Written by When presented with health insurance options it’s easy to get confused with the complexities of different plans and coverage types. Which one is the best for me? Which one is the cheapest? If you’re unfamiliar with the structure of health plans then it can be difficult to select a plan that meets your medical needs. Here, the pros and cons of HMOs and PPOs are examined to give you the basic tools you need to select healthcare coverage.
How HMOs Work
HMO stands for health maintenance organization. It is a frequently offered plan by employers because of its lower cost. The plan functions by negotiating discounted rates for all of its service lines with a small network of providers. The plan members must then use an in-network provider when seeking medical care. When enrolling in the plan, members must choose a primary care physician (PCP) who will be their main care coordinator and responsible for referrals to specialists as deemed medically necessary. Members enrolled in this plan must always receive a referral from their PCP to visit a specialist and receive coverage.
Advantages
An HMO presents several advantages to both the party administering the plan and the members who sign up for it. Whether the plan is being sponsored by an employer or a third party commercial payer such asAetna, it is typically cheaper because of the discounted rates negotiated with providers. Providers then benefit by having less competition since there is a smaller network from which members can choose to receive medical care.
The cost savings does trickle down to members; for in-network benefits there is typically no deductible with these plans and the office co-pays are usually reasonable. A common co-pay price for an HMO would be $20 for a visit to your PCP and $40 for a visit to a specialist. You will have a fee due for nearly all visits unless the service rendered is considered “preventive” according to the recent healthcare reform brought on by President Obama. Lastly, the monthly premium associated with an HMO is almost always the lower of the two plans.
Drawbacks
The most glaring drawback of an HMO is the lack of patient choice. If for some reason you are not happy with the providers in the network, you may not have the option to choose a new one and still be covered. In addition, if you have been seeing the same doctor for several years and change your coverage to an HMO, you may have to switch to a new doctor in the network who is unfamiliar with your needs or past medical history.
A little known drawback of HMOs is that PCPs are sometimes penalized by the plan for giving too many referrals to specialists because it incurs more cost to the plan. This knowledge can make patients uncomfortable since they might be unsure if they are being referred for the appropriate level of care.
How PPOs Work
PPO stands for preferred provider organization. This type of plan has become increasingly popular in recent years as a type of employer sponsored health plan to offer members more freedom of choice when choosing a medical provider. PPOs also negotiate a discounted rate with providers, but this rate will generally be higher than that of an HMO. As a result, more providers will accept the fee schedule and be a part of the network.
Advantages
The main advantage to having a PPO is freedom of choice. There are typically many more providers in the preferred provider network giving you the option to choose a doctor or facility you are comfortable with. The plan also usually offers out-of-network coverage as well, in contrast to that of an HMO which will only offer a small fraction of coverage, if any, for out-of-network benefits.
Certain PPO plans may afford you the option to save money, tax deferred, in what’s called a health savings account. If you have a high deductible health plan as defined by the IRS, you can contribute up to $6,050 to this account annually which can be used for qualified medical expenses. The amount contributed rolls over year to year.
Drawbacks
The biggest downside to this type of plan is without a doubt, cost. A PPO plan will inevitably cost you more than its HMO cousin. This is because the contracted rates with providers are higher and due to the deductible and coinsurance responsibilities that come with the plan. You will pay coinsurance for nearly all types of care provided unless it is preventive, which the new healthcare reform mandates to be covered at 100%.
A PPO can have a deductible ranging from as little as $100 annually to thousands depending on who is administering the plan and the percentage of the cost that party is willing to incur. After your deductible is met you then must pay coinsurance; a percentage of the provider negotiated fee for services rendered. This is most often between 10-30%. Finally, the monthly premium of a PPO tends to be the higher of the two plans.
So who wins this fight? Neither really. It’s very tough to put a stamp on either a PPO or HMO and say that one is “better” than the other. Each plan has definitive pros and cons which may or may not affect your situation. If you’ve been with your PCP for 20 years and have a decent income then you may want to consider the extra cost of a PPO to keep the level of comfort you’ve enjoyed with your doctor for so long. Conversely, if you’re on a tight budget and don’t have a preference for what provider is giving the care you need, then an HMO may meet your needs. Choose wisely!
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