Getting the best healthcare often requires choosing between an HMO and a PPO. In at least one instance in our lives, we need to deal with some form of illness or ailment. You need to be able to make an informed decision on which plan will work best for you.
Securing health insurance is so important that it’s almost impossible to overemphasize its benefits. The rising cost of healthcare can put an individual or family in a difficult financial position in case of a major illness or an accident. To help deal with the situation, an individual can opt for either of the two types of health insurance providers – a Health Maintenance Organization (HMO) or a Preferred Provider Organization (PPO).
What is an HMO?
A Health Maintenance Organization, or HMO, is a network of healthcare providers who agree to provide services at lower prices negotiated by an insurance company.
Members choose a single physician from a list of approved healthcare providers. HMO members can only see a health care specialist such as an obstetrician, rheumatologist, or cardiologist if they get a referral from their Primary Care Physician (PCP), who is also known as the gatekeeper.
Various services/benefits provided by an HMO can differ depending on the company and the health plan. It may cover health screenings, cancer screening, prescribed medications, laboratory tests, X-rays, and other scans. HMOs usually cover prenatal care and well-baby care also.
What is a PPO?
A Preferred Provider Organization, or PPO, is also a network of healthcare providers that provide its members with multiple choices regarding healthcare and healthcare providers.
PPOs do not restrict patients to receiving care in-network. It’s optional to designate a PCP (primary care physician). Patients can make appointments directly with the providers and referrals aren’t required.
Usually, PPO plans provide better benefits and lower costs for services availed from network providers, which covered persons are encouraged to use. However, members can also receive care from providers outside of the network, although they will likely pay more for it.
Examples – HMO vs. PPO
Let’s say, you get an earache. You wouldn’t directly consult an ENT specialist. Rather, you would first go to your PCP (primary care physician), who would examine you. In case he/she fails to help you, then they will give you a referral to a trusted ENT specialist in your network.
Mr. A is enrolled in a PPO plan. Although he sees a PCP, he generally visits him just for his annual physical check-up. When he needs to see a specialist, he does his own research and books an appointment with him/her. Last month, his foot was bothering him so he made an appointment with a local in-network podiatrist. He paid a $25 co-payment and 10% of the cost of the X-ray. He also sees an out-of-network therapist and pays him in full upfront. He then submits a claim and is reimbursed a percentage of the cost.
Major Differences – HMO vs. PPO
A network is a group of healthcare providers that are under contract with insurance companies to offer discounted services for a particular HMO or PPO plan. They typically include general physicians, along with specialists such as dermatologists and chiropractors. In order to receive coverage in an HMO, you must first see your PCP, no matter what the problem is. If they can’t treat you, they will refer you to someone else within the network. Staying within your network in an HMO plan, you can expect maximum insurance coverage. Go outside of the network and your coverage vanishes. With a PPO, you can visit doctors outside the network and still get some coverage, but not as much as you would if you remained in the network.
With a PPO, the trade-off for receiving the freedom of choice and flexibility is higher premium costs for the plan. An HMO offers no coverage outside the network but patients enjoy lower premium costs.
With an HMO, patients do not need to file a claim because healthcare providers are paid directly by the insurance company. Under PPO, however, patients must sometimes first pay out-of-network providers and then file a claim for reimbursement from the insurance company.
The range of services provided under the two plans depends on the company and the type of plan taken, but they are usually similar.
Just like the coverage under an HMO is limited to a network, the pharmacy locations where one can get their prescriptions filled and covered under the plan are limited as well. PPOs allow patients to fill a prescription almost anywhere but with additional charges for an out-of-network pharmacy.
Patients with an HMO plan do not need a referral during an emergency or for in-network visits to a gynecologist or obstetrician.
The Final Choice – HMO vs. PPO
There is no universal answer to the question of which is better – an HMO or PPO. It is largely based on the personal preferences of customers. The bottom line is that HMOs provide affordability, while PPOs provide greater flexibility and freedom of choice. Statistics show that more people are enrolled in PPO plans than HMO plans. In 2014, 58% of workers chose a PPO as their employer-supplied health insurance plan, compared to just 13% of workers who chose an HMO. Despite the popularity of PPOs, a study conducted by the National Committee for Quality Assurance (NCQA) shows that HMO plans draw better customer satisfaction ratings.
The choice between HMOs and PPOs is mainly a choice between cost and convenience.
Thank you for reading CFI’s guide to HMOs and PPOs. For more information on insurance and finance topics, we suggest the following CFI resources: