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Managed care structures: HMO, PPO, and POS plans

Lesson 33 of 92 · All lessons · Up next: Consumer-directed health accounts: FSA, HDHP/HSA, and HRA →

Why managed care exists

Traditional indemnity health insurance pays a share of whatever bill any provider sends. The insurer has no say over who delivers care or what it costs. Managed care joins the financing of care to its delivery: the plan contracts with a network of doctors and hospitals, negotiates what they are paid, and uses tools to steer members toward appropriate, cost-effective care. Florida's HMO law describes this purpose directly: prepaid plans that emphasize effective cost and quality controls (Fla. Stat. § 641.18(2)-(3)).

Three structures dominate the exam: the HMO, the PPO and the POS plan. They sit on a spectrum. At one end the plan controls more and costs less; at the other the member has more freedom and pays more for it.

A horizontal arrow runs across the top. Its left end is labeled more plan control and lower cost; its right end is labeled more member freedom and higher cost. Below it are three boxes from left to right. The first box is the H M O: prepaid and network only, a primary care physician acts as gatekeeper, specialists require a referral, out-of-network care is not covered except for emergencies, members pay low copays, and doctors are often paid by capitation. The middle box is the point-of-service plan, a hybrid of an H M O and a P P O: it has a primary care gatekeeper and in-network referrals, but out-of-network care is covered at higher cost-sharing, and the member chooses which way to go each time care is needed. The right box is the P P O: discounted fee-for-service, no gatekeeper, no referral needed, and out-of-network care covered at a lower benefit, where the provider may balance bill; it carries the highest premium.
HMO, POS and PPO trade plan control and low cost for member freedom.

Health maintenance organization (HMO)

An HMO is a prepaid plan. The member pays a regular premium, and the HMO arranges care through its own network rather than reimbursing bills after the fact (§ 641.18(2)). Its defining features:

  • Network only. Covered services must come from providers the HMO designates. If a

member uses a nonparticipating provider, the member may be liable for the bill, except in very limited circumstances such as emergencies (§ 641.309(1)(c)).

  • Primary care physician (PCP) as gatekeeper. Each member picks a PCP, who provides

routine care and coordinates everything else.

  • Referrals. A member sees a specialist through a referral from the PCP (§ 641.185(1)(b)).
  • Service area. An HMO serves a defined geographic area (§ 641.49(3)(s)). It must still

provide emergency care around the clock and arrange emergency coverage outside that area (§ 641.49(3)(l), (r)).

  • Preventive care. Keeping members healthy is cheaper than treating illness, which is

where the name "health maintenance" comes from (§ 641.185(1)(b)).

  • Low out-of-pocket cost. Usually a flat copayment per visit, with small or no

deductibles.

HMOs often pay primary care doctors by capitation: a fixed amount per member per month, whether that member visits once or ten times. This gives the provider a reason to keep patients healthy. HMOs are organized in several models. In a staff model, the doctors are HMO employees. In a group model, the HMO contracts with a multispecialty medical group. An individual practice association (IPA) contracts with independent doctors who keep their own offices, and a network model contracts with several groups.

Preferred provider organization (PPO)

A PPO contracts with providers who agree to discounted fees, usually still paid fee-for-service. The member has two tiers of benefits:

  • In network: lower deductible and coinsurance, and the provider accepts the negotiated

fee as payment in full.

  • Out of network: still covered, but at a lower benefit level with higher cost-sharing.

The out-of-network provider may also balance bill the member for the amount above what the plan allows.

A PPO has no gatekeeper. Members can see specialists without a referral. They pay for that freedom through higher premiums and more cost-sharing than an HMO.

Point-of-service plan (POS)

A POS plan is a hybrid. It works like an HMO when the member stays in network: they choose a PCP, get referrals, and pay low copays. Unlike a pure HMO, the member can go out of network and still receive some benefit, with a deductible, higher coinsurance and more paperwork, the way a PPO works. The member decides at the point of service, each time care is needed, which way to go.

Controlling utilization

All three use utilization review to manage cost. Common tools include:

  • Prior authorization (precertification) before a planned admission or service. Florida

HMOs must keep written procedures for providers to request it (§ 641.315(8)).

  • Concurrent review during a hospital stay.
  • Second surgical opinions (§ 641.185(1)(b)).
  • Case management for costly conditions.

Selling managed care

In Florida, an HMO contract is sold like health insurance. Anyone who solicits one must be licensed and appointed as a health insurance agent (§ 641.386(1)).

Key terms

Sample questions

Which statement best describes managed care?

  • The insurer pays a share of whatever bill any provider sends, with no say over who delivers care
  • The plan joins financing and delivery of care through provider networks, negotiated payment and utilization controls
  • A government program that pays hospitals directly for all residents of a state
  • A savings account the member funds and draws on to pay medical bills
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