Managed care structures: HMO, PPO, and POS plans

What managed care is

Managed care is any arrangement that combines paying for health care with controlling how that care is delivered. A traditional indemnity (fee-for-service) plan simply reimburses whatever doctor or hospital the insured chooses. A managed care plan instead steers members toward a network of contracted providers and uses tools to control cost and quality:

• Provider networks of doctors and hospitals that agree to the plan's rates and rules
• Primary care physicians (PCPs) who act as gatekeepers for other care
• Referrals required before seeing a specialist
• Utilization review: precertification (prior approval) before a hospital admission or major procedure, concurrent review during a stay, and retrospective review after care is given
• Case management for expensive, long-term conditions
• Emphasis on preventive care, which is cheaper than treating advanced illness

A common statutory definition captures the core idea: a managed care product is one that requires covered services, other than emergency care, to be provided by or on referral from a primary care provider, with referred services rendered by providers in the insurer's network.

The three structures tested most often are the HMO, the PPO and the POS plan. Think of them as points on a line: the HMO gives the least freedom at the lowest cost, the PPO gives the most freedom at the highest cost, and the POS sits between them.

Health maintenance organization (HMO)

An HMO provides comprehensive care to members in a defined service area in exchange for a prepaid, fixed periodic fee. It both finances and delivers (or arranges) the care.

• Each member chooses a PCP gatekeeper, and a referral is needed to see a specialist.
• Care must come from in-network providers. Except for emergencies, out-of-network care is generally not covered at all.
• Members usually pay small copayments and little or no deductible, so out-of-pocket cost is low and predictable.
• Providers are often paid by capitation: a fixed amount per member per month, whether or not the member uses any care. Capitation shifts risk to the provider and rewards keeping members healthy.
• HMOs stress preventive care such as checkups and screenings.

HMOs are organized under several models:

• Staff model: the HMO employs salaried physicians who work in HMO-owned facilities (a closed panel).
• Group model: the HMO contracts with one multispecialty medical group to serve its members.
• Network model: the HMO contracts with several medical groups.
• Individual practice association (IPA) model: the HMO contracts with an association of independent physicians who keep their own offices and also see non-HMO patients (an open panel).

Preferred provider organization (PPO)

A PPO is a network of doctors and hospitals that have agreed to provide care at discounted, negotiated fees, usually on a fee-for-service basis rather than capitation.

• There is no gatekeeper and no referral requirement. Members may see any specialist directly.
• Members may go out of network, but they pay more: a higher deductible, a lower coinsurance percentage (for example 80 percent in network, 60 percent out), and possible balance billing for the difference between the provider's charge and the plan's allowed amount.
• Premiums and cost sharing are typically higher than an HMO's, in exchange for more choice.

A variation, the exclusive provider organization (EPO), works like a PPO without the out-of-network benefit: no gatekeeper, but only network care is covered except emergencies.

Point-of-service (POS) plan

A POS plan is a hybrid of the HMO and the PPO, sometimes called an open-ended HMO. The member chooses at the point of service, each time care is needed, which way to go:

• In network, through the PCP: the member uses the gatekeeper and referrals and receives HMO-style benefits with low copays.
• Out of network, or without a referral: the plan still pays, but at a reduced level with deductibles and higher coinsurance, much like a PPO's out-of-network tier.

Telling them apart on the exam

• Gatekeeper and no out-of-network coverage? HMO.
• No gatekeeper, out-of-network covered at a lower level? PPO.
• Gatekeeper in network, but out-of-network still covered at a lower level? POS.
• Paid a fixed amount per member per month? Capitation, the HMO hallmark.
• Discounted fee-for-service network? PPO.

In every structure, true emergency care is covered even when the provider is outside the network.