How do commerical (PPO vs HMO) insurance plans work?

HMO vs. PPO

Managed-care plans try to reduce medical care costs, without sacrificing quality care. With the growing need for managed care plans, HMO and PPO plans have gained popularity over traditional fee-for-service plans, where coverage is provided regardless of provider or hospital used.

An HMO is a Health Maintenance Organization, while PPO stands for Preferred Provider Organization.

The differences, besides acronyms, are distinct. But the major differences between the two plans is the cost, size of the plan network, your ability to see specialists, and coverage for out-of-network services.

When you're choosing a plan, you should consider your total health care costs, not just the monthly premium you'll pay to an insurance company every month. The premium is important, but other amounts, sometimes lumped together as "out-of-pocket" costs, can affect your total spending on your health care, and can sometimes be more than a monthly premium.

Among the "out-of-pocket" costs to consider are the deductible, copayments and coinsurance, and if there is an "out-of-pocket" maximum to your plan.

The deductible is how much you have to spend for covered services before the insurance company pays for anything other than free preventive services, such as an annual physical.

Copayments and coinsurance are payments you make whenever you get a medical service after you've reached your deductible.

And the "out-of-pocket" maximum is the most you'll have to spend personally for covered services in a year. After reaching it, if your plan has one, the insurance company will pay 100% for covered services.

Premiums

To begin with, premiums for an HMO are usually lower than for a PPO. But the provider network will be more restrictive, and you have to coordinate medical care through a primary care physician (PCP).

According to the Kaiser Family Foundation 2018 health benefits survey, published in October 2018, the average monthly premium paid by firms of all sizes for a single person HMO was $572, and for a family, was $1,620, with annual average premiums totaling $6,869 for an individual and $19,445.

For a PPO, the average monthly premium paid by firms of all sizes was $596, and for a family, $1,694, with annual average premiums totaling $7,149 for an individual and $20,324 for a family.

Besides lower monthly premiums, HMOs typically have the lowest out-of-pocket costs. Depending on the specifics of the HMO plan offered by a particular company, you might have a low deductible or even no deductible. But, if you use a provider not part of your HMO network, be prepared to pay 100% of the cost.

Deductible and Copay

HMOs, while often not having a deductible or having a low deductible, typically require copayment fees for non-preventive visits.

A PPO, on the other hand, allows members to see any health care provider in the insurance company's network, without a referral -- even specialists. Often, if your situation requires regular visits to specialists, this makes a PPO preferable to an HMO, because there is no PCP requirement for referrals. And there are fewer restrictions on seeing out-of-network providers.

On non-preventive medical care, like HMO plans, a PPO plan will usually have copayments. But a PPO plan will also likely have an annual deductible and higher premiums.

The main differences between an HMO plan and a PPO plan are:

PPO Plans:

Offer more flexibility in selecting a doctor or hospital
Often has fewer restrictions on seeing out-of-network providers
Sometimes covers the costs of visits to out-of-network providers.
The majority of companies that offer health insurance benefits to employees offered PPO plans -- 73% -- while only 37% offered HMOs in the 2018 survey.

HMO Plans:

Often are more affordable, with lower monthly premiums and a low or no annual deductible
Usually, require PCP referrals to see specialists for non-emergency needs
Usually provide a list of network providers, including specialists -- but if you choose to visit a doctor outside of the network, it's possible there will be no coverage provided and you will have to pay the full cost for the visit.

Which Insurance Plan is Better for You?

Deciding which is better for you depends on your current or expected health needs. Paying the lowest possible monthly premium may appear right for you now, as time goes on you might want more flexibility like a lower deductible later.

Before deciding, make sure you review a list of in-network providers where you live first. You also should realistically gauge your income, check HMO availability where you live, and consider if you will need to see any specialists in the coming year.