HMO or PPO: Which health plan is best for you?

August 23, 2010

Health maintenance organizations (HMOs) and preferred provider organizations (PPOs) are both managed health care insurance options. Both plans share some similarities, but there are distinct differences between the two as well--primarily with regard to cost and access to care.

Health Maintenance Organizations (HMOs)

According to the Insurance Information Institute, HMOs typically have fewer out-of-pocket costs than other health insurance plans. The trade-off for lower costs: restrictions on where you can receive care. HMOs require the insured to choose a primary care physician (PCP) from a list of approved providers in the HMO network. The PCP plans and manages your health care. For example, in order to see a specialist or to receive coverage for certain medical procedures, your PCP must provide a referral.

HMOs have smaller monthly health insurance premiums compared to other types of health insurance coverage, but HMOs requires a co-payment fee for services such as doctor office visits and prescription drugs. If you see a doctor on a regular basis, these costs can add up. When you are comparing the cost of health insurance plans, you should be sure to consider co-payments and other out-of-pocket expenses along with the price of your monthly premiums.

Some HMOs have an annual deductible, which is the amount you must pay on a yearly basis before your medical insurance coverage kicks in. However, the California Office of the Patient Advocate notes that the annual deductible for HMOs does not typically apply to preventative care, such as family planning services, so you are only responsible for paying the co-payments for such services.

Preferred Provider Organizations (PPOs)

Under a PPO, a health insurance company contracts with certain hospitals and doctors for services at discounted rates--but still allows you the flexibility to seek care outside of the network, as long as you pay the difference.

Like HMOs, PPOs charge a monthly fee to maintain coverage. You are also financially responsible for co-pays for doctor and emergency room visits and hospital stays. Some PPOs charge a yearly deductible, which has to be met before the provider begins to provide coverage. Like HMOs, prescription drugs may have a separate yearly deductible.

Although PPO plans provide more freedom than HMOs, you may pay more for certain services. If you see an out-of-network provider, the cost for the visit depends on what your PPO typically pays for the same service. This is sometimes referred to as the "usual and customary" provision. Should the out-of-network doctor bill you for a service for an amount that exceeds what your insurance company considers to be usual and customary, you will have to pay the co-insurance amount (a percentage of the cost of service) plus the difference between what your provider charges and what your insurance company is willing to pay.

It's important to know the costs of services and what your PPO pays before you see an out-of-network doctor.

Which plan is best for you?

An HMO health insurance plan might be your best option if you prefer to keep billing simple, need lower health insurance premiums and want to keep out-of-pocket costs to a minimum. However, if the freedom and flexibility to choose your doctor is most important, you should consider a PPO health insurance plan.

Evaluating the basic makeup of available health insurance plans can help you choose the option that works best for you.

Rob Sabo

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