If you’re a business owner who wants to offer health insurance coverage for your employees, it’s important to understand the differences between an HMO vs PPO and other types of health insurance plans. This article will explain:
- HMO vs PPO: What’s the Difference?
- Other Types of Health Networks: EPOs, POSs, HDHPs, and more
- Choosing the Right Plan for Your Small Business
We’ll compare these health insurance plans in terms of cost / monthly premium amount, coverage (i.e. the number of physicians in the network), flexibility (i.e. whether or not they will cover treatment outside the network), and other rules and regulations, like whether you need to see Primary Care Physician (PCP) before you can see a specialist.
Below is a quick summary of the different types of networks, followed by a more detailed comparison and guide to choosing the right network for you and your employees.
Summary Table: HMO vs. PPO and Other Types of Health Networks
Below is a comparison of HMOs vs. PPOs and the other three major types of health plans, including average deductibles and premiums. It’s important to note these are only general characteristics and health insurance varies by location and provider. In addition, the older your employee is, the higher the premium will be to cover him or her.
|Must Pay Deductible? (A deductible is the out of pocket cost to the insured before coverage kicks in)||No||Usually (avg. $1415)||Sometimes||Usually (avg. $1,310)||Yes (avg. $2,196)|
|Cost of Monthly Premium for Single Insured*||$518||$548||Unavailable; comparable to HMO||$522||$464|
|Cost of Monthly Premium for Family*||$1,437||$1,539||Unavailable; comparable to HMO||$1,409||$1,331|
|Need referral from Primary Care Physician (PCP)?||Yes||No||No||Most of the time||Depends on if the plan is a PPO or POS|
|Covers physicians outside network?||No||Yes, but at a higher cost||No||Yes, but at a higher cost||Yes, but at a higher cost|
*Based on national averages from Kaiser Family Foundation 2015 Employer Health Benefits Study. Family coverage is commonly defined as employee, spouse, and up to 3 dependents, but check your plan for more information.
HMO vs PPO: What’s the Difference?
Here we will start to dive deeper into each type health insurance plan, so that you can understand what options you are offering your employees (or yourself). Since the HMO and PPO are the most common plans, we’ll start by explaining those two first.
HMOs and PPOs sort of represent the two opposite ranges of what you can provide for your employees. On one end is the HMO where there’s a very small network, referrals are required, and low cost for both the business owner and the employee. On other end is the PPO, which has a much larger network of coverage, no referrals, but is costlier for both the business and the employee.
Health Maintenance Organization (HMO)
Most people have heard of an HMO (Health Maintenance Organization) plan, but what on Earth does it really mean? And why do some people vehemently hate HMOs?
If you choose to offer an HMO plan, you and your employees need to be aware of the following:
- The insured must have an in-network PCP (Primary Care Physician) and will need a referral to see a specialist.
- The number of in-network providers is dependent upon your location (which can even vary within a state, such as New York City versus Buffalo)
- If you can stay in-network, you’ll pay very little to nil in medical expenses.
An HMO contains costs by using only in-network doctors, which then bill at a reduced cost to the insurance company as part of an agreement between the two companies. If you have an HMO, you and your employees would need to use practitioners that are in-network (and sometimes, you have to confirm they will take you as a new patient). To see a specialist such as an orthopedic surgeon or gastroenterologist, you’d have to get a referral from your PCP.
If you can find doctors in-network, you and your employees will save a lot of money and have to pay very little, both out of pocket and in premiums each month. If you or your employees use someone out of network, 100 % of the cost will be the patient’s.
Preferred Provider Organization (PPO)
A Preferred Provider Organization (PPO) is also a fairly familiar term to most people. But again, what on Earth does “PPO” mean?
The differences between an HMO and a PPO are:
- In general, a PPO lets the insured person go to the doctor of their choice (there is still a network, but it’s HUGE compared to the HMO).
- Moreover, a patient doesn’t need referrals for a specialist visit, like a dermatologist.
- The final catch is in the cost, of course. A PPO with a small deductible is going to be by far the most expensive of the plans (especially versus an HMO), and will continue to get more costly as you and your employees get older. Some premiums reach over $1,000/ month!
However, deductibles (or what a person has to pay each year before PPO insurance coverage kicks in) are available in a wide range for PPOs, from as little as $400 to as much as $6000 per person. Anything over $1,300 for a deductible is known as a High Deductible Health Plan (HDHP), which we will explain more.
If you and your employees choose to have a PPO plan, they need to know:
- The insured probably can continue to see their current doctor. No referrals are needed to see a specialist.
- The insured people should still double check the insurance’s network coverage since it varies by state and city.
- Check your costs – Check not just the monthly premiums but also the deductible, and make sure it’s something you as the employer are comfortable with, especially if you are paying for the insurance.
Other Options That May Be Better for Your Business: EPO, POS, or HDHP
If the HMO and PPO plans don’t seem to be a fit for your business needs, there are three other options: Exclusive Provider Organization Plans (EPO), Point of Service Plans (POS), or High Deductible Health Plans (HDHP). These plans that are used less frequently and are not available through every insurance carrier, but for some businesses, they are a good fit.
