Saving Money on Employee Benefits: HMOs
In this artlcle, I’ll continue my discussion of saving money on employee benefits. In our last article we covered the most common type of health insurance plan today, the PPO. But there is another type of plan still found in many employee benefits packages. That is the Health Maintenance Organization (HMO).
Once Upon a Time in the Early Days of HMOs
If you’re as old as we are then you probably remember when HMOs were ruling the health insurance market. Those were the days of no deductibles and ridiculously low copays for virtually all services including inpatient hospital stays. But those were also the days of gatekeeper Primary Care Physicians (PCP).
PCPs Were the Lynchpin
In order for HMOs to work financially for the patient, doctor, and insurance company, they were set up differently than almost any type of health insurance used in the marketplace to that point. PCPs received reimbursements based on a capitated (per head) arrangement. This means they received money for every patient who had them listed as their PCP. This payment was made even if the patient never came in to receive services that year. In addition to that, they received flat reimbursements for services that were performed.
This caused some PCPs to want to spend as little time as they could with their patients. In doing so, they could see as many as possible and bill as many services as possible. But it also sometimes made them unwilling to refer you to a specialist. Sending patients to specialists meant sending money out the door with the patient. Before you demonize PCPs for this, understand that their per patient payments were much lower with HMOs. While trying to maintain the level of care provided, they needed to be seeing patients to make the model work financially. And the insurance company required them to closely scrutinize referrals to specialists.
Because the PCP was gatekeeper for patient care, patients were in a tough spot if they needed care, but their PCP couldn’t see them when they wanted to be seen. Patients tried to call around to get in to see someone else…anyone else. That involved an incredibly frustrating downward spiral. First, of trying to get that other doctor’s office to even take an appointment. The other doctor’s office was reluctant to do this if they were not the listed PCP. To get that changed, a patient would have to call the insurance carrier. And remember the patient at this point didn’t even know if they would like the new doctor. Patients who tried this PCP switch tactic often found that when they called the new doctor to finally make an appointment, the new doctor couldn’t provide a much sooner appointment.
There were many opportunities for frustration, when all the patient wanted was relief for something like an ear infection!
Frustrations were many, but were those early HMOs all bad? No, of course not. In fact, many patients, despite the frustrations, liked the plans. They were priced well, the out of pocket expenses were very easy to understand ($20 per doctor visit, $100 in-patient hospital stay, etc.), and it was relatively easy to understand that everything had to go through the PCP.
In my personal experience, I was on an HMO in Florida when I gave birth to each of my sons. I paid a total (from first visit to confirm the pregnancy all the way through delivery) of $10 for my first son. Then two years later I paid a whopping $15 for my second son’s maternity and delivery. Unbelievable! No wonder HMOs were generally liked by patients.
HMOs Eventually Fell Out of Favor
So, why aren’t HMOs as popular now as they were back then? Insurance carriers were setting HMO premiums far lower than the PPO plans so they were adopted very quickly by employers. But that train ran out of tracks eventually. This was mainly due to unreasonably low copays that insulated patients from the true cost of services. That insulation caused many patients to request (in some cases demand) expensive services that were not needed. Since they never got a bill, they saw no consequence to getting scans, tests, and referrals to all manner of specialists. The carriers were forced to raise premiums and employers quickly soured on the plans when their cost exceeded the PPOs. They basically stopped becoming a good product for saving money on employee benefits – both for the employer and the employee.
HMOs in Today’s Market
HMOs do still exist in today’s healthcare world. They mainly exist in large cities, and/or in cities where Kaiser Permanente (or another large hospital system) has a presence. These large hospital systems are able to offer nearly every required service and manage access and costs very closely. Their large size and extensive services allow them to do this.
Usually you must go to in-network physicians and facilities or you have no coverage. Some HMO plans also don’t cover all the services that a PPO typically covers. As an example, when I was struggling to get pregnant, I went to visit my HMO primary care doctor to talk about it. He said he could refer me to an infertility doctor to do tests but that from the first visit I wouldn’t have any coverage, so he recommended that we just keep trying. Needless to say, that was pretty frustrating!
HMOs usually don’t have a deductible. They generally have copays of varying amounts for all services (what we call a fee-for-service plan), but could potentially have a coinsurance % for some services, meaning your cost share will vary depending on the total cost of the services.
HMOs typically still make you designate a PCP and they may or may not make you get referrals before you can see a specialist.
