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Understanding your new health insurance: HMO vs PPO

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The change in health insurance regulations in recent years have led to the demise of the type of insurance most of us grew up with—the Private Fee for Service plans, also known as PFFS. In this type of insurance, a person could go to any doctor, with or without a referral, and receive care. If the doctor was a "provider," he/she billed the insurance and accepted the insurance payment, discounting any unpaid amount, other than the patient copay. If the doctor was not "contracted," the patient may have simply been responsible for a higher bill. Today nearly all health insurance plans—with the exception of Medicare and Medicaid—are either HMO or PPO. Understanding the difference between an HMO and PPO will save you a lot of frustration when care is needed.

What is a PPO

PPO stands for Preferred Provider Organization and is more restrictive than the old PFFS but less restrictive than the HMO. The organization contains an extensive list of doctors and facilities who have agreed to accept insurance "assignment." That is a fancy term referring to the amount the insurance company thinks is a fair price for a particular service in a given geographical area. The doctors in the list are called "providers." Usually a patient can visit any doctor in the list without a referral. If the patient sees a doctor off the list, the amount charged is likely to be higher. Both your insurance policy and your doctor will disclose this fact.

What is a HMO

An HMO is a "Health Maintenance Organization." These plans were started by President Nixon in the early 70s and were actually group insurance plans created as an affordable option for employers. They are the most restrictive type of plan; they require that you have a "gatekeeper" or primary care doctor who will refer you to another doctor in the organization if necessary. The gatekeeper is compensated on his effectiveness—which is simply an indication of his ability to treat a patient without using a more costly specialist. Even if he thinks you need a specialist, the insurance company can disagree and can choose the service they think will solve your problem. People often think that just means the service the company is willing to pay for. Under a true HMO, you don't just pay more for a doctor outside the network—you can't see a doctor not referred by your primary care physician (PCP). Some companies—Blue Cross, Blue Shield being one—now have HMO/PPO hybrids. In these plans, you have a PCP, but you can see a doctor in the network without a referral. You may be billed a higher amount. The HMO will usually have the lowest monthly premiums and cost sharing alternatives—meaning your copays, deductibles, and coinsurance. However, the Affordable Health Care Act standardized insurance in general so that certain services are required coverage under most plans, and, unless a person qualifies for subsidies to pay for the insurance, the premiums and deductibles are higher than they were under the old system.

Familiar Companies

Some of the most familiar names among health insurance companies are Blue Cross Blue ShieldAetna, United Healthcare, and Cigna.  These companies offer  both HMO and PPO plans. BC/BS is the best known insurer in the country because each state has its own variation, so you would have BC/BS of Ohio, etc. United Health is by far the largest health insurer in the nation, having bought out many other companies after passage of the Affordable Care Act.  Cigna and Aetna were at one time primarily known for group insurance but have expanded into the private market as well.

PPO, HMO and People on Medicare or Medicaid

If you are 65 or older, you are most likely on Medicare. Medicare remains a private fee for service plan unless you opt out of original Medicare and sign up for a Medicare Advantage plan. Medicare Advantage plans use Medicare funds both to make a profit and to pay for your care. In most areas they are all either PPO or HMO with HMO being most common. A few states still have the PFFS Advantage plan which allows a person to see any doctor as long as that doctor agrees to accept assignment. Medicaid is also a PFFS, but due to the low payment, fewer doctors are willing to accept it. Use our site to research the types of policies you are interested in. Ask your agent for specific detail on what the plan will cover and what restrictions are applied.