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A health maintenance organization, or HMO, is a type of health insurance plan that typically offers lower premiums and out-of-pocket costs in exchange for members using the plan’s network of providers.

That network is usually confined to a certain city or geographic area.

An HMO can be a good choice for healthy people who don’t anticipate needing a lot of specialized care in the coming year.

However, these plans tend to offer less flexibility in where you can go for care than other types of health plans, such as preferred provider organizations (PPOs).

Read on to learn if an HMO could be the right plan for you and your family.

How Do HMOs Work?

HMOs contract with a group of doctors, hospitals, and other healthcare providers within a certain area for a negotiated fee.

In return for accepting lower payments, HMOs offer providers a steady stream of patients. Insurers can then pass the savings onto patients in the form of lower premiums and out-of-pocket costs.

To take advantage of these lower costs, HMO members must, for the most part, receive care only from network providers.

This starts with your primary care physician (PCP). HMO members typically should choose a PCP from the plan’s network. Your PCP takes care of annual check-ups and other medical needs that require an office visit.

In an HMO, your PCP is typically also the gatekeeper for your other health needs. To see a specialist, such as a podiatrist or a dermatologist, you would likely need to first visit your PCP to get a referral to a specialist within the network.

There are often some exceptions to network-only care, however. Emergency care received out-of-network is usually covered. And, with some preventive care services, such as mammograms and gynecological visits, you may be able to see a network doctor without first getting a referral.

In cases where you may have a serious health condition requiring a specialist not included in the network, the HMO may cover that treatment as long as you request pre-approval.

In addition to low premiums, there are often low or no deductibles with an HMO. Instead, the plan will typically charge a copayment, or copay, for each clinical visit, test, or prescription.

How Do HMOs Compare With Other Types of Health Insurance?

Another commonly available health plan offered by employers and health insurance companies is a preferred provider organization, or PPO. These plans have many features in common with HMOs, but also a few key differences.

As with an HMO, members of a PPO plan have access to a network of providers. When they use providers within that network, they will typically pay less out-of-pocket costs, such as copays.

Unlike an HMO, however, care outside of the network is usually also covered, but at an additional cost.

How much the PPO will pay for an out-of-network doctor may be capped at what the PPO deems the “customary and usual” payments for providers in your area. Depending on where you live, that could mean a small or potentially large additional out-of-pocket cost.

Depending on where you live, that could mean a small or potentially large additional out-of-pocket cost.

Another key difference between these two types of plans: With a PPO, you typically do not need a referral to see a specialist, either within or outside of the network.

In addition, PPO plans usually have deductibles, while some HMOs do not. PPO plans also typically have more expensive premiums than HMOs.

However, not having to see your PCP (and pay a copay) to get a referral to a specialist can be a cost saver for members of PPOs.

Recommended: What Is a PPO Plan?

The Pros and Cons of HMOs

It can be a good idea to weigh the advantages and disadvantages of HMOs before you choose a plan, just as you would with any other type of insurance coverage.

Here are some of the most common pros and cons.

Advantages of HMOs

•   Lower costs. Premiums, deductibles, and copays are usually lower with an HMO compared to other types of health care plans. Some plans even have no deductible. Your out-of-pocket costs will also likely be lower for your prescriptions.
•   Less paperwork. Because your care is managed through your PCP and you are receiving care through the HMO network, billing tends to be less complicated for those with an HMO.
•   Care is often high quality. Because preventive services are generally fully covered and because your PCP can act as your advocate for early intervention medical care, many people find HMOs provide good quality of health care.

Disadvantages of HMOs

•   Provider restrictions. With an HMO, you must choose a primary care physician from the plan’s network. This doctor will manage your care and refer you to specialists within the network. If your current doctor is not in the HMO network, you would likely need to switch.
•   Restricted emergency care. Emergency care is usually covered even if it is received from out-of-network providers. But HMOs often have strict rules on what constitutes an emergency and which emergency providers will be covered.
•   Geographic restrictions. Because HMO networks are usually located within one geographic area, your network of providers will only be available within that location. That means if you’re traveling and you need medical care, those bills may not be covered, unless it is an emergency. Also, dependent college children who attend school out of state are usually not covered.