For example, you might want to have a Point of Service (POS) plan available to your employees if you like the price of the HMO but like the coverage of the PPO — a POS is a hybrid. Another case where an HMO and PPO might not make sense is if your city has a great EPO network through a reputable insurance provider. An HDHP might be a good fit if you have a tight budget and a young, healthy employee base that rarely goes to doctors. You could also offer health savings plans like an FSA, HRA or HSA.
Exclusive Provider Organization (EPO)
If you are like most people, you’ve never heard of an Exclusive Provider Organization (EPO). They aren’t that commonly used and seem to have been lost in the shuffle, but certainly still have some merit for some businesses.
EPOs are like HMOs in some ways and like PPOs in other ways.
- Like HMOs, EPOs generally don’t cover care outside the plan’s provider network unless it’s an emergency.
- Members, however, may not need a referral from a primary care physician (PCP) to see a specialist, making them more like PPOs. However, there is still a limited network of doctors and hospitals to choose from (like an HMO).
It’s important to know who participates in an EPO plan’s network. If someone goes to a doctor or hospital that doesn’t accept their EPO plan, they’ll have to pay all of the costs out of pocket.
If you choose to have an EPO plan as an option for your employees, they will need to know:
- What doctors are in-network in the area – While they won’t need a PCP, your employees will need to stay in-network to avoid high costs.
- They don’t need referrals for a specialist (e.g. orthopedic specialist, dermatologist, etc.), but the doctor they choose will need to be in-network.
- If the insured can stay in-network on an EPO plan, your employees will pay very little in medical expenses (and you will pay a smaller premium if you’re covering the cost of the premium).
Point of Service Plan (POS)
A Point of Service (POS) plan is like a hybrid of an HMO and a PPO, which could make it a popular option for you and your team (lower premiums, but there are some rules).
If you provide a POS as an insurance plan option, like an HMO, your employees will pay nothing (or maybe only a minimal co-payment) when they use a healthcare provider within the network. However, POS members also need a primary care physician (PCP) that is in-network.
However, like a PPO, the network provided is larger and members can also go to an out-of-network doctor for a higher cost (versus an HMO, where out of network would be ALL their cost). Insured parties might also have to pay higher co-pays or a higher rate of co-insurance when they go out of network.
If you choose to provide your team with a POS plan, your employees need to know:
- They’ll need an in-network PCP (Primary Care Physician).
- The POS network’s ease of use and number of participating providers is contingent on location (i.e. Chicago versus Springfield, IL).
- Out of network doctors can be covered to some extent, but your employees will need to check on this to avoid high bills.
High Deductible Health Plan (HDHP)
Health insurance can be sort of like gambling. Take, for example, the High Deductible Health Plan (HDHP). If you decide to provide an HDHP, you’re kinda asking your employees to put all of their chips into the “I won’t get sick” basket.
An HDHP is what is known as “catastrophic” coverage since the deductible is so high (currently over $1,300 per person) that its practical costs could be tough for your employees to pay (although for you as the employer, the premiums are low).
To make it even more complicated, an HDHP can also be a PPO or a POS (although it’s almost always a PPO). Some HDHPs offer health savings account (HSA) options, or wellness incentive benefits, like discounted gym memberships, to keep their members healthy and offset the high out of pocket costs.
If you choose to provide an HDHP plan to your employees, you and they need to know:
- They can probably go to their current doctor.
- They are going to pay cash or via credit card for anything medical up to the deductible amount, so they need to be prepared for the worst case scenario. Bonus – you can provide a Health Savings Account (HSA) option for them.
- Check your costs – Since the premiums are low, can you cover the whole premium? Or can you afford to contribute to your employees’ HSA fund?
Choosing the Right Plan for Your Business
Now that the alphabet soup of insurance is a little bit more clear, let’s talk about the factors you should consider when choosing the right plan for your employees.
The major factors to consider are:
- What is your employee base like? Young & healthy workers versus older, seasoned professionals with children might influence what options you provide.
- What do your employees want? Have they told you what they are looking for and if they are willing to help foot the bill?
- Who will you cover? Just employees, employees + spouse, or full family coverage?
- How much can you help in the cost of the plans? Remember, you are not legally required to provide insurance if you have fewer than 50 full time employees, and you don’t have to pay for it regardless of your company’s size. However, if you do provide it, the insurance must be affordable or less than 9.96 % of each employee’s salary (from the employer mandate law, which is part of the Affordable Care Act).
Recommended Plans for Varying Situations*
|Who The Covered Parties Are...||Healthy||Accident Prone/Risk-Taker (i.e. smoker)||With a Chronic Health Condition|
|Employees Only||HDHP or HMO||POS, EPO, or PPO||POS, EPO, or PPO|
|Employee + Spouse||HDHP or HMO||Any plan except HDHP||POS, EPO, or PPO|
|Employee + Dependents (Children up to 26)||POS or EPO||Any plan except HDHP||POS, EPO, or PPO|
|Family Coverage||POS, EPO, or PPO||POS, EPO, or PPO||POS, EPO, or PPO|
*Remember to always check the network prior to offering any health insurance plan for your employees, but especially for POS, EPO, and HMO plans.
Read our Guide to Health Insurance for a detailed overview of plan types and the factors to consider when choosing one for your small business.
The Bottom Line
Now that you know the difference between HMO vs PPO and the other types of health plans, you are ready to make an informed choice for your business and your employees. Let us know in the comments which health insurance plan you ended up choosing and why? Don’t forget to tell us where you are located and who you cover on your plan!