HMOs (Health Maintenance Organizations) Essay

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A health  maintenance organization (HMO) is an organization that  arranges  or  provides  managed care for health  insurance,  self-funded  health  care benefit   plans,   individuals,   and   other   entities. HMOs are prepaid  to act as an intermediary with all types of health  care providers  (e.g., hospitals, doctors,  and  rehabilitation services). The  HMO Act  (1973)  requires  employers  who  have  25  or more employees to offer HMOs as an option  if the employer  offers traditional health  insurance  to its employees. HMOs contract with health  care providers, who agree to treat patients following the HMO’s   guidelines  and  restrictions. Health   care providers  benefit from this arrangement by receiving the HMO’s  clients. Emergency care is covered, whether  or  not  the  service  is received  at  a  contracted  hospital  or with  a contracted health  care provider.

The  difference  between  HMOs, preferred  provider organizations (PPOs), exclusive provider organizations (EPOs),  and  point-of-service (POS) plans can be confusing. HMOs cover care provided by  doctors   and   hospitals   inside  their   network. They typically require  a primary  care physician  to manage patients’ care, especially with regard to referrals  to  other  providers  and  specialists.  PPOs cover  care  provided  inside  and  outside  their  network.  Out-of-network costs  are  typically  higher for  the  patient.  EPOs  are  similar  to  HMOs, and they  usually  do  not  cover  care  outside  their  network   either.   However,   EPOs  do   not   generally require  a primary  care physician  to refer for specialist care. POS plans  are  usually  a blend  of the HMO and PPO models.


HMOs can  be  traced   back  to  1910,   when  the Western   Clinic   offered   lumber   mill  owners   in Tacoma,  Washington, and their employees specific medical services for a cost of 50 cents per member per month.  The Ross-Loos  Medical  Group, founded  in 1929,  is, however,  considered  the first example   of  an   HMO.  The   group   served   Los Angeles Department of Water  and Power and Los Angeles County  employees. That year, the cost was $1.50  per month  per employee. About a year later, the  Los Angeles Fire Department had  joined  the group, followed by the Los Angeles Police Department and the Southern California Telephone Company  shortly   thereafter. More   than   35,000 were enrolled by 1951. In 1982, the Ross-Loos Medical  Group,  the Insurance  Company of North America,  and  Connecticut General  merged.  The Insurance  Company of North America had been in existence   since  1792,   and   Connecticut  General since  1865.  At  that  time,  the  merged  companies came to be known  as CIGNA.

In 1929,  a physician  created  a health  plan that farmers  were able to buy shares in for $50 to help raise money for a hospital  in Elk City, Oklahoma. The Farmer’s Union took over the plan and the hospital  in 1934.  That  year, Baylor  Hospital had begun  to  provide  teachers  with  prepaid  care and had enrolled about 1,500 teachers. This was the beginning of Blue Cross. Since Blue Cross only covered hospital services, state medical societies organized  to create Blue Shield to cover physician services. By 1970,  HMOs had  declined  to  fewer than 40. In 1973, the Health Maintenance Organization Act was developed. It had three main components. To  plan,  start,  or  expand  an  HMO, grants and loans were provided. Federally certified HMOs were no longer subject to state restrictions. Employers   with   25   or   more   employees   were required  to offer a federally certified  HMO as an option  if the  employer  also  offered  health  insurance.  The   dual-choice   provision,   requiring   the offer  of  an  HMO if health  insurance  is offered, was the most important factor in the resurgence of HMOs. For the first time, HMOs had access to the employer-based market. After the regulations and plans  were certified  by the federal  government in 1977,  HMOs began  to  grow  rapidly.  The  dualchoice provision  expired  in 1995.


