HMO vs. PPO plans: What's the difference & which is better?

HMOs and PPOs. HSAs and FSAs. Deductibles and copays. Ancillary benefits like disability insurance and critical illness insurance.

Open enrollment season is back — and as full of confusing jargon and fine print as ever.

If you have ever had to choose between an HMO and a PPO, you may be familiar with these two types of health insurance plans. (If not, you may be wondering what those abbreviations even stand for.)

There's a world of difference between the two, and it can be a challenge unraveling the upsides of downsides of each.

Let's take a closer look at both HMO and PPO plans, including their advantages and disadvantages, to help you decide which best meets your needs.

HMO plans, explained

Health Maintenance Organization (HMO) plans have been around a long time. In 1910, the Western Clinic in Tacoma, Washington, offered lumber mill owners and their employees a selection of medical services from its group of providers for a premium of $0.50 per member per month.

The premise for today's HMOs is the same. An employee or individual termed a "member" is presented with a network of healthcare providers to obtain their services for a monthly premium. Providers receive a portion of that premium if they are selected by the member to be their "Primary Care Provider," meaning they'll be the first doctor the member will see for their medical needs.

HMOs are based on a network of hospitals, doctors, and other health care providers that agree to provide care to members for a set fee. This is what makes HMO plans less expensive than PPOs.

An HMO will generally only cover care you receive from one of the plan's contracted providers, known as "in-network" providers. The member's primary care prover must refer a member to a specialist; the member can't make an appointment with the specialist without this referral.

HMO plans will sometimes refer members to specialists out of the network for care that can't be provided within their HMO system. Members are also able to seek emergency care from the closest emergency care facility.

Advantages of HMO plans

HMO plans are a popular choice for budget-conscious people that don't anticipate seeing a doctor very often. Benefits include:

  • Lower monthly premiums
  • Lower out-of-pocket costs
  • Minimal filing of claims since the care you receive is usually in-network
  • Having a primary care physician to coordinate and manage your care

Disadvantages of HMO plans

There are also some downsides of being enrolled in an HMO to be aware of, such as:

  • The number of physicians that participate in HMOs is generally smaller than PPOs, meaning your current doctor may not be on the list of approved providers, and you'll have to begin to see a doctor that's new for you.
  • You must get a referral from your primary care doctor to see a specialist
  • You must stay within the network to get medical care unless it's an emergency. If you see a provider outside of the network, you may have to pay 100% of the bill.

HMO plans sometimes have a deductible you must meet before the insurer covers your healthcare costs. You also will very likely have a "co-pay" when you see a doctor, both your primary and any specialist.

PPO plans, explained

If you understand the HMO, you've got a good start towards understanding Preferred Provider Organization (PPO) plans.

PPOs also have a provider network, but you don't have to select a primary care provider. You're free to see any in-network doctor, and you don't need a referral to see a specialist. Doctors who participate in a PPO don't receive a flat fee since there are no "members" in a PPO; you're considered an insured individual. Instead, doctors receive an agreed-upon rate for services they provide to insureds.

A PPO plan is designed to provide you with greater flexibility in choosing which providers you wish to see, so you might find it easier to see your doctor's name on the PPO's list of providers.

Advantages of PPO plans

Many people prefer PPOs for the following reasons:

  • Greater flexibility in using providers both in-network and out-of-network
  • Out-of-network providers may be partially covered instead of you having to pay 100% of the cost of utilizing them
  • No referral is needed to see a specialist
  • More doctors participate in PPOs than HMOs

Disadvantages of PPO plans

PPOs do have some disadvantages, too:

  • PPOs typically have a higher monthly premium than HMOs, as well as higher out-of-pocket costs.
  • With a PPO, you have greater responsibility for managing and coordinating your care.

Besides having higher monthly premiums and out-of-pocket costs, you may also have to pay a deductible before your coverage begins. You'll also have to pay in full when you see an out-of-network provider, then file a claim with the insurance company for reimbursement.

How to decide which is better for you

The decision to choose an HMO or a PPO should be based on what's most important to you: cost or flexibility. If you want lower costs and don't mind choosing a doctor from within the HMO network, then an HMO is a good choice for you. Less flexibility in choosing your health care providers comes with a lower cost.

If you already have a doctor or specialists you want to continue seeing, but they aren't in the HMO network, a PPO plan might be your best option. Though a PPO plan is generally more expensive than an HMO plan, it comes with greater flexibility.

In making your decision, it's important to ask plenty of questions. Based on your specific needs, your health history, and the information found above, formulate a list of questions for your employer, HR department liaison, or insurance company representative. They are there to answer your questions.

Be sure to consider things like deductibles and out-of-pocket costs, not just monthly premium costs.

Ask yourself if you want to continue to see your current doctor or team of specialists. Look carefully at the providers' list for both plans and see which one has doctors that you prefer to see.

Lastly, ask your HR department documentation that compares the two types of plans side-by-side. Insurers typically will provide them, and they're a great aid in understanding both types of plans and making an informed decision.

Employer considerations

If you're an employer, you strive to offer the best employee benefits package you can. Successfully so requires to understand that your employees are unique individuals with different health insurance needs.

Some are younger, single, and rarely go to the doctor. An HMO may be the perfect choice for them. It affords them lower premiums and allows them to have selected a physician in advance of when they need one.

You probably also have employees with younger children. Kids visit the doctor more frequently than most, and parents are reluctant to change pediatricians when selecting a health plan. A PPO plan may be a better option for these employees.

To meet these varying needs, larger employers will often offer both types of plans to their employees. This will be viewed positively by your employees, increasing morale and reducing turnover, two essential components for a successful business.

You'll also want to hold informational meetings with your employees to explain the benefits of the plan(s) selected, explaining coverage options, and the differences between the HMO and PPO plans if you've chosen to offer both.


Jack Wolstenholm is the head of content at Breeze.

The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.

Insurance
Published October 28, 2020