HMOs Versus PPOs: Which Is Better for Your Business?

Posted on Monday, July 29, 2019

Health Maintenance Organizations, or HMOs, and Preferred Provider Organizations, or PPOs, are both types of health insurance plans that fall under a category called "managed care." These plans attempt to control premium costs by restricting their plan members to the lower-cost care providers in a given area.

They do this largely by contracting with a limited number of physicians, hospitals and clinics. An established HMO or PPO can bring a steady stream of patients to any provider in its network. The smaller the network, the more significant the patient flow is to those providers that are in the network. In return for the steady flow of patient referrals from the plan, care providers routinely give deeply discounted pricing for services rendered to members of the HMO or PPO.

This is a big part of how these organizations can pass on savings to plan members -- the deep discounts on care they are able to negotiate with plan providers. If managed care plans did not contract with a relatively limited number of providers in each category, they would have less power to demand price concessions from them.

HMO Basics

With an HMO, the patient must go through a designated primary care physician, or PCP. This physician acts as a sort of 'gatekeeper' to the health care system. He or she is the doctor primarily responsible for coordinating medical care when it involves many different providers. If you want to see a specialist, and your situation is not a medical emergency, HMOs generally require you to get a referral from your primary care physician. If you bypass this process for non-emergency care, your insurance company may not pay the claim, or pay out a reduced amount.

Preferred Provider Organizations

Like HMOs, preferred provider organizations also direct plan members to a restricted network of plan providers. If you seek care outside of the network for non-emergency services, you will likely have to pay more out of pocket, either via a higher co-pay or increased co-insurance. And like HMOs, PPOs may decline to pay the claim for out-of-network care entirely, depending on the terms of your insurance contract.

The difference between HMOs and PPOs is in the role of the primary care physician. A PPO network does not require members to obtain a referral from a PCP before seeing a specialist. You are free to make an appointment with a specialist directly. If the care is medically necessary, the PPO will honor the claim for an in-network specialist.

Preventative Care

Both HMOs and PPOs tend to put more emphasis on preventative care rather than on other more traditional forms of insurance. Historically, members paid little or nothing out of pocket for routine checkups and many screenings. Recent changes in federal law, under the Patient Protection and Affordable Care Act, however, are mandating that all health insurance plans provide expanded coverage of preventative care – so some of these features will apply across the board in the near future, as these reforms work their way through the health insurance industry.

Costs

Both PPOs and HMOs have generally been successful at containing health insurance costs. They do so largely through the price concessions they are able to receive from in-network providers in exchange for patient flow.

There is a downside to this approach to cost saving, though: Plan members have limited ability to choose their own doctor. In many cases, this is not a problem -- people who are generally healthy may not have a pre-existing relationship with a family doctor anyway. However, if it is very important to you to be able to keep going to a specific doctor, and that doctor is not in the network, you may want to consider a traditional fee for service or indemnity insurance plan, rather than a managed care plan.

HMOs tend to be somewhat lower in cost than PPOs -- in part because primary care physicians have cut down on unnecessary expenditures on specialists.

Both HMOs and PPOs may be excellent choices for those who need access to medical care frequently.

Other Advantages

Because of the reliance on limited networks to provide care, managed care plans are able to streamline billing practices among many providers. They also bring all your medical expenditures under one roof. This can greatly simplify your billing experience -- especially compared to an indemnity-type plan, which may require you to keep many documents and receipts and submit separate requests yourself to the insurance company seeking reimbursement. With HMOs and PPOs, you deal with a single billing system and a single point of contact. Much of the claims procedure will be invisible to you, since your doctor's office staff will handle the back office procedures of billing and claims. HMOs minimize your paperwork headaches.

One note about utilization: A study by the National Committee for Quality Assurance suggested that HMO patients were more likely to see the doctors they need to see than those in other kinds of health care plans. They were also more likely to have received preventative care and screenings than those in other plans -- suggesting that HMO patients were, indeed, receiving significant value for their premiums.

Disadvantages

Network-based plans may not be suitable for those who live in very remote areas, simply because there may be few physicians in your area to begin with -- much less physicians who happen to be in your plan's network. HMOs tend to work better in urban areas, with a high concentration of physicians and other care providers.

Posted in Tax Topics For Individuals

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.