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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.
- “HMO Insurance Plans.” http://ehealthinsurance. com/health-plans/hmo (Accessed September 2014).
- gov. “Health Maintenance Organization Plan.” http://medicare.gov/sign-up-change-plans/medicare-health-plans/medicare-advantage-plans/hmo-plans.html (Accessed September 2014).
- “HMO, PPO, EPO: What Health Plan Is Best?” (August 15, 2014). http://webmd.com/health-insurance/20140815/hmo-ppo-epo-hows-a-consumer-to-knowwhat-health-plan-is-best (Accessed September 2014).