# Understanding Health Maintenance Organizations (HMOs): Benefits and Drawbacks

![Health Maintenance Organization: A network or organization that provides health insurance coverage for a monthly or annual fee.](https://www.investopedia.com/thmb/CSgAqzy4W_nUzZhrsJJOePDJ92k=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/hmo.asp-Final-9f9b68a2060f44c2b28782a83e14764a.jpg)

*— Investopedia / Sabrina Jiang*

## What Is a Health Maintenance Organization (HMO)?

A health maintenance organization (HMO) provides healthcare for a monthly or annual fee. HMOs differ from other types of health insurance plans primarily through their use of an established network of healthcare providers that members must use. They offer potential cost savings for members through lower premiums, but restrictions that keep costs low include the need to first receive medical care services from your designated primary care physician (PCP) and to obtain referrals from your PCP to other physicians for any additional needed care.

### Key Takeaways

*   Health Maintenance Organizations (HMOs) offer lower premiums and out-of-pocket costs than traditional health insurance plans, making them an attractive option for cost-conscious consumers.
*   HMOs require members to select a primary care physician (PCP) who coordinates all healthcare services, including referrals to specialists within the network, which can lead to better integrated and preventive care.
*   While HMOs generally provide comprehensive care within a specified network, their coverage is limited to these in-network providers, with exceptions for emergencies and certain urgent care situations.
*   Compared to PPOs and Point-of-Service (POS) plans, HMOs tend to have more restrictions on provider choice but offer lower costs and a streamlined approach to health management.

## Understanding the Functionality of Health Maintenance Organizations (HMOs)

HMOs provide health insurance coverage for a monthly or annual fee. An HMO typically limits member coverage to medical care provided by doctors, hospitals, and other healthcare providers within its network, except for emergencies and out-of-area urgent care.

With guaranteed patient volume, providers enter into contracts at discounted rates, enabling HMOs to reduce costs and offer lower [premiums](https://www.investopedia.com/health-insurance-premium-4773146) than other health plans. This system can limit care options for HMO members.

When deciding whether to choose an HMO plan, you should consider:

*   the cost of premiums
*   out-of-pocket costs
*   any requirements you have for specialized medical care
*   whether it’s important to you to have your own [primary care physician (PCP)](https://www.investopedia.com/insurance/what-are-direct-primary-care-doctors-and-how-do-you-find-one/)  
    

### Note

An HMO is a [health insurance provider](https://www.investopedia.com/the-best-health-insurance-companies-8762191) offering basic and supplemental health services to its subscribers.

In addition to cost savings, the agreed-upon contracts with providers help ensure consistent and structured care standards across HMO networks. With a coordinated system of referrals and communication between primary care physicians and specialists, HMOs are known for providing subscribers with integrated care that focuses on prevention and wellness.

The HMO as it exists today was established under the Health Maintenance Organization Act of 1973. The law clarified the definition of HMOs as “a public or private entity organized to provide basic and supplemental health services to its members.” The law further requires that plans provide insured individuals with basic healthcare in exchange for regular, fixed premiums that are established “under a community rating system.”

### Guidelines for HMