What Is an HMO and How Does It Work?

Understanding what an HMO is and how they work is critical when choosing a health plan during open enrollment as well as when using your HMO after you're enrolled.

Woman at primary care physician
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What Is an HMO?

HMO stands for health maintenance organization, a type of managed care health insurance. As the name implies, one of an HMO’s primary goals is to keep its members healthy. Your HMO would rather spend a small amount of money up front preventing illness than a lot of money later while trying to treat it.

If you already have a chronic condition, your HMO will try to manage that condition to keep you as healthy as possible.

According to the Kaiser Family Foundation's annual health benefits survey, 19% of employees with employer-sponsored health benefits had HMO coverage as of 2019, versus 44% of employees covered by PPOs (preferred provider organization); this is another type of managed care plan that tends to be more expensive but offers greater freedom and flexibility).

But in the individual market—ie, health plans that people buy themselves, instead of obtaining via an employer—HMOs (and EPOs or exclusive provider organizations) have become more common so PPOs work to contain costs. The type of managed plan you're likely to have depends in large part on how you obtain your health insurance.

How Does It Work?

Let's take a look at what you need to know about HMOs.

1. You must have a primary care physician.

Your primary care physician, usually a family practitioner, internist or pediatrician, will be your main doctor and will coordinate all of your care. Your relationship with your primary care physician is very important in an HMO. Make sure you feel comfortable with him or her or make a switch. You have the right to choose your own primary care physician as long as he or she is in the HMO’s network. If you don’t choose one yourself, your insurer will assign you one.

2. Your primary care physician will probably need to refer you for any special treatment. 

Your primary care physician will be the one who decides whether or not you need other types of care and must make a referral for you to receive it. Examples are seeing a specialist, getting physical therapy or obtaining medical equipment such as a wheelchair. Requiring a referral ensures the treatments, tests and specialty care you’re receiving are medically necessary. Without a referral, you don’t have permission for those services and the HMO won’t pay for them.

The benefit of this system is that patients receive fewer unnecessary services. But the drawback is that patients have to see multiple providers (a primary care physician as well as the specialist) and pay copays or other cost-sharing for each visit.

The requirement that you get a referral from your PCP to see a specialist is a longstanding feature of HMOs. But it's not a set-in-stone rule. Modern HMOs don't always have this requirement, and you might find that you're enrolled in an HMO that allows you to see in-network specialists without a referral. As always, read the fine print!

3. You must use in-network providers.

Every HMO has a list of healthcare providers that are in its provider network. Those providers cover a wide range of healthcare service including doctors, specialists, pharmacies, hospitals, labs, X-ray facilities, and speech therapists. If you get care out-of-network, the HMO won’t pay for it; you’ll be stuck paying the entire bill yourself.

Accidentally getting out-of-network care can be a very expensive mistake when you have an HMO. Fill a prescription at an out-of-network pharmacy or get your blood tests done by the wrong lab and you could be stuck with a bill for hundreds or even thousands of dollars.

It’s your responsibility to know which providers are in-network with your HMO. And you can’t assume that, just because a lab is down the hall from your doctor’s office, that lab is in-network with your HMO. You have to check. And sometimes out-of-network providers end up treating you without you even knowing about it—an assistant surgeon or an anesthesiologist, for example.

If you're planning any sort of medical treatment, ask lots of questions in advance in an effort to ensure that everyone who will be involved in your care is in your HMO's network.

There are three exceptions to the requirement to stay in-network:

  1. True emergencies
  2. The HMO doesn’t have an in-network provider for the specialty service you need. This is rare. But, if it happens to you, pre-arrange the out-of-network specialty care with the HMO—keep your HMO in the loop.
  3. You’re in the middle of a complex course of specialty treatment when you become an HMO member, and your specialist isn’t part of the HMO. Most HMOs decide whether or not you may finish the course of treatment with your current physician on a case-by-case basis.

4. Your cost-sharing requirements in an HMO are usually low—but not always.

Cost-sharing like deductibles, copayments, and coinsurance has historically been kept to a minimum with an HMO. Some employer-sponsored HMOs don’t require any deductible (or have a minimal deductible) and only require a small copayment for some services. Because of their low cost-sharing and low premiums, HMOs are considered one of the most economical health insurance choices.

However, in the individual health insurance market, where about 6% of the US population obtained their coverage in 2018, HMOs tend to have much higher deductibles and out-of-pocket costs. In some states, the only plans available in the individual market are HMOs, with deductibles that reach as high as several thousand dollars. In most states, there tends to be less choice available in the individual market in terms of network types (HMO, PPO, EPO, or POS), versus the employer-sponsored market, where network design choice remains more robust.  

HMO vs. Other Health Insurance Types

All types of managed care health insurance (which includes virtually all private coverage in the U.S.) have some things in common. For example, no managed care health plan will pay for care that isn’t medically necessary, and all managed care plans have mechanisms in place to help them figure out what care is medically necessary, and what care isn’t.

Managed care plans like PPOs, EPOs, and POS plans differ from HMOs in several ways. Some will pay for out-of-network care, and some won’t (they all have to, if it's truly an emergency). Some have low cost-sharing requirements while others have hefty deductibles and require significant coinsurance. Some require a primary care physician, but others don’t.

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Article Sources
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  1. Kaiser Family Foundation. 2019 Employer health benefits survey. September 25, 2019.

  2. Medicare.gov. Health Maintenance Organization (HMO).

  3. Kaiser Family Foundation. Health insurance coverage of the total population.

  4. Healthcare.gov. Health insurance plan & network types: HMOs, PPOs, and more.