Health care coverage is commonplace in the United States – The United States Census Bureau’s most recent report found that 91.7% of Americans had health insurance in 2021.
Understanding health care coverage, however, is not – The 2021 Kaiser Family Foundation (KFF) survey estimates that 41% of Americans do not know how health insurance works.
With the complexity of health insurance plan information condensed under acronyms with difficult explanations, it’s no wonder that nearly half of our nation’s population is in the dark when it comes to grasping the fundamentals of health care coverage.
In this article, we will explore a common coverage option – HMO insurance plans.
Let me guess – you just saw “HMO,” panicked, and wondered what type of coverage those illusive 3-letters describe and how it works. Here at Combined, our benefits specialists want to provide you with answers to these frequently asked health insurance questions so you no longer have frequently felt health insurance concerns.
By reading this article, you will learn what an HMO is, understand how this type of insurance plan works, and be able to better discern if it is a viable coverage option for you.
What is an HMO?
An HMO or Health Maintenance Organization is a managed care insurance plan.
In other words, HMO insurance plans are designed to help participants manage or reduce the cost of receiving high-quality health care.
How does an HMO manage the cost and maintain the quality of health care?
HMO insurance reduces the cost of health care by ensuring low-cost insurance premium rates while developing a network of high-quality providers.
To do this, HMO plans are structured to have:
- A comprehensive network of health care providers offering covered care to plan participants
- A group of enrolled participants limited to covered care from in-network medical providers
The HMO prepays each network provider a fixed amount to extend covered services to plan participants.
How does a prepaid agreement affect the cost of insurance premiums?
Let’s think of this in terms of a service you likely use every day – your cell phone plan.
If you don’t use your wireless phone often, a pay-by-the-minute plan may be the most cost-effective, preventing you from overspending on a service you know, for a fact, you rarely need.
However, if you use your phone regularly, paying by the minute for your cell phone service could amount to an extreme price tag. In this case, it’s more cost-effective to pay a fixed rate for unlimited minutes, preventing you from overspending on a service you know, for a fact, you often need.
But what if you don’t know, for a fact, how often you will use your phone?
In this case, a fixed rate option makes more sense because mediating the risk and expense of overuse outweighs the potential for slight savings.
This is the premise for an HMO paying providers a fixed amount – because it’s difficult to project the amount and extent of health care services that will be provided over a period of time, prepaying a set rate prevents overspending for use of services and keeps insurance costs low.
If you’ve ever received medical care, you know that the receipt for it before coverage can appear as damaging to your wallet as your health concern did to your well-being. Now, if those are the financial implications of one visit to the doctor, imagine how quickly the cost of care adds up given multiple.
By paying providers a fixed cost, HMO plans prevent this from happening to their overhead costs. And, because this amount is a preset agreement, it does not change in response to the services extended by health care providers.
As a result, an HMO has predictable and controlled expenses for high-quality providers and can offer low-cost coverage premiums to plan participants.
And low coverage premiums mean reduced cost health care or managed care.
How does a prepaid agreement affect the quality of network health care providers?
Let’s think of this in terms of basic economics – the concept of supply and demand.
The health care industry is competitive. In fact, it is the third-largest industry in the United States.
The need for health care is constant, but the number of providers is continually growing. This means that health care providers have to contend with each other for business.
With this in mind, why does it make sense for health care providers to join an HMO network and accept a fixed pay rate with the potential to undercut the cost of the services they lend?
Recall that the structure of an HMO includes a group of enrolled participants limited to covered care from in-network health care providers. As part of an HMO network, health care providers receive a built-in source of business in a competitive industry.
It is important to also note that when joining an HMO network, it is virtually impossible to predetermine the amount or extent of services that will be necessary to meet the prepaid agreement – for all intents and purposes, a provider may end up profiting more from a fixed fee than they would otherwise.
For these reasons, the HMO insurance model attracts high-quality health care providers at a fixed cost.