HMOs  operate   under   a   number   of   different models.  Some have  multiple  divisions,  with  each utilizing a different  model, and often two or more models are blended. The staff model has physicians who  are  salaried   and  have  offices  in  buildings owned or leased by the HMO. This is also referred to as a closed-panel  HMO because the physicians can   only   see  that   particular  HMO’s   patients. The  group   model  has  physicians   who  are  contracted   within  a  multispecialty physician  group. The group  practice  employs  the physicians,  while the  group  contracts with  the  HMO. This  type of HMO may also establish  the group  practice,  and members  may  be  required  to  see HMO patients exclusively, but  this is not  a requirement. HMOs may   also   contract  with   an   existing   physician group.  This group,  referred  to as the independent group model, may also see other patients  not associated with the HMO. Physicians can also contract with  an  independent practice  association, which may, in turn, contract with an HMO. These physicians  typically  have  their  own  offices  or  established practice and continue  to see non-HMO patients. In the network model, HMOs contract in any combination of the models. Since 1990,  most HMOs operate  under  the network model.

HMOs  typically  operate   in  prescribed   ways. Often,  members  are  required  to  select a primary care physician.  That  doctor  typically manages  the entire case and directs the patients’ access to other medical services. Primary care physicians are typically  general  practitioners, family  physicians, pediatricians, or internists. If the primary care physician  is the  manager  of  the  case,  patients   must obtain  a referral from him or her to see a specialist, and  that  cannot  be authorized unless the HMOs’ guidelines  are  followed.   In  an  open-access   and POS plan,  patients  are  not  required  to  use a primary  care  physician  to  manage  their  care.  They can  see a specialist  or  other  physician  without a referral. However, if patients  use their primary care physician  for  a  referral,   the  HMO benefits  are typically  better   when  comparing   the  associated costs (i.e., the copayment).


HMOs usually provide  preventive  care at a lower cost  or  even free to  keep  their  members  healthy and reduce the costs of in-depth medical care. Preventive care usually includes immunizations, mammograms, physicals, and well-baby checkups. They  also  monitor their  physicians  to  see  how they compare  with  other  doctors  in the network, in  a  process  called  utilization review.  Some  services, like outpatient mental  health  care, are limited and more costly. Experimental treatment and elective  services  (i.e.,  plastic  surgery  that  is  not reconstructive or  related  to  a medical  condition) are almost never covered. Case management is typically   offered   by   HMOs,  especially   when patients  have a catastrophic illness or chronic  disease (e.g., cancer,  diabetes,  or  asthma). The  case manager  ensures  that  the  patient  is receiving  the appropriate  care   available   and   that   no   two providers  are overlapping in their care. Case management  has  the  goal  of managing  the  condition so that  it does not worsen  beyond  help.

Research  is  mixed  as  to  whether   HMOs are more  successful  at  cost  containment  than   non-HMO plans. HMOs do not affect the total expenditures of consumers, although out-of-pocket costs for routine  care are often reduced.  Some speculate that consumers utilize physician care more often because  out-of-pocket expenses  are initially reduced  for  members.  Some critics  have  claimed that HMOs, especially those run for profit, increase administrative costs and tend to pick healthier patients. HMOs have been sued for allegations  of restricting  access to necessary care. Courts  have to decide  whether  it  is the  HMO or  the  managing physician,   however,   who   restricted   the   access. HMOs have also been sued for breach  of contract and  violations  of state  law. Hospitals can be held responsible  for negligence if they select an unqualified physician,  and HMOs can also face this legal conundrum. HMOs have to be diligent  in screening and hiring the physicians who provide for their patients’ care. HMOs are regulated at the state and federal levels. Rather  than  licensed under an insurance license, HMOs are licensed by the state under a certificate of authority. HMOs must follow state and federal  mandates to provide  particular services.


  1. “HMO Insurance Plans.” http://ehealthinsurance. com/health-plans/hmo (Accessed September  2014).
  2. gov. “Health Maintenance Organization Plan.” (Accessed September 2014).
  3. “HMO, PPO, EPO: What Health  Plan Is Best?” (August 15, 2014). (Accessed September  2014).

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