What are the main characteristics of an HMO?

A Health Maintenance Organization (HMO) is a type of network health insurance plan which focuses on prevention and coordinated care by a primary care physician (PCP). The PCP coordinates members’ care with in-network specialists, so members must receive a PCP’s referral to see any specialist. Out-of-network care generally isn’t covered at all, except in an emergency.

What Is a Health Maintenance Organization (HMO)?

A Health Maintenance Organization is a health insurance plan that focuses on prevention and provides integrated care by requiring a referral from an in-network primary care physician in order to visit an in-network specialist.

With most HMO plans, patients must receive care and services from in-network primary care physicians, specialists, hospitals, clinics, and pharmacies unless it is for out-of-area urgent care or emergency care.

There are a few other points of consideration regarding HMO insurance plans:

• Many services require a referral or prior approval.

• If patients receive care from outside the network, services may not be covered.

• In most cases, prescription drugs are covered.

What Is the Purpose of a Health Maintenance Organization?

The purpose of a Health Maintenance Organization is to focus on overall patient wellness and preventive healthcare while keeping costs low for its members by only covering in-network physicians and facilities.

What Is One Advantage of an HMO?

One advantage of an HMO is that they typically offer lower monthly premiums and out-of-pocket costs (deductibles, copays, and coinsurance) than other types of insurance plans. An HMO is especially affordable for people who only need basic medical care such as annual checkups and immunizations.

In addition to lower costs, there are other advantages of an HMO:

• HMOs in just about every part of the U.S. have large networks of doctors, including specialists.

• HMOs often honor the networks of associated plans (such as plans run by the same insurance carrier in other states). Members who travel can call the plan to ask about in-network care on the road.

• There are no restrictions on the number of primary care visits.

• Drug costs are kept low (generally requiring only a small co-payment) and both generic and brand name drugs are available.

• Usually, patients will not be required to submit claims to the insurance company.

• They offer an appeal process if a claim is denied.

There are, however, a few disadvantages of an HMO:

• Patients will only get insurance coverage if they visit an in-network physician and facility.

• If a primary care physician leaves the network, patients will need to change doctors.

• Patients must get a referral from their primary care physician before seeing a specialist (unless it’s an emergency).

Is It Better to Have a PPO or HMO?

Whether or not it is better to have a PPO or an HMO depends on several factors, including the general health of the plan’s members, the desired amount of flexibility in choosing doctors and healthcare facilities, and budget constraints.

A Preferred Provider Organization (PPO) offers more flexibility in doctors and facilities than HMOs because members have more options. Members don’t need a primary care physician’s referral to visit a specialist and also have the option to visit out-of-network healthcare providers, albeit, at a higher out-of-pocket cost. Also, PPOs generally come with higher co-payments and/or deductibles.

PPO:

• Does not require a primary care physician.

• Members may select any doctor, even out-of-network (at a higher cost).

• There is no need to get a referral to see a specialist.

• Members may need to submit an insurance claim for out-of-network care.

• The plan costs are generally higher.

HMO:

• A primary care physician coordinates all healthcare decisions and makes referrals to specialists and for hospital visits (except in the case of an emergency).

• Members are not required to file claims, since the insurance company pays the provider directly.

• The costs are generally lower.

When deciding between the two plans, it basically comes down to the greater flexibility of a PPO plan versus the lower cost of an HMO plan.

Definition/Introduction

Health maintenance organizations (HMOs) are a type of managed care health insurance plan that features a network of health care providers that treat a patient population for a prepaid cost.[1] As prepaid health plans, HMOs combine financing and care delivery and thus allegedly provide an incentive to provide cost-efficient quality care.[2] The motivation for the emergence of HMOs was a desire to align financial and care-quality incentives. Such alignment of incentives contrasts with alternative health care payment structures such as fee-for-service designs where those providing care may have a financial incentive to do so inefficiently.

Issues of Concern

HMOs increased in popularity following the passage of the HMO Act in 1973, which sought to increase the usage of HMOs to improve patient care, decrease health care costs, and put a greater emphasis on preventative health care.[3][4] In the years following the HMO Act, HMOs became a prominent method of health insurance in the United States. For example, by 1987, over 29 million Americans (12%) received care through HMOs.[1] As such, it is useful for health care providers to understand HMOs and their features. 

