HMO plans were originally established with intention that the growth in insurance costs could be reduced. In HMO plans insurance companies negotiate a fee schedule with doctors and other medical establishments for a listed set of medical procedures. If plan subscribers use doctors on the list approved by the HMO (the network) then office visits or procedure costs are typically covered under the plan.
In addition to using their contracts with providers for services at a lower price, HMOs hope to gain an advantage over traditional insurance plans by managing their patients' health care and reducing unnecessary services. To achieve this, most HMOs require members to select a primary care physician (PCP), a doctor who acts as a "gatekeeper" to medical services. PCPs are usually internists, pediatricians, family doctors, or general practitioners. In a typical HMO, most medical needs must first go through the PCP, who authorizes referrals to specialists or other doctors if deemed necessary. Emergency medical care does not require prior authorization from a PCP, and many plans allow women to select an OB/GYN in addition to a PCP, whom they may see without a referral. In some cases, a chronically ill patient may be allowed to select a specialist in field of the illness as a PCP.
HMOs also manage care through utilization review. The amount of utilization is usually expressed as a number of visits or services or a dollar amount per member per month (PMPM). Utilization review is intended to identify providers providing an unusually high amount of services, in which case some services may not be medically necessary, or an unusually low amount of services, in which case patients may not be receiving appropriate care and are in danger of worsening a condition. HMOs often provide preventive care for a lower copayment or for free, in order to keep members from developing a preventable condition that would require a great deal of medical services. When HMOs were coming into existence, indemnity plans often did not cover preventive services, such as immunizations, well-baby checkups, mammograms, or physicals. It is this inclusion of services intended to maintain a member's health that gave the HMO its name. Some services, such as outpatient mental health care, are often provided on a limited basis, and more costly forms of care, diagnosis, or treatment may not be covered. Experimental treatments and elective services that are not medically necessary (such as elective plastic surgery) are almost never covered.
Other methods for managing care are case management, in which patients with catastrophic cases are identified, or disease management, in which patients with certain chronic diseases like diabetes, asthma, or some forms of cancer are identified. In either case, the HMO takes a greater level of involvement in the patient's care, assigning a case manager to the patient or a group of patients to ensure that no two providers provide overlapping care, and to ensure that the patient is receiving appropriate treatment, so that the condition does not worsen beyond what can be helped.
HMOs often shift some financial risk to providers through a system called capitation, where certain providers (usually PCPs) receive a fixed payment per member per month and in return provide certain services for free. Under this arrangement, the provider does not have the incentive to provide unnecessary care, as he will not receive any additional payment for the care. Some plans offer a bonus to providers whose care meets a predetermined level of quality.
HMOs operate in a variety of forms. Most HMOs today do not fit neatly into one form; they can have multiple divisions, each operating under a different model, or blend two or more models together.
In the staff model, physicians are salaried and have offices in HMO buildings. In this case, physicians are direct employees of the HMOs. This model is an example of a closed-panel HMO, meaning that contracted physicians may only see HMO patients.
In the group model, the HMO does not pay the physicians directly, but pays a physician group. The group then decides how to distribute the money to the individual physicians. This model is also closed-panel.
Physicians may contract with an independent practice association (IPA), which in turn contracts with the HMO. This model is an example of an open-panel HMO, where a physician may maintain his own office and may see non-HMO members.
In the network model, an HMO will contract with any combination of groups, IPAs, and individual physicians.
PPO plans typically offer a reduced co-pay if plan subscribers use doctors and medical establishments that are in their network.
In health insurance, a preferred provider organization (or "PPO") is a managed care organization of medical doctors, hospitals, and other health care providers who have covenanted with an insurer or a third-party administrator to provide health care at reduced rates to the insurer's or administrator's clients.
The idea of a preferred provider organization is that the providers will provide the insured members of the group a substantial discount below their regularly-charged rates. This will be mutually beneficial in theory, as the insurer will be billed at a reduced rate when its insured utilize the services of the "preferred" provider and the provider will see an increase in its business as almost all insureds in the organization will use only providers who are members. Even the insured should benefit, as lower costs to the insurer should result in lower rates of increase in premiums. Preferred provider organizations themselves earn money by charging an access fee to the insurance company for the use of their network. They negotiate with providers to set fee schedules, and handle disputes between insurers and providers. PPOs can also contract with one another to strengthen their position in certain geographic areas without forming new relationships directly with providers.
PPOs differ from health maintenance organizations (HMOs), in which insureds who do not use participating health care providers, receive little or no benefit from their health plan. PPO members will be reimbursed for utilization of non-preferred providers, albeit at a reduced rate which may include higher deductibles, co-payments, lower reimbursement percentages, or a combination of the above. Exclusive Provider Organizations (EPOs) are similar to PPOs, except that they do not provide any benefit if the insured chooses a non-preferred provider, except for some exceptions in cases of emergencies. Some state regulations limit how much and under what circumstances an insurance plan can lower the insured's benefit for using a non-preferred provider.
Other features of a preferred provider organization generally include utilization review, where representatives of the insurer or administrator review the records of treatments provided to verify that they are appropriate for the condition being treated rather than largely or solely being performed to increase the amount of reimbursement due, a procedure that many providers resent as second-guessing. Another near-universal feature is a pre-certification requirement, in which scheduled (non-emergency) hospital admissions and, in some instances outpatient surgery as well, must have prior approval of the insurer and often undergo "utilization review" in advance.
The rise of PPOs was credited by some with a reduction in the rate of medical inflation in the U.S. in the 1990s. However, as most providers have become members of most of the major preferred provider organizations sponsored by major insurers and administrators, the competitive advantages outlined above have largely been reduced or almost entirely eliminated, and medical inflation in the is again advancing at several times the rate of general inflation. Furthermore, passive PPOs are now a part of the marketplace. These PPOs obtain discounts for insurance companies on indemnity and out-of-network claims, and often take as their fee a portion of the discount obtained. The aspects of utilization review and pre-certification are now widely used even in traditional "indemnity" plans, and are widely regarded as being essentially permanent features of the American health care system.
PPOs can also create inefficiencies and ironies in the health care industry. Though PPOs often require insurers to pay a claim within a certain timeframe in order to take the PPO discount, calculating the PPO discount and having the insurer pay the PPO's access fee is still one more step-- and one more opportunity for mistakes and delays--in the already-complex process of paying for health care in the United States. Since PPOs have more power in their relationship with providers, they can still provide a benefit to insured patients. Uninsured patients may, however, be unable to obtain these discounts--even if they pay cash.
Point of Services (POS) plans have features of both an HMO (Health Maintenance Organization) and a PPO (Preferred Provider Organization). POS plans are modeled on the same managed care foundation of an HMO. Lower health coverage costs but in turn a more limited choice of physicians, specialists and hospitals. Plan subscribers must select a primary care physician (PCP) who becomes the “point of service” when referred to specialists. If the subscriber uses a PCP or “gatekeeper:” then the HMO type benefits are applied but the co-payment or coinsurance fees may be higher for the services of the specialist if the specialists is outside the insurance network of doctors.