Managed care under an HMO is low-cost and high-quality
As a result, an HMO has predictable and controlled expenses for high-quality health care providers and can offer low-cost coverage premiums to plan participants.
And low coverage premiums mean reduced cost health care or managed care.
The win-win takeaway:
An HMO is an insurance plan with low-cost premiums that gives participants access to affordable medical care from qualified, in-network providers.
How does an HMO work?
Let’s say you decide to purchase health care coverage through an HMO insurance plan.
Here are the essential details you’ll need to know about your plan.
Your insurance premium only pays for your in-network coverage
The immediate cost of your HMO coverage is a repeating monthly charge – this is your insurance premium.
Your insurance premium functions like a gym membership, except instead of gaining access to barbells and bicycles, you have health care options at your fingertips.
But, in the same way that your 24 Hour Fitness membership won’t grant you entry into LA Fitness, your HMO insurance premium only covers health care providers that are within your HMO network.
Under an HMO insurance plan, should you need to see an out-of-network provider, you will have to pay the full cost out of pocket.
Your coverage is coordinated by an in-network primary care physician (PCP)
Once you are enrolled in an HMO and your premium is paid, you have in-network health care options available to you.
So, how do you use your coverage to receive care?
First, you have to select an in-network primary care physician (PCP). Typically, your PCP is a general practitioner who will address the majority of your health care concerns but will refer you to an in-network specialist for any advanced care you may need.
Suppose you sustain a knee injury at 24 Hour Fitness when your treadmill decided, with a mind of its own, that your pace should rival Usain Bolt’s world record run. And, you know you need to see an orthopedic doctor. Can you call the specialist directly and make an appointment?
No – not if you expect to receive insurance coverage for the appointment. With HMO insurance, even if you are certain that only a specialist can treat you, you have to get a referral from your PCP before you can see one. Once you do, your advanced care will be covered and you’ll be back to running, hopefully at a slower pace, in no time.
Your copayment pays for the case-by-case medical attention and treatment you receive
Usually, HMO plans also operate on a copayment or copay system.
Where your insurance premium is the immediate and regularly occurring cost of coverage, your copay is the cost of your appointments and prescriptions. It is a fixed dollar amount, assigned as part of your specific plan, that you pay when receiving medical attention.
You will be expected to pay your copay amount when:
- Visiting your PCP for treatment
- Visiting your PCP to get a referral
- Visiting a referred in-network specialist
- Visiting a pharmacy to fill a prescription
Yes, emphasis on “visiting” – because under an HMO insurance plan, you will typically pay a small copay every time you visit any of your health care providers to compensate for the medical attention and medication you receive.
However, there are some exceptions for in-network preventive care. When visiting a health care professional for routine check-ups, screenings, shots or vaccinations, and sometimes even counseling, your HMO will generally waive your copay responsibility.
Summary of how HMO coverage works
If you decide to purchase your health care coverage through an HMO plan:
- You will pay a monthly premium rate. With HMO insurance, this premium rate tends to be lower than that of other insurance models.
- You will only be covered for care received from your HMO's network of health care providers. Any care received outside of this network of providers will be an out-of-pocket expense.
- You will select a primary care physician (PCP) who will be your point-of-contact professional for all health care concerns. Your PCP will coordinate your care, using a referral system to organize specialized or advanced treatment.
- You will pay a fixed copayment amount each time you receive care or prescription medication. With HMO insurance, this copay amount tends to be lower than that of other insurance models.
- You will have access to cost-free, in-network preventive care.
Next steps - Find the right health insurance plan for you
If you are here, trying to understand different available health insurance plans is nothing short of confusing. This makes selecting the right coverage option for you not just challenging, but nearly impossible.
In this article, we dissected the structure and function of HMO insurance plans. By reading it, you learned what an HMO is and how this type of insurance plan works.
Here at Combined, our benefits experts want to make sure you find the right health insurance plan for you. With years of experience, our team is confident that we can answer all of your health insurance questions so you can confidently enroll in your best-fit coverage option and receive your best-fit care.
This article is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.
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