Understanding HMO and PPO Health Plans: How are They Different and Why Does it Matter?
Most Americans receive their health services via managed-care health insurance. This applies to both publicly and commercially insured patients, and the two most common managed-care setups are Health Maintenance Organizations (HMOs) and Preferred Provider Organizations (PPOs).
Since the 1980s, when managed care organizations began to replace fee for service (FFS) models, the goal was to contain healthcare spend and to provide the early interventions that could improve patient health, while also preventing higher cost downstream treatments.
According to this 2019 Health Benefits Employer Survey from the Kaiser Family Health Foundation, PPOs are the most common insurance plan type, enrolling 44% of covered U.S. workers, while 19% of employer-covered individuals are in an HMO. In the individual market, in which individuals purchase their own coverage, HMOs have become more common and, generally speaking, are the lower-cost option.
HMOs and PPOs are different from each other in four key ways. Understanding how each model works—and their implications for both your patients and your provider practice—may help you to diversify your payer mix and to deliver more patient-centered care.
4 Key Differentiators Between HMOs and PPOs
1. The health plan’s requirement that all patients have a primary care physician (PCP), internist or pediatrician who will provide preventive and standard care, and refer the patient to required medical specialists or services.
2. The mandate to secure pre-authorizations or prove medical necessity for non-standard or more expensive treatments and interventions.
3. Network size and provider reimbursement models.
4. Member/patients’ up-front or per-service costs.
PCP-Patient Relationships, Coordination of Patient Care and Specialist Referrals
HMOs: In most HMO plans, members must select a primary care provider for standard care and to coordinate patients’ referrals and access to specialist care. Some HMOs automatically assign their members to a PCP, while other patients get to select a PCP from within the HMO’s approved or contracted network.
PPOs: By contrast, most PPOs do not require their members to select a network PCP. This gives the patient direct access to specialty services, but it also means that, often, the patient must coordinate their own specialty care, with or without the expertise to do so.
Implications for the provider: “In an HMO setting, your primary care physician (PCP) becomes the most integral and central person involved in your health,” writes Dr. Sanaz Majd, a family physician who writes an online column and broadcasts a podcast, “House Call Physician.”
Given the central role of the PCP in HMO care, it’s important to ensure that there’s a good patient-provider fit and a high degree of trust. Also, HMOs typically restrict their coverage and the number of covered visits, tests or treatments.
HMOs: As we know, managed care organizations work under the dual aim of saving healthcare costs while achieving better patient health outcomes. Or, as Dr. Majd writes: “… the goal with an HMO model is to keep you as healthy as possible in order to decrease the utilization of healthcare and hence keep costs down.”
For HMO members, PCPs are generally responsible for getting authorizations or proving the medical necessity case for certain higher-cost procedures or services, including diagnostic procedures such as MRIs and newer or more expensive prescription drugs.
PPOs: In effect, PPO plans use the pre-authorization process—often done by the patient—to safeguard costs by ensuring that they only pay for medically necessary services or procedures. What exact procedures require pre-authorizations? Each plan has different requirements, but it’s safe to assume that non-emergency inpatient admissions and surgeries must be pre-authorized.
Implications for providers: Generally, this depends on who needs to secure the pre-authorization. If it’s the provider, then that can mean longer wait-times for your patients and increased staffing hours at your practice. Also, some insurers will nudge specialists or PCPs toward cheaper alternatives before authorizing the more invasive or higher-cost option. For many providers, the payers’ “medical necessity” determinants or requirements appear to undermine or diminish the provider’s medical training, patient care standards and expertise.
HMOs: HMO provider networks are generally smaller and, therefore, provide fewer provider choices for their members. Also, HMOs tend to reimburse providers via capitated payments—in which a provider is paid a monthly rate for each HMO member in their care.
PPOs: PPO provider networks tend to be much larger, and offer the member expanded in- and out-of-network choices. In PPOs, physicians and other providers are more likely to be paid for each service or via a fee-for-service (FFS) model.
Implications for providers: Of course, larger networks tend to offer more competition, especially when it comes to attracting new patients into your particular practice or service. In terms of reimbursements, HMO capitation payments provide guaranteed and predictable income. However, particularly in the case of patients covered by Medicaid, the per-service reimbursement rates will be much lower than those paid by commercial insurances or Medicare.
The Patients’ or Plan Members’ Up-Front or After-care Costs and Choices
HMOs: From the members’ monthly premiums to their per-service cost sharing (deductibles, copayments and coinsurance), HMOs cost less. In fact, some employer-sponsored HMOs don’t require (or have very low) deductibles, and set minimal copayments for selected services. These member cost-savings don’t always translate to the individual-insurance market, in which members find and pay for their own health coverage and where deductibles and out-of-pocket costs are higher (than employer-sponsored plans). The lower costs only apply when HMO members receive their care from providers within the HMO’s contracted network. Except for emergency care, an HMO won’t pay for any out-of-network care.
PPOs: With their expanded networks and access to, and partial coverage for, out-of-network care, PPOs are the more expensive option. Like HMOs, PPOs cost incentivize their members for using its in-network services, including physicians, laboratories, x-ray facilities or hospitals. However, unlike HMOs, PPOs provide partial coverage for out-of-network care and, therefore, offer increased member flexibility and choices.
Implications for providers: Often, surprise medical bills or unprecedented post-procedure costs fuel a high degree of patient dissatisfaction. Therefore, if or when you provide out-of-network care to either an HMO or a PPO member, that patient needs to know that they will probably be paying for all (HMO) costs or part (PPO) of the services provided by your practice. This may include balance billing, in which, sans a contracted reimbursement rate, the patient is responsible for the difference between your practice’s pre-contracted amount and your normal, uncontracted costs.
As a provider, you may feel that your patients’ health insurance choices are beyond your purview or responsibility. However, just as we know that patient engagement can help to drive overall treatment compliance, informed and discerning health-insurance consumers can help to advance their own health outcomes by choosing the managed care option that works best for them.