in most cases will not require a doctor’s referral.

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

HMOs are regulated by both states and the federal government. The McCarran-Ferguson Act of 1945 established that states regulate the insurance industry, and that no federal law can override state regulation unless it explicitly does so.

As such, regulation of health insurance is left largely to the states. Still, some legislation—such as the HMO Act of 1973 and the Employee Retirement Income Security Act of 1974, among others—can bring some aspects of the health insurance business under the purview of the federal government.

The federal government does maintain some oversight of HMOs. For example, the 2010 Dodd-Frank Act created the Federal Insurance Office (FIO), which can monitor all aspects of the insurance industry.

Note

The Affordable Care Act of 2010 created the ACA Health Insurance Marketplace, which provides access to various HMO and other plans for individuals, families, and small businesses who do not have access to employee-sponsored coverage.

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. Some 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 PPO is a medical care plan in which health professionals and facilities provide services to subscribed clients at reduced rates. PPO 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 that participants receive healthcare services from an assigned provider. 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. PPO plans are the oldest type of managed healthcare plan and—due to their flexibility and relatively low out-of-pocket costs—have long been the most popular. That advantage has narrowed, however, as plans reduce the size of their provider networks and take other steps 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.

However, a POS plan will pay more toward an out-of-network service if the policyholder gets a referral from their PCP than if they don’t secure a referral. 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.

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. 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.

If you don’t travel frequently, you’ll be better off with an HMO plan than a POS plan because of the lower costs.

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

Lower out-of-pocket costs
Primary care physician directing your treatment
Higher quality of care

Cons

Must use medical professionals in the plan’s network
No specialist visits without a referral
Emergencies must meet certain conditions

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. That is because patients are encouraged to get annual physicals and seek out 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. You are responsible for any costs incurred if you see someone out of the network, even if there’s no contracted doctor in your area.

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

What Are the Benefits of an HMO?

The main benefits are cost and quality of care. People who purchase HMO plans enjoy lower premiums than traditional forms of health insurance. The plan's focus on preventative medicine allows insured parties to get a higher quality of care from providers who are contracted with the organization. HMOs typically come with low or no deductibles and relatively low co-pays.

What Are Examples of HMOs?

Almost every major insurance company provides an HMO plan. For instance, Cigna and Humana provide their own versions of the HMO. Aetna offers individuals two options: the Aetna HMO and the Aetna Health Network Only plan.

What Is the Difference Between an HMO and a PPO?

Both an HMO and a PPO use a network of physicians and specialists to help control costs. HMOs tend to have lower premiums and require you to obtain a referral from your primary care physician to see an in-network specialist. PPOs allow you to see any specialist without requiring referrals, but the fees and deduictibles for out-of-network services are higher.

How Does an HMO Differ From Traditional Health Insurance?

Coverage under an HMO is generally fairly restrictive and comes at a lower cost to insured parties. Traditional medical insurance charges higher premiums, higher deductibles, and higher co-pays. However, non-HMO plans are much more flexible. People with health insurance don’t need to have a primary care physician to outline treatment. Health insurance also pays some of the costs for out-of-network providers.

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, including which doctors who you see. Make sure you weigh the benefits and disadvantages of each plan before you choose your coverage.