They may cover less services than a PPO (such as infertility as I mentioned above), but they may offer some bells and whistles that a PPO doesn’t such as wellness or fitness plans. It just depends on the insurance company/health system offering it and the actual plan design your employer purchased.
Jenny’s Insider Tips
HMOs are usually priced less than a comparable PPO. This is because the insurance company can negotiate lower rates for services with the physicians/facilities in their network in exchange for driving a larger percentage of patients to them. Since the network is small, more patients will be concentrated onto the providers in the plan. Conversely, PPOs are more expensive in general because patients have more physicians to choose from so the insurance company can’t drive down the costs as much as they can on HMOs.
Additionally, HMOs frequently require a PCP as noted above. They do this because theoretically having one regular physician managing each patient’s overall care and acting as a gatekeeper to specialists and diagnostic tests will keep costs to the insurance company (and hopefully to the patient, too!) as low as possible.
My advice for employees considering an HMO, particularly if they are attracted to the lower cost of the HMO, is to carefully study the provider network. Make sure a PCP you want to see is in the network. You’ll be depending on that doctor to manage your care and having a good relationship with them will be critical.
Can an HMO Really Save you Money?
Whenever your ability to choose providers is limited by a plan, then it is usually less expensive, so yes you can oftentimes be saving money on employee benefits by choosing an HMO option. Extending my insider tip above, you should ensure the provider network makes sense for you and your family. Your PCP will be critical for the reasons stated above. Because the network is smaller, your choice of specialists could be considerably smaller than for a PPO. Unlike a PPO, where you can go out of network with reduced coverage, most HMOs have NO coverage out of network.
So, being comfortable with the network and understanding its limitations is critical.
Jenny’s Insider Tips
Some HMOs can have you saving money on employee benefits vs a PPO offering and it could be a great option for you if the limitations of an HMO are known and acceptable to you.
I have found that employees that have been on a PPO for many years have a difficult time adjusting to an HMO due to the much smaller network and need to go through their PCP for most services.
Conversely, I have seen younger employees without established relationships with providers typically like HMOs because they are cheaper, easy to understand, and frankly, easy to use because your doctor helps coordinate everything.
Some things to think about and be aware of before choosing an HMO:
- If you travel frequently, how does the plan handle emergencies while you are away from the network? Most plans have some provision for reimbursing you for services while out of the network, but they may not make it easy. And they may not provide the same coverage as if you were in network.
- Related to this is retirees or semi-retirees who live or winter in different parts of the country. The HMO networks are usually limited to relatively small geographic areas. Sometimes they are limited to within a specific hospital system as well. You could have trouble getting routine care out of your service area. In this case, an HMO is probably not right for you.
- HMOs usually cover the same common services as PPOs, but you’ll want to ask about the less common services if they are important for you. Do you have a chronic condition, or a known condition that requires special services, even if infrequently? Ask your employer about coverage of those services. If they don’t know, ask the insurance company directly. You don’t want to be surprised with an out-of-network bill.
- HMOs premiums can save you money over the premium of a typical PPO, but look at all of the costs involved. Some HMOs can have rather high copays. Their out of pocket maximums may be quite high compared to a PPO. So, while a PPO might cost you more in premium and until you hit the PPO out of pocket maximum, the PPO might save you money if you frequently use a service that has a high copay on the HMO plan.
- Employers are increasingly choosing pharmacy plans that are in some way separate from the main medical plan. So, while it is not always the case, it is typically true that pharmacy plans offered with HMOs are more restrictive than those offered with PPOs. There are usually fewer participating pharmacies and lists of covered drugs may be smaller than those offered with a PPO. This varies highly by plan, but in an effort to make the HMO cheaper than a PPO, cheaper pharmacy plans usually come along for the ride. Similar to providers, make sure your medications are covered and at what cost. Depending on the medication, the PPO plan might save you more money.
That concludes my discussion on HMOs. Hopefully you’ve learned enough to decide if this type of insurance coverage is right for you and for ways to start saving money on employee benefits.
Please let me know if you have questions and I welcome suggestions for future articles!
Current and Upcoming Articles in the Saving Money on Employee Benefits Series:
Health Maintenance Organizations (HMOs) (This Article)
ACOs, Saving Money on Employee Benefits (Coming soon)
High Deductible Health Plans (HDHPs) (Coming soon)
Spousal Surcharges (Coming soon)
Posted by Jenny