Recommended: Choosing an Individual Health Insurance Plan

The Takeaway

HMO plans can be an efficient, low-cost way to manage your health care needs. These plans can foster a close relationship with your primary care physician, who can help you navigate both preventive and specialty care.

Some consumers feel the restrictions on receiving care from out-of-network providers and the hassles of getting a referral can be an obstacle to optimal care.

HMOs are often compared to PPOs, which generally allow members more freedom to see out-of-network providers (though going out of network may cost more). PPOs typically don’t require referrals to see specialists.

To determine which type of health plan is best for you, you’ll likely want to weigh the costs and plan offerings against your budget and health needs. Before choosing a plan, it might also be helpful to track your spending for a few months to see how much you are currently spending on medical care.

When the unexpected happens, it’s good to know you have a plan to protect your loved ones and your finances. SoFi has teamed up with some of the best insurance companies in the industry to provide members with fast, easy, and reliable insurance.

FAQ

What are some downsides of having an HMO?

One drawback of having an HMO is that you’ll likely need to get a referral before seeking specialized care. Also, you generally can only see doctors within your plan’s network.

What does an HMO not cover

Coverage varies by insurer and plan, but in general, HMOs do not cover care from out-of-network providers, except in emergency situations.

Are HMO plans cheaper than PPO plans?

Generally speaking, yes. HMO plans tend to have lower monthly premiums and lower out-of-pocket costs than PPO plans.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

A preferred provider organization (PPO) is a type of health care plan that offers lower out-of-pocket costs to members who use doctors and other providers who are part of the plan’s network.

These preferred providers have signed onto the network at a lower negotiated rate than they might charge outside of the network.

PPOs also offer members the flexibility to see providers outside of the plan’s network, although they will most likely pay more in out-of-pocket costs to do so.

To learn more about PPOs, and how this type of plan compares to other health insurance options, read on.

How Does PPO Insurance Work?

When you join a PPO health plan, you’re joining a managed care network that includes primary care doctors, specialists, hospitals, labs, and other healthcare professionals. PPO networks tend to be large and geographically diverse.

If you see a preferred provider, you will likely pay a copay, or you might be responsible for a coinsurance payment (after you meet the health care plan’s deductible).

While you are free to see any health care provider whether or not they are in the PPO network, if you see a provider outside of the network, you may pay significantly more in out-of-pocket costs. In return for flexibility, large networks, and low in-network cost sharing, PPO plans typically charge higher premiums than many other types of plans.

PPOs are a common, and often a popular, choice for employer-sponsored health insurance.

Recommended: Common Health Insurance Terms & Definitions

What Are the Costs of Going Out of the PPO’s Network?

If you see a provider who is not part of the plan’s network, you will likely be expected to bear more of the cost. PPOs typically use what’s called a “usual, customary, and reasonable” (UCR) fee schedule for out-of-network services.

Insurers calculate UCR fees based on what doctors in the area are charging for the same service you were provided.

If your doctor charges more than what your insurance company determines to be usual, customary, and reasonable, you most likely will be charged for the difference between the amount charged for the service and the amount covered by your insurer.

Depending on where you live and the service you received, this difference could be significant. It may also come as a surprise to policyholders who assume their medical costs will be covered and don’t fully understand the distinction between in-network and out-of-network providers.

A good way to avoid surprise charges with a PPO (or any health plan) is to talk to your provider and your insurer before you receive treatment about the total cost and what will be covered.

How PPOs Compare to Other Types of Health Care Plans

PPO plans are most often compared with health maintenance organizations (HMOs), another common type of managed care health plan.

HMOs typically offer lower premiums and out-of-pocket costs than PPOs in exchange for less flexibility.

