How HMOs Work

A health maintenance organization (HMO) is a type of health insurance that employs or contracts with a network of physicians or medical groups to offer care at set (and often reduced) costs.

HMOs can be more affordable than other types of health insurance, but they limit your choices of where to go and who to see.

This article will discuss how HMOs work, their requirements, and what other types of insurance options are available.

What is an HMO?

A health maintenance organization is a health insurance plan that controls costs by limiting services to a local network of healthcare providers and facilities. HMOs usually require referrals from a primary care physician for any form of specialty care.

How HMOs Work

Understanding HMOs and how they work is critical for choosing a health plan during open enrollment, the yearly period when you can select or switch your health insurance, and avoiding unexpected charges after you’re enrolled.

You’ll need to follow the steps necessary to receive coverage from the HMO.

You Need a Primary Care Provider

Your primary care provider, usually a family practitioner, internist, or pediatrician, will be your main healthcare professional and coordinate your care in an HMO.

Your relationship with your primary care provider is very important in an HMO. Make sure you feel comfortable with them, or make a switch.

You can choose your primary care provider as long as they are in the HMO’s network. If you don’t choose one, your insurer will assign you one.

Referrals for Special Treatments Are Required

In most HMOs, your primary care provider will be the one who decides whether or not you need other types of special care and must make a referral for you to receive it. Referrals will all be within the region where you live.

With an HMO, you typically need a referral for the following:

• To see a specialist
• To get physical therapy
• To obtain medical equipment, such as a wheelchair

The purpose of the referral is to ensure that the treatments, tests, and specialty care are medically necessary. Without a referral, you don’t have permission for those services, and the HMO won’t pay for them.

The benefit of this system is fewer unnecessary services. The drawback is that you have to see multiple providers (a primary care provider before a specialist) and pay copays or other cost-sharing for each visit.

A copay is a set amount you pay each time you use a particular service. For example, you may have a $30 copay each time you see your primary care provider.

Need for Referrals

Referrals have long been a feature of HMOs, but some HMOs may drop this requirement and allow you to see certain in-network specialists without one. Become familiar with your HMO plan and read the fine print.

You Must Use In-Network Providers

Every HMO has a list of healthcare providers in its provider network. Those providers cover a wide range of healthcare services, including doctors, specialists, pharmacies, hospitals, labs, X-ray facilities, and speech therapists.

Accidentally getting out-of-network care can be costly when you have an HMO. Fill a prescription at an out-of-network pharmacy or get your blood tests done by the wrong lab, and you could be stuck with a bill for hundreds or even thousands of dollars.

It’s your responsibility to know which providers are in your HMO’s network. And you can’t assume that it is in-network just because a lab is down the hall from your healthcare provider’s office. You have to check.

And sometimes, out-of-network providers end up treating you without you even knowing about it—an assistant surgeon or an anesthesiologist, for example.

If you’re planning any medical treatment, ask lots of questions in advance to ensure that everyone involved in your care is in your HMO’s network.

Exceptions

There are some exceptions to the requirement to stay in-network. This can include:

• You have a true medical emergency, such as a life-threatening accident that requires emergency care.
• The HMO doesn’t have a provider for the service you need. This is rare. But, if it happens to you, pre-arrange the out-of-network specialty care with the HMO.
• You’re in the middle of a complex course of specialty treatment when you become an HMO member, and your specialist isn’t part of the HMO. Most HMOs decide whether or not you may finish the course of treatment with your current provider on a case-by-case basis.
• You’re out of the network region and need emergency care or dialysis. If there are no providers in-network in the place where you experience an emergency or need dialysis, care should be covered.

Types of HMOs

As the name implies, an HMO’s primary goal is to keep its members healthy. Your HMO would rather spend a small amount of money upfront to prevent an illness than a lot of money later to treat it.

If you already have a chronic condition, your HMO will try to manage that condition to keep you as healthy as possible.

There are three main types of HMOs.

• Staff model: Healthcare professionals are employed by the HMO and only see patients enrolled with the HMO.
• Group model: Healthcare professionals are not directly employed by the HMO but have contracts to offer care at a fixed rate. The group physicians only see patients enrolled with the HMO.
• Network model: Healthcare professionals are not directly employed by the HMO, and the HMO has contracts with multiple physician groups. Healthcare professionals see patients with the HMO as well as patients with other types of insurance.

Differences Between HMO and Other Insurance

An HMO is a type of managed care health insurance, which means that the health insurance company has agreements with providers for the cost of care. (Managed care includes virtually all private coverage in the U.S.)

The type of options you’re likely to have will depend on where you live and how you get your health insurance. For example, if you are selecting health insurance through your employer, there may only be one or two options, or there may be multiple. If you are purchasing insurance on your own, the options vary by state.

HMO vs. PPO

PPO stands for preferred provider organization. These tend to be more expensive but allow more choices than HMOs. PPOs charge different rates based on in-network or out-of-network healthcare providers and facilities, which means you still have some coverage if you go out-of-network. You don’t need to go through a primary care physician.

HMO vs. EPO

Exclusive provider organizations (EPOs) are another type of health insurance. Similar to an HMO, an EPO only covers in-network care. It may or may not require referrals from a primary care provider.

HMO vs. Point-of-Service

Point of service (POS) is a combination of an HMO and PPO. This type of plan means that you can decide to stay in-network and have care managed by a primary care provider or go out-of-network with higher costs but still some coverage.

Dropping HMO Numbers

According to the Kaiser Family Foundation’s annual health benefits survey, 12% of employees with employer-sponsored health benefits had HMO coverage as of 2022, versus 49% of employees covered by PPOs.

No managed care health plan will pay for care that isn’t medically necessary. All managed care plans have guidelines in place to help them figure out what care is medically necessary, and what isn’t.

Pros and Cons of HMOs

Premiums, or the monthly amount you pay for the plan, tend to be lower with HMOs than other health insurance options. In addition, cost-sharing requirements such as deductibles, copayments, and coinsurance are usually low with an HMO—but not always.

Some employer-sponsored HMOs don’t require any deductible (or have a minimal deductible) and only require a small copayment for some services.

However, in the individual health insurance market, where about 6% of the U.S. population got coverage in 2021, HMOs tend to have much higher deductibles and out-of-pocket costs.

In some states, the only plans available in the individual market are HMOs, with deductibles as high as several thousand dollars. In most states, there tends to be less choice available in the individual market regarding network types (HMO, PPO, EPO, or POS) versus the employer-sponsored market, where choice remains more robust.

Summary

HMOs are considered one of the more affordable health insurance choices, yet costs vary based on the plan, region, and whether you enroll through your employer or as an individual. HMOs only cover in-network services. A primary care provider typically manages care.

Verywell Health uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.

1. Centers for Medicare and Medicaid Services. Health maintenance organizations (HMOs).
2. Alliance for Health Policy. Network-model HMO.
3. Health Insurance Marketplace. Health insurance plan & network types: HMOs, PPOs, and more.
4. KFF. 2023 Employer Health Benefits Survey.

By Elizabeth Davis, RN
Elizabeth Davis, RN, is a health insurance expert and patient liaison. She's held board certifications in emergency nursing and infusion nursing.

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