Whether you’re an individual shopping for health insurance or a business owner who wants to offer coverage, it’s important to understand the differences between an HMO vs. a PPO and other types of health networks. This article will make it easy to grasp the five major types (HMO, EPO, PPO, POS and HDHP) and the pros and cons of each.
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Why Health Networks?
Over the years, health coverage in the U.S. has evolved greatly. When insurance was first introduced, the concept of health networks did not exist. Insurance companies would help cover medical expenses if they exceeded a certain predetermined amount. This type of plan, called indemnity, did not limit patients to a particular network. Ideally, treatment would be covered (albeit, with high up-front costs to the patient) no matter where it was received.
Years later, insurance companies found they could lower costs by developing a network of professionals. A health network is a list of doctors and practitioners in a particular geographic area. It is a limited list of who and what the insurance company will cover (although, some are more flexible than others). Because a doctor usually receives more business when included in a network, insurance companies are able to negotiate lower rates for their customers. For this reason, managed healthcare plans became popular and have continued to dominate the health market today.
Types of Networks
There are two major types of health provider networks – HMOs and PPOs – and several variations of each. These networks vary in several ways, including the cost of premiums – the monthly fees to be insured, deductibles – the amount patients must pay out-of-pocket before insurance “kicks in” and copay or coinsurance– the amount or rate insurance companies will pay vs. what the individual must pay for a given doctor’s bill.
Networks also vary in their size (i.e. the number of physicians in the network) their flexibility (i.e. whether or not they will cover treatment outside the network) as well as other rules and regulations (i.e. if they require a primary care physician referral or pre-authorization for treatment). Below is a quick summary of the different types of networks, followed by a more detailed comparison and guide to choose the right network for you:
Health Maintenance Organization (HMO)
An HMO is a closed health network, meaning the insurance company will not cover treatment received from practitioners outside the network. Premiums tend to be high and deductibles low (often $0). Patients designate a Primary Care Physician (PCP) who acts as a gatekeeper to visit other specialists. For example, to receive treatment from a dermatologist, you would first need to visit your PCP and obtain a referral to a dermatologist within your network.
Preferred Provider Organization (PPO)
A PPO is an open network, meaning the insurance company will cover treatment outside of the network, though usually at a lower rate than in-network care. On average, monthly premiums are about the same as HMOs, though deductibles are higher. Patients are not required to designate a PCP and thus can visit a specialist without a referral. However, because of the greater flexibility, patients are usually required to pre-authorize major procedures with the insurance company. This is so the insurance company can ensure treatment is necessary.
Exclusive Provider Organization (EPO)
An EPO is a closed network, similar to an HMO. However, EPOs do not require primary care physicians or referrals to see a specialist. Like a PPO, they often require pre-authorization for major treatment.
Point of Service Plan (POS)
A POS is basically an HMO with an open network. Patients will receive a degree of coverage outside their network, but, like an HMO, must designate a primary care physician.
High Deductible Health Plan (HDHP)
Also known as a Consumer Directed Health Plan, the HDHP is an offshoot of a PPO with lower monthly premiums and much higher deductibles. HDHPs can be tied with a Health Savings Account (HSA), which allows policyholders to deposit pre-tax dollars in a special account for health expenses. They can also accrue interest tax-free.
Comparing Plans: HMO vs. PPO and Others Table
Below is a comparison of the five major types of health networks. It’s important to note these are only general characteristics. Health networks vary greatly across regional markets and not all will fit the model – i.e., some HMOs may charge a high deductible and/or cover treatment outside a network.
Nonetheless, the following chart will make it easy to grasp the common distinctions of health networks and their average costs to consumers:
|Must pay deductible?*||Usually Not||Usually Not||Usually (avg. $800)||Usually (avg. $1,310)||Yes (avg. $2,000)|
|Cost of Premium ($)**||Higher (avg. $1,080)||Higher||Higher (avg. $1,020)||Lower (avg. $960)||Lower (avg. $890)|
|Need referral from Primary Care Physician?||Yes||No||No||Yes||No|
|Covers physicians outside network?||No||No||Yes, but at a higher cost||Yes, but at a higher cost||Yes, but at a higher cost|
|Need pre-authorization for major treatment?||No||Yes||Yes||No||Yes|
|Have to file claims for reimbursement?||No||No||No, except outside network||No, except outside network||No, except outside network|
*Average deductible for single coverage, 2013. Rounded. From Kaiser Employer Health Benefits Survey
**Average worker contribution for single coverage, 2013. Rounded. From Kaiser Employer Health Benefits Survey
Choosing the Right Network for You
As a general rule of thumb, a plan with a higher premium means low out-of-pocket costs for treatment and vice-versa. However, there are many other factors that will influence your decision, including age, income level and geographic location.
According to Lisa Zamosky, healthcare expert and author of Healthcare, Insurance, and You: The Savvy Consumer’s Guide
the very first factor to consider is which network(s) include your preferred doctors.
“Especially if you have a chronic illness,” Zamosky explained, “and are being treated on an ongoing basis. You definitely want to look at the network regardless of the type of plan and make sure your doctors are in that network.”
