Health Maintenance Organizations (HMOs)

Health Maintenance Organizations, better known as HMOs, are becoming the most prevalent type of health care offered by employers today. They are popular because they are relatively lower in cost than traditional fee-for-service plans and offer broad health coverage. They have, however, been criticized on the grounds that the cost-cutting comes at the expense of patient care.

How an HMO works. The insurance company or managed care company contracts with physicians, both general practitioners and specialists, and hospitals to provide care to its insureds. Sometimes the doctors have their offices together, in sites selected by the HMO; sometimes the doctors maintain whatever offices they like, in small groups or individually, and see patients from within and without the HMO.

The people who are insured under the HMO are required to choose a general practitioner from the list of doctors that the HMO has contracted with. Patients who use the services of doctors outside the HMO network will not be covered by the insurance for those services. Whenever a person insured under the HMO has a medical problem, he or she must go to the chosen general practitioner, known as the person's Primary Care Physician (PCP). The PCP will either treat the patient or refer the patient to a specialist who is also under contract with the insurance company.

If the patient tries to get medical care from a doctor other than the PCP or does not receive a referral from the PCP to see a certain specialist, the insurance company will not pay for any of the costs except in cases of life-threatening emergency. If the patient follows the rules and sees his or her PCP and gets referrals to approved specialist and hospitals, he or she will generally only have to make a small co-payment to the doctor for each visit.

So, if you're only paying a small amount per visit, how are the doctor and the HMO making any money? There are two ways: volume and capitation.

Patient volume. Many HMO doctors have more patients than they know what to do with. Many physicians have so many patients from HMOs that they can no longer accept new patients, and it is often difficult for current patients to get a timely appointment. So, sheer patient volume is one way that doctors make money on HMOs.

Capitation. Capitation refers to the financial arrangement between the doctor and the insurance company. For each person that chooses a certain doctor as his or her PCP, the insurance company will pay the doctor a certain fee each month, whether that patient sees the doctor during that month or not.

Example If Dr. No has 100 patients from the HMO and his capitation fee is $25 per patient per month, he'll receive $2,500 per month from the HMO. If patient A and patient B both have Dr. No as a PCP, and patient A sees Dr. No 10 times during the month, and patient B doesn't see Dr. No at all, Dr. No is still going to get $25 for each patient. This arrangement has been criticized because some charge that in order to maximize profits, the doctors are motivated not to see patients and care for them as often and as well as they should. Furthermore, some arrangements have also been set up to penalize doctors financially for referring patients to specialists because the referrals add to the costs for the insurance companies.

Regardless of how you feel about HMOs, they are a pretty good deal, on the whole, if they are available in your area. Their major drawbacks are rigid rules and lack of free choice in physicians and medical facilities. However, they offer a vast array of coverage and even offer different co-payment levels to help strike the right balance in cost-sharing between employers and employees. They often cover preventative care, and the cost out of your pocket is generally affordable.

Who will like HMOs? People who hate claims forms and recordkeeping will be happier with HMOs. Rarely are you even billed for services -- it's all taken care of by the doctors and the insurance company. HMOs are also a good value for those with a large family to cover. Those who have special, on-going medical needs are less likely to like an HMO because they may not be able to see a doctor with whom they have established a relationship.