Unlike a PPO, HMO members typically must choose a primary care physician from the plan’s network of providers. Care from providers out of the HMO network is generally not covered, except in the case of an emergency.

Also unlike a PPO, an HMO’s network of providers is usually confined to a specific local geographic area.

Another key difference between these two types of plans: HMO members typically must first see their primary care doctor to get a referral to a specialist. With PPOs, referrals are not usually required.

PPOs are also often compared to point of service (POS) plans.

POS plans are generally a cross between an HMO and a PPO. As with a PPO, POS members typically pay less for care from network providers, but may also go out of network if they desire (and potentially pay more).

Like an HMO, POS plans require a referral from your primary care doctor to see a specialist.

PPOs (as well as HMOs and POS plans) are very different from high deductible health plans, or HDHPs.

HDHPs charge a high deductible (what you would have to pay for health care costs before insurance coverage kicks in).

This means that you would need to pay for all of your doctor visits and other medical services out of pocket until you meet this high deductible. In return for higher deductibles, these plans usually charge lower premiums than other insurance plans.

You can combine a HDHP with a tax-advantaged health savings account (HSA). Money saved in an HSA can be used to pay for qualified medical expenses.

HDHPs are generally best for relatively healthy people who don’t see doctors frequently or anticipate high medical costs for the coming year.

Recommended: Beginner’s Guide to Health Insurance

What Are the Pros and Cons of PPO Insurance?

As with all health insurance options, PPOs have both advantages and disadvantages. Here are a few to consider.

Advantages of PPOs

•   Flexibility. PPO members typically do not have to see a primary care physician for referrals to other health care providers, and they may see any doctor they choose (though they may pay more for out-of-network providers).

•   Lower costs for in-network care. Out-of-pocket costs, such as copays and coinsurance, for care from in-network providers can be lower than some other types of plans.

•   Large provider networks. PPOs usually include a large number of doctors, specialists, hospitals, labs, and other providers in their networks, spanning across cities and states. As a result, network coverage while traveling or for college student dependents can be easier to access than with more restricted plans.

Disadvantages of PPOs

•   High premiums. In return for flexibility, PPO members can expect to pay higher monthly premiums than they may find with other types of plans.

•   High out-of-pocket costs for out-of-network care. Depending on where you live, the treatment you receive, and how your insurer calculates “usual, customary, and reasonable” fees, you may find you are responsible for a large portion of the bill when you receive care outside of the PPOs network.

•   Might be more insurance than you need. If you rarely see doctors and wouldn’t mind potentially switching doctors, you may be able to save money by going with an HMO or a HDHP.

The Takeaway

PPOs are a popular type of health plan because of the flexibility, ease of use, and wide range of provider choices they offer. PPO networks tend to be large and varied enough to include a patient’s existing doctors. If not, members still have the option of going out-of-network and receiving at least some coverage from a PPO. PPO members pay for this flexibility, however.

PPOs typically come with higher premiums, along with extra costs associated with out-of-network care. That can be prohibitive for many consumers.

Your employer’s benefits department or an experienced insurance agent or broker can help you compare PPOs to other types of health care plans and determine which choice is right for your health care needs and your budget.

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FAQ

What is a disadvantage of having an HMO?

One drawback of PPO plans is that they’re often more expensive than HMO plans. Monthly premiums are usually higher, and you’ll likely have to pay more out of pocket if you see doctors who are out of the plan’s network.

What does PPO mean?

PPO stands for preferred provider organization. It’s a type of health care plan that offers lower out-of-pocket costs to members who see health care providers who are part of the PPO plan’s network.

Is having a PPO worth it?

It depends. PPOs tend to have large networks, which can make them a good choice for someone who travels frequently within the U.S. or lives in two different states.

Auto Insurance: Must have a valid driver’s license. Not available in all states.
Home and Renters Insurance: Insurance not available in all states.
Experian is a registered trademark of Experian.
SoFi Insurance Agency, LLC. (“”SoFi””) is compensated by Experian for each customer who purchases a policy through the SoFi-Experian partnership.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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