Insurers have a list (often on their website) that shows which providers participate in their plans. However, Zamosky noted, “these lists also notoriously contain mistakes. So, it’s always a good idea to also call the doctor’s office directly to inquire.”
Once you determine which networks your preferred doctors belong to, consider the following questions to further zero-in on a plan:
Do you anticipate regular medical expenses, or do you just need coverage for the unexpected?
For young and healthy individuals who do not receive regular treatment, a low premium/high deductible plan (such as an HDHP) can be a good choice. With low monthly fees, these plans will cover major illnesses and injuries. The downside is that you will have to pay high amounts out-of-pocket for primary care visits. HDHPs are generally not a great option for those who visit the doctor frequently. These individuals should consider a plan with a low deductible (such as an HMO) even if it means paying more each month.
“[D]epending on your medical needs,” Zamosky explained, “paying a little bit more each month… may over the course of a year end up being cheaper for you.” Rather than fixate on the monthly dollar amount, Zamosky recommended patients consider the overall cost of their treatment – including deductibles, coinsurance and copays.
How much flexibility do you require in choosing physicians?
Let’s say you have a list of preferred doctors but not all of them are in the same network. In this scenario, one would benefit most from an open-access plan (such as a PPO or POS), as you could receive at least partial coverage for treatment outside the network.
Flexible plans generally (but not always) cost more than closed networks (such as an HMO or EPO). So if you’re fine with being limited to specialists in your network, it may not be worth paying the extra amount for flexibility.
However, it’s important to note that networks can change from year to year. In particular, Zamosky noted, “people who have purchased plans on their own through ACA marketplaces are finding the networks in some cases to be far more limited than before.” As a result, she continued, “a lot of people are complaining that they don’t have access to the doctors they used to have access to.”
Furthermore, as life circumstances change, one may need a greater range of coverage. If children are in the picture, you’ll have to make sure reliable pediatric care is covered by your plan. Marriage, likewise, may require you to research a new list of specialists as per your spouse’s needs. Thus, if a growing family is on the horizon, you’ll want to make sure your network covers all the bases.
Luckily for such individuals, recent legislation under the Affordable Care Act makes it easier to change plans, as health insurance companies can no longer deny coverage due to pre-existing conditions.
Where do you live?
The health insurance market varies greatly across the country due to factors like competition, the distribution of doctors and state regulation. While it’s difficult to generalize how one’s region will affect their network options, there are some notable trends.
For one, doctors and medical experts tend to be concentrated in larger metropolitan areas. If you live in a city, there’s a good chance you’ll be geographically close to all the doctors in your network and thus closed network options (such as HMOs) may dominate the market. In rural areas where doctors are less concentrated, open-access and/or larger network plans like PPOs may be more common.
Health networks also vary state-by-state, especially with regard to Affordable Care Act options. While ACA plans are offered in every state, some states run their own marketplaces with a wider array of options. This can include subsidized plans for low-income residents and/or HDHPs that will cover 3 primary care visits per year, which can be ideal for young people.
Networks also differ in how they set up and approve doctor visits. HMOs and POS plans require primary care physicians to write referrals before you can see a specialist. If you want to avoid this extra step, you may be more interested in a PPO or EPO, which allow you to contact specialists directly. However, such plans often require patients to authorize major treatments with the insurance companies beforehand, else the treatment may not be covered.
Another option worth noting, especially for young and middle-aged workers in good health and with a steady income, is a Health Savings Account (HSA): A tax benefitted savings account one can use to pay for medical expenses.
“The advantage of the HSA,” Zamosky explained, “is that it’s triple tax-free. You put the money in tax-free. You use the money (if you want to pay for medical expenses) tax-free and the money grows tax-free over time.”
However, the HSA does have some limitations. It can only be used with a high deductible health plan (as of 2014, that means a deductible of at least $1,250 for an individual and $2,500 for a family) and there are annual limits to deposits.
Choosing The Right Health Network For You: Examples
While there’s no one-size-fits-all solution to finding a health network, here are some general examples that can help you decide what’s best for you:
Young and healthy:
Consider a High Deductible Health Plan. If you don’t see a doctor very frequently, you’ll save with lower monthly payments and still receive coverage for preventative care and major treatment.
Single, with a pre-existing condition:
Consider an HMO or EPO. Although you may pay higher amounts each month in premiums, you’ll be able to set up appointments with doctors in your network with little cost out-of-pocket.
Married with a family:
Consider a PPO or POS. Such networks give you the greatest flexibility, which can come in handy for big families.
Consider an HMO or EPO that includes your preferred doctors. If no such plan exists, or if you want greater flexibility, consider a PPO or POS.
“[Health Insurance] is a complicated decision.” Zamosky said. “There’s no sugar coating that… But it’s important for people to know that there is help available to them… If you buy insurance on your own the health reform law has set up all kinds of navigators and assisters that you can also access through healthcare.gov.”
Also, feel free to leave questions in the comment section. Fit Small Business will be happy to respond with our best knowledge.
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