There are three basic types of managed
care health insurance plans: (1) HMOs, (2) PPOs, and (3) POS
A health maintenance organization (HMO) is a type of managed
healthcare system. HMOs, and their close cousins, preferred
provider organizations (PPOs), share the goal of reducing
healthcare costs by focusing on preventative care and
implementing utilization management controls.
Unlike many traditional insurers, HMOs do
not merely provide financing for medical care. The HMO
actually delivers the treatment as well. Doctors, hospitals,
and insurers all participate in the business arrangement
known as an HMO.
HMOs provide medical treatment on a
prepaid basis, which means that HMO members pay a fixed
monthly fee, regardless of how much medical care is needed
in a given month. In return for this fee, most HMOs provide
a wide variety of medical services, from office visits to
hospitalization and surgery. With a few exceptions, HMO
members must receive their medical treatment from physicians
and facilities within the HMO network. The size of this
network varies depending on the individual HMO.
When you join an HMO, you choose a primary
care physician (PCP) who is your first contact for all
medical care needs. The primary care physician provides your
general medical care and must be consulted before you can
see a specialist. Because of this control system, HMO costs
tend to increase less rapidly than other insurance plans.
Advantages of HMOs
Low out-of-pocket costs
With most types of insurance, you are responsible for paying
a percentage of the bill every time you receive medical
care. Additionally, there may be a deductible that must be
met before insurance starts picking up the tab. In contrast,
HMO members pay a fixed monthly fee, regardless of how much
medical care is needed in a given month. Instead of
deductibles, HMOs often have nominal co-payments.
Focus on wellness and preventative care
By reducing out-of-pocket costs
and paperwork, HMOs encourage members to seek medical
treatment early, before health problems become severe.
Additionally, many HMOs offer health education classes and
discounted health club memberships.
Typically no lifetime maximum payout
Unlike most health insurance
plans, HMOs generally do not place a limit on your lifetime
benefits. The HMO will continue to cover your treatment as
long as you are a member.
Disadvantages of HMOs
Tight controls can make it more difficult to get
As an HMO member, you must choose a primary care
physician (PCP). Your PCP provides your general medical care
and must be consulted before you seek care from another
physician or specialist. This screening process helps to
reduce costs both for the HMO and for HMO members, but it
can also lead to complications if your PCP doesn't provide
the referral you need.
Care from non-HMO providers generally
Except for emergencies occurring
outside the HMO's treatment area, HMO members are required
to obtain all treatment from HMO physicians. The HMO will
not pay for non-emergency care provided by a non-HMO
physician. Additionally, there may be a strict definition of
what constitutes an emergency.
Like an HMO, a preferred provider organization (PPO) is a
managed healthcare system. However, there are several
important differences between HMOs and PPOs.
A PPO is actually a group of doctors
and/or hospitals that provides medical service only to a
specific group or association. The PPO may be sponsored by a
particular insurance company, by one or more employers, or
by some other type of organization. PPO physicians provide
medical services to the policyholders, employees, or members
of the sponsor(s) at discounted rates and may set up
utilization control programs to help reduce the cost of
medical care. In return, the sponsor(s) attempts to increase
patient volume by creating an incentive for employees or
policyholders to use the physicians and facilities within
the PPO network.
Rather than prepaying for medical care,
PPO members pay for services as they are rendered. The PPO
sponsor (employer or insurance company) generally reimburses
the member for the cost of the treatment, less any
co-payment percentage. In some cases, the physician may
submit the bill directly to the insurance company for
payment. The insurer then pays the covered amount directly
to the healthcare provider, and the member pays his or her
co-payment amount. The price for each type of service is
negotiated in advance by the healthcare providers and the
Advantages of PPOs
Free choice of healthcare provider
PPO members are not required to seek care from PPO
physicians. However, there is generally strong financial
incentive to do so. For example, members may receive 90%
reimbursement for care obtained from network physicians but
only 60% for non-network treatment. In order to avoid paying
an additional 30% out of their own pockets, most PPO members
choose to receive their healthcare within the PPO network.
Out-of-pocket costs generally limited
Healthcare costs paid out of your own pocket (e.g.,
deductibles and co-payments) are limited. Typically,
out-of-pocket costs for network care are limited to $1,200
for individuals and $2,100 for families. Out-of-pocket costs
for non-network treatment are typically capped at $2,000 for
individuals and $3,500 for families.
Disadvantages of PPOs
Less coverage for treatment provided by non-PPO
As mentioned previously, there is a strong financial
incentive to use PPO network physicians. For example,
members may receive 90% reimbursement for care obtained from
network physicians but only 60% for treatment provided by
non-network physicians. Thus, if your longtime family doctor
is outside of the PPO network, you may choose to continue
seeing her, but it will cost you more.
More paperwork and expenses than HMOs
As a PPO member, you may have to fill out paperwork in order
to be reimbursed for your medical treatment. Additionally,
most PPOs have larger co-payment amounts than HMOs, and you
may be required to meet a deductible.
A Point of Service (POS) plan is a type of managed
healthcare system that combines characteristics of the HMO
and the PPO. Like an HMO, you pay no deductible and usually
only a minimal co-payment when you use a healthcare provider
within your network. You also must choose a primary care
physician who is responsible for all referrals within the
POS network. If you choose to go outside the network for
healthcare, POS coverage functions more like a PPO. You will
likely be subject to a deductible (around $300 for an
individual or $600 for a family), and your co-payment will
be a substantial percentage of the physician's charges
Advantages of POS plans
POS coverage allows you to maximize your freedom of choice.
Like a PPO, you can mix the types of care you receive. For
example, your child could continue to see his pediatrician
who is not in the network, while you receive the rest of
your healthcare from network providers. This freedom of
choice encourages you to use network providers but does not
require it, as with HMO coverage.
As with HMO coverage, you pay only
a nominal amount for network care. Usually, your co-payment
is around $10 per treatment or office visit. Unlike HMO
coverage, however, you always retain the right to seek care
outside the network at a lower level of coverage.
When you choose to use network
providers, there is generally no deductible. Thus, coverage
begins from the first dollar you spend as long as you stay
within the POS network of physicians.
No "gatekeeper" for
If you choose to go outside the
POS network for treatment, you are free to see any doctor or
specialist you choose without first consulting your primary
care physician (PCP). Of course, you will pay substantially
more out-of-pocket charges for non-network care.
Out-of-pocket costs limited
Healthcare costs paid out of your
own pocket (i.e., deductibles and co-payments) are typically
limited. The average yearly limit for individuals is around
$2,400. For families, the average yearly limit is
Disadvantages of POS plans
Substantial co-payment for non-network care
As in a PPO, there is generally strong financial incentive
to use POS network physicians. For example, your co-payment
may be only $10 for care obtained from network physicians,
but you could be responsible for up to 40% of the cost of
treatment provided by non-network doctors. Thus, if your
longtime family doctor is outside of the POS network, you
may choose to continue seeing her, but it will cost you
Deductible for non-network care
In most cases, you must reach a
specified deductible before coverage begins on
out-of-network care. On average, individual deductibles are
around $300 per year, and the average annual family
deductible is about $600. This deductible amount is in
addition to the co-payment for out-of-network care.
Tight controls to get specialized care
As in an HMO, you must choose a primary care physician
(PCP). Your PCP provides your general medical care and must
be consulted before you seek care from another doctor or
specialist within the network. This screening process helps
to reduce costs both for the POS and for POS members, but it
can also lead to complications if your PCP doesn't provide
the referral you need.
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