Health Maintenance Organization for employees:
Definition, Types, Benefits & Comparison

A Health Maintenance Organization (HMO) for employees is a type of health insurance plan that provides medical services through a network of contracted healthcare providers in exchange for fixed monthly or annual premiums. Under the US Health Maintenance Organization Act of 1973, employers with 25 or more employees are required to offer federally certified HMO options alongside traditional healthcare plans. HMOs cover care provided by doctors, hospitals, and healthcare professionals who have agreed by contract to treat patients according to the HMO's guidelines in exchange for a steady stream of customers.

Unlike traditional indemnity insurance, HMOs operate as capitated systems where the organization receives a fixed amount per enrollee through premiums and small copayments, regardless of how much care is provided. Since the HMO is responsible for both financing and delivering care, it must manage its budget while coordinating medical services, often emphasizing preventive care to reduce long-term costs. HMOs cover emergency care regardless of the healthcare provider's contracted status.

Related terms: managed care, primary care physician (PCP), capitation, preferred provider organization (PPO)

HMOs often require members to select a primary care physician (PCP) who acts as a gatekeeper to direct access to medical services. PCPs are usually internists, pediatricians, family doctors, geriatricians, or general practitioners. Except in medical emergency situations, patients need a referral from the PCP to see a specialist or other doctor, and the gatekeeper cannot authorize that referral unless the HMO guidelines deem it necessary.

HMOs function as capitated systems rather than third-party payer systems operating on a fee-for-service basis. The organization receives a fixed amount per enrollee through monthly premiums and small copayments, regardless of how much care is provided. Some HMOs pay gatekeeper PCPs set fees for each defined medical procedure they provide to insured patients while capitating specialists with a set fee for each insured person's care. HMOs also manage care through utilization review, monitoring doctors to ensure appropriate service levels.

HMOs often provide preventive care for a lower copayment or for free to keep members from developing preventable conditions that would require extensive medical services. Services intended to maintain member health include immunizations, well-baby checkups, mammograms, and physicals. Some services like outpatient mental health care are limited, and more costly forms of care, diagnosis, or treatment may not be covered. Experimental treatments and elective services that are not medically necessary are almost never covered.

There are 4 organizational models that HMOs use to deliver healthcare services to employees:

• Staff model HMO: Physicians are salaried employees who work in HMO buildings. This is a closed-panel HMO where contracted physicians may only see HMO patients. This type was previously common but is now nearly inactive.
• Group model HMO: The HMO contracts with a multi-specialty physician group practice rather than employing physicians directly. The group may be captive (established by and exclusively serving the HMO) like Kaiser Permanente, or independent (continuing to treat non-HMO patients). The HMO pays the medical group a negotiated per capita rate, which the group distributes among its physicians, usually on a salaried basis.
• Independent Practice Association (IPA) model: Physicians contract with an IPA, which in turn contracts with the HMO. This is an open-panel HMO where physicians maintain their own offices and may see non-HMO members.
• Network model HMO: The HMO contracts with any combination of groups, IPAs, and individual physicians. Since 1990, most HMOs run by managed care organizations with other lines of business use this model.

Most HMOs today do not fit neatly into one form and can have multiple divisions operating under different models or blend two or more models together.

HMO plans offer employees 3 key advantages:

• Lower out-of-pocket costs: Employees pay fixed monthly or annual premiums that are lower than traditional health insurance, with typically low or no deductibles and lower copayments for doctor's appointments, lab tests, and prescription drugs.
• Coordinated care through a primary care physician: A designated PCP is responsible for managing treatment and care, advocating for services, and making referrals for specialty services.
• Higher quality preventive care: The quality of care is generally higher because patients are encouraged to prioritize preventive care such as annual physicals and to seek treatment early, with preventive services often covered at 100%.

HMO plans feature predictable expenses with fixed copays for services, making healthcare costs more manageable for employees. The focus on preventive medicine allows insured parties to receive higher quality care from providers contracted with the organization.

HMO plans come with 3 primary limitations that employees should consider:

• Must use network professionals: Employees must choose an in-network doctor responsible for their care and referrals. If they see someone out of network, they are typically responsible for all costs incurred, although some HMOs may cover certain out-of-network services in emergencies.
• Specialist visits require referrals: Employees need referrals from their PCP for any specialist visits if they want the HMO to pay. If a referral is not obtained, the employee is responsible for the entire cost.
• Strict emergency definitions: There are usually very strict definitions of what constitutes an emergency. If the condition doesn't fit the criteria, the HMO plan won't pay.

