Health Maintenance Organization (HMO): Definition & Overview

Instructor: Yolanda Williams

Yolanda has taught college Psychology and Ethics, and has a doctorate of philosophy in counselor education and supervision.

Health Maintenance Organization (HMO) is a specific type of health insurance plan. Let's follow a hypothetical HMO consumer, Emy, as she learns all about her medical coverage under her HMO plan.

Definition

Oh no! Emy has just fallen down the stairs and injured her arm. Good thing that Emy has health insurance. Let's follow Emy as she uses her health insurance for the first time.

Emy has a Health Maintenance Organization (HMO) plan. An HMO is a one of the common types of health insurance that is used to pay for expenses related to the treatment and diagnosis of covered medical conditions.

There are four types of HMO plans:

  • Staff Model: The HMO pays the covered physicians a set salary regardless of the number of patients they treat. In other words, the physicians are salaried employees of the HMO.
  • Group Model: The HMO has a contractual agreement with group practices to treat HMO insurance holders. The group practices under this agreement provide services primarily to HMO insurance holders.
  • Network Model: The HMO has a contractual agreement with several groups of physicians to treat HMO insurance holders. The groups under this agreement also provide services to a large number of patients who are not HMO insurance holders.
  • Independent Practice Association: The HMO has a contractual agreement with individual physicians or with other associations that have contracts with independent physicians. These physicians provide services to HMO insurance holders at a negotiated rate.

With HMO plans, you get to choose a primary care physician (PCP) from a list of covered physicians. Your PCP is responsible for managing all of your health care needs. If a situation arises where you need to see a specialist, you would need a referral from your PCP in order for your treatment to be covered by your HMO plan.

Emy goes to see her PCP. He tells her that she has a complicated fracture and refers her to an orthopedic surgeon.

What Does Emy Pay For?

With her HMO plan, Emy is responsible for paying three things: her premium, deductible, and copayments.

The premium is the amount of money that you are required to pay up front for your HMO plan coverage. Emy's premium is $120 a month; however, her employer covers her premium in full so she doesn't have to pay it.

The deductible is the amount of money you have to pay out of your own pocket before your HMO plan will pay anything. Most HMOs do not have a deductible. Emy's plan has a $100 deductible, so she has to pay for the first $100 of her medical expenses. Then her insurance coverage will begin to pay.

The copayment is a flat amount of money that you are required to pay for a covered medical service. The amount of the copayment depends on the service rendered. Emy has a $20 copayment for each visit to a specialist. Therefore, she has to pay the orthopedic surgeon $20 in order to receive treatment.

If Emy goes to a see a physician or hospital outside of her HMO network, or if she goes to see a specialist without getting a referral from her PCP, Emy will likely have to pay the full amount of her medical care. This does not include the following situations:

  • If Emy has to go to an emergency room outside of her network for a medical emergency. The HMO has its own definition of what a constitutes a medical emergency.
  • If Emy needs care that is medically necessary and cannot be provided by any of the physicians in her network.
  • If Emy has a point-of-service option that allows her to see physicians outside of her network if she is willing to pay more of the costs.

What Does the HMO Pay For?

Most HMO plans have an out-of-pocket maximum, which is the maximum amount of money you have to pay out of your own pocket each calendar year. Emy's out-of-pocket maximum is $2,000. Once Emy has spent $2,000 on her medical expenses, her insurance will cover all of her remaining expenses. It is important to note that the out-of-pocket maximum for physicians who are not in Emy's network is substantially higher than the out-of-pocket maximum for the doctors who are covered by the HMO.

Once Emy has met her deductible and paid her copayments, the HMO will pay for any remaining balance. Emy's visit with the orthopedic surgeon cost $600. Emy paid the $100 deductible and the $20 copayment. The HMO will pay the remaining $480. Now Emy's broken arm has been treated and she is feeling much better.

Advantages of the HMO plan include:

  • Lower premiums than most of the other insurance plans.
  • Inclusion of a wide range of services, i.e. hospital visits, check-ups, and surgery.

Disadvantages of the HMO plan include:

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