Clinical Significance

In the years preceding the HMO Act of 1973, rising health care costs and feelings of inferior care quality in the U.S. motivated innovation in health care delivery.[1] Preventative medicine was not a prominent idea in health care at the time. Dr. Paul Ellwood, a Minnesota physician, is credited with championing some of the major concepts of HMOs, such as rewarding health care providers and organizations that emphasized maintaining their patients' health.[1] The Nixon presidential administration supported Dr. Ellwood’s ideas, ultimately leading to the passage of the HMO Act in 1973.[1]

The HMO Act offered funds to support HMO development with the hope of improving overall U.S. health care and simultaneously decreasing costs. HMOs are designed to accomplish these goals by integrating health insurance and health care delivery within the same organization and thus aligning the incentives of the health care payer and provider.[5] This structure intends to yield lower health care costs by, for example, motivating the transition of inpatient care to outpatient care when appropriate and the utilization of less expensive and fewer unnecessary medical interventions.[5][6] Following the passage of the HMO Act, HMO enrollment increased from approximately 6 million in 1976 to over 29 million in 1987.[1]

From a patient’s perspective, HMOs represent a potential option for health insurance. HMOs provide medical care for their patients for a prepaid fee. Compared to other common health insurance plans, such as preferred provider organizations (PPOs), HMOs are generally less expensive. Patients with an HMO must have a primary care provider (PCP). These patients usually need to receive referrals from their PCP to receive coverage to see a specialist. For this reason, the PCP is sometimes referred to as a “gatekeeper” as they are the first providers to evaluate patients before sending patients to specialists if necessary.[7] Additionally, patients with an HMO generally only receive coverage to see providers within their HMO network - referred to as “in-network” providers. There are exceptions to this, notably in emergencies.

HMOs feature a variety of payment processes and structures but generally collect payment from their enrolled patients through methods such as premiums, copays, and deductibles. Copays and deductibles are cost-sharing strategies where patients are potentially responsible for paying a portion of the cost of seeing a provider. By charging patients per provider visit, cost-sharing strategies seek to disincentivize the overuse of medical services that might occur if patients were not responsible for any per-visit costs.

Over the years, different types of HMOs have developed with varying structures.[8] These different models include group model HMOs, network model HMOs, independent practice association (IPA) HMOs, and staff model HMOs. Group model HMOs form contracts with groups of medical providers and possibly with hospitals to provide care for their members.[9] Health care providers under contract with a group model HMO generally only care for patients covered by the HMO. Network model HMOs share many similarities with group model HMOs, except that providers under contract with a network model HMO also usually treat a substantial number of patients outside of the HMO. IPA HMOs contract with providers individually or with organizations representing individual providers. These providers are commonly solo practitioners and will see patients both inside and outside of the HMO.[9] Lastly, staff model HMOs generally employ their providers directly and own the facilities where care is delivered.[9]

Over the years, HMOs have faced a variety of issues leading some vendors to financial collapse. Given that HMOs operate with a prepaid model and thus must make predictions about future costs and revenue, failures generally involve the HMO underestimating its incurred claims while overestimating the funds it receives.[10] Additional reasons contributing to the financial collapse of some HMOs include underpricing of medical services provided, mergers, and a lowered ability to cost-shift. Such factors have led to continued innovation in managed care solutions and designs in an attempt to improve upon some of the pitfalls of HMOs.

Accountable care organizations (ACOs), including the similar concept of clinically integrated organizations (CIOs), represent one such innovation in the managed care space. CIOs are the commercial counterpart of ACOs, as ACOs were designed, strictly speaking, to contract with Medicare only.[11] ACOs were authorized in the 2010 Affordable Care Act (ACA), and like HMOs, were introduced to provide quality, cost-efficient care.[11] A primary structural and conceptual difference between HMOs and ACOs is that HMOs are insurance groups that contract with clinicians, while ACOs consist of clinician groups that contract with insurers.[11] ACOs often include features that motivate quality care, such as incentives to meet specific quality benchmarks involving factors such as disease prevention and successful management of chronically ill patients.[12] In summary, ACOs represent the continual evolution of managed care organizations intending to provide high-quality and affordable care.

Despite attempts to decrease health care costs and improve care quality in the U.S. through strategies such as HMOs, the U.S. health care system is still the most expensive of any health care system in the world, encompassing approximately 18% of U.S. gross domestic product (GDP).[13][14] Multiple managed care options exist in addition to HMOs, such as PPOs, point of service (POS) plans, and the previously discussed ACOs, each with different nuances and features designed to contain health care costs while also meeting the preferences of different groups of patients. Innovations in health care delivery are likely to continue as society perpetually strives to decrease costs and improve care. Given the dynamic character of the health care system and health insurance landscape, health care providers can benefit by remaining attentive to health policy and participating in ongoing modifications to policy.

Nursing, Allied Health, and Interprofessional Team Interventions

HMOs are a type of managed care designed to maintain the health of their patients cost-effectively. A primary method HMOs use to achieve these goals is to coordinate health services and care provided to patients.[15] Such care coordination requires collaboration among various members of the care team. Multiple strategies have sought to attempt to improve care coordination in managed care organizations such as HMOs. For example, explicitly defining the responsibility of each member of the care team is thought to improve coordination among members.[16] Financial risk-sharing strategies, such as bundled payments and capitated payments, shared among different care team members, can also incentivize increased collaboration for cost-efficient care.[17] Additionally, pharmacies have attempted to control costs without compromising care by using techniques such as drug formularies and prescribing protocols.[17] Ultimately, strategies that can incentivize communication among the various members of the care team and further align their goals can improve care coordination within an HMO.

References

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Morrison EM, Luft HS. Health maintenance organization environments in the 1980s and beyond. Health Care Financ Rev. 1990 Fall;12(1):81-90. [PMC free article: PMC4193099] [PubMed: 10113465]

Prepaid group practice and the delivery of ambulatory care. N Engl J Med. 1974 Aug 15;291(7):361-3. [PubMed: 4212260]

Roemer MI, Shonick W. HMO performance: the recent evidence. Milbank Mem Fund Q Health Soc. 1973 Summer;51(3):271-317. [PubMed: 4202740]

Stano M. HMOs and the efficiency of healthcare delivery. Am J Manag Care. 1997 Apr;3(4):607-13. [PubMed: 10169528]

Miller RH, Luft HS. Managed care plan performance since 1980. A literature analysis. JAMA. 1994 May 18;271(19):1512-9. [PubMed: 8176832]

Barnett ML, Song Z, Bitton A, Rose S, Landon BE. Gatekeeping and patterns of outpatient care post healthcare reform. Am J Manag Care. 2018 Oct 01;24(10):e312-e318. [PubMed: 30325192]

Wallack SS. Managed care: practice, pitfalls, and potential. Health Care Financ Rev Annu Suppl. 1991:27-34. [PubMed: 10117117]

Paley WD. Overview of the HMO movement. Psychiatr Q. 1993 Spring;64(1):5-12. [PubMed: 8469728]

Christianson JB, Wholey DR, Sanchez SM. State responses to HMO failures. Health Aff (Millwood). 1991 Winter;10(4):78-92. [PubMed: 1778570]

Stefanacci RG, Guerin S. Calling something an ACO does not really make it so. Manag Care. 2013 Mar;22(3):15-7. [PubMed: 23610801]

Moy HP, Giardino AP, Varacallo M. StatPearls [Internet]. StatPearls Publishing; Treasure Island (FL): Feb 10, 2022. Accountable Care Organization. [PubMed: 28846320]

Shrank WH, Rogstad TL, Parekh N. Waste in the US Health Care System: Estimated Costs and Potential for Savings. JAMA. 2019 Oct 15;322(15):1501-1509. [PubMed: 31589283]

Papanicolas I, Woskie LR, Jha AK. Health Care Spending in the United States and Other High-Income Countries. JAMA. 2018 Mar 13;319(10):1024-1039. [PubMed: 29536101]

Gilchrist-Scott DH, Feinstein JA, Agrawal R. Medicaid Managed Care Structures and Care Coordination. Pediatrics. 2017 Sep;140(3) [PubMed: 28838950]

Choi Y. Care Coordination and Transitions of Care. Med Clin North Am. 2017 Nov;101(6):1041-1051. [PubMed: 28992853]

Curtiss FR. Managed health care. Am J Hosp Pharm. 1989 Apr;46(4):742-63. [PubMed: 2719053]

What are the characteristics of an HMO?

What are the advantages of HMO?

What are the advantages and disadvantages of HMO?

What is a characteristic of preferred provider organizations?