HMO plans generally limit member coverage to medical care provided by doctors, hospitals, and other healthcare providers within the network, except for emergencies and out-of-area urgent care. An HMO may require employees to live or work within the plan's geographic area to be eligible for coverage.

HMOs are often compared to 3 related health insurance plan types:

HMO vs. PPO

HMOs require participants to receive healthcare services within an assigned network and typically require PCP referrals to see specialists. PPO participants are free to use services of any provider within their network and can access out-of-network care at higher cost without referrals. PPO plans usually have deductibles while HMO plans typically do not. Approximately 47% of covered workers are enrolled in PPO plans versus 13% in HMO plans according to KFF research.

HMO vs. POS Plan

A POS plan is like an HMO in requiring a policyholder to choose an in-network PCP and get referrals for specialist coverage. However, POS plans still provide coverage for out-of-network services, though the policyholder pays more for those services than using in-network providers. POS plan premiums fall between the lower premiums offered by HMOs and the higher premiums of PPOs. A patient who never uses out-of-network services would be better off with an HMO because of its lower premiums.

HMO vs. HDHP

An HDHP is a broader category of health plan that can be structured as an HMO. Both feature lower monthly premiums, but HDHPs are often paired with health savings accounts that allow employees to save pre-tax dollars for medical expenses. While HMOs focus on low copayments and no deductibles, HDHPs require employees to meet high deductibles before coverage begins.

Though some forms of group managed care existed prior to the 1970s, HMOs came about chiefly through the influence of President Richard Nixon. The earliest form of HMOs appeared in prepaid health plans starting in 1910, when the Western Clinic in Tacoma, Washington offered lumber mill owners and their employees medical services for $0.50 per member per month.

Ross-Loos Medical Group, established in 1929, is considered the first HMO in the United States. It was headquartered in Los Angeles and initially provided services for Los Angeles Department of Water and Power and Los Angeles County employees. 200 DWP employees enrolled at a cost of $1.50 each per month. Within a year, the Los Angeles Fire Department, Los Angeles Police Department, and Southern California Telephone Company signed up. By 1951, enrollment stood at 35,000 and included teachers, county and city employees.

The Health Maintenance Organization Act of 1973 had three main provisions that expanded HMOs in employee benefits: grants and loans were provided to plan, start, or expand an HMO; certain state-imposed restrictions on HMOs were removed if federally certified; and employers with 25 or more employees were required to offer federally certified HMO options alongside indemnity plans upon request. This dual choice provision gave HMOs access to the critical employer-based market that had often been blocked in the past. The federal government was slow to issue regulations until 1977, when HMOs began to grow rapidly. The dual choice provision expired in 1995.

Although businesses pursued the HMO model for its alleged cost containment benefits, some research indicates that private HMO plans do not achieve any significant cost savings over non-HMO plans. Although out-of-pocket costs are reduced for consumers, controlling for other factors, the plans do not affect total expenditures and payments by insurers.

A possible reason for this failure is that consumers might increase utilization in response to less cost sharing under HMOs. Some have asserted that HMOs, especially those run for profit, actually increase administrative costs and tend to select healthier patients. Research published in Economic Inquiry found that HMO plans may not reduce expenditure in the private sector as expected.

HMOs in the United States are regulated at both state and federal levels. They are licensed by states under a certificate of authority rather than under an insurance license. State and federal regulators also issue mandates requiring health maintenance organizations to provide particular products.

In 1972, the National Association of Insurance Commissioners adopted the HMO Model Act, intended to provide a model regulatory structure for states to use in authorizing HMO establishment and monitoring their operation. The Patient Protection and Affordable Care Act of 2010 introduced additional federal regulation, while the McCarran-Ferguson Act of 1945 allows states to control the industry unless federal law explicitly says otherwise.

The Employee Retirement Income Security Act (ERISA) of 1974 can preempt negligence claims against HMOs. Whether an HMO can be held responsible for a physician's negligence partially depends on the HMO's screening process. ERISA does not preempt or insulate HMOs from breach of contract or state law claims asserted by an independent, third-party provider of medical services.