An HMO is both a provider of care, as well as a financier of health care. Health care is delivered through a series of negotiated contracts between the HMO and the hospitals, physicians, specialists, pharmacies, nursing homes, home health agencies, laboratories, and therapy providers. In the staff model, primary care physicians are paid a salary and usually share in the profits of the company at the end of the fiscal year. HMOs usually have a closed panel of physicians. Referrals to specialists are limited as well to those individuals who are on the panel.
Individuals can only seek care which is referred by the primary care physician.
However, referrals and pre-authorizations do not guarantee that the HMO will determine the procedure or visit was medically necessary and pay the fee. Some HMOs offer prescription drug benefits. The prescription drug benefit is usually calculated on the price the HMO negotiates with the pharmacy, not the co-payment made by the individual. Pharmacies contract with the HMO to provide a certain list of drugs, which is called a formulary. To keep costs lower, pharmacists may use therapeutic substitutions in which they substitute one medication which is similar in nature to the one prescribed by the physician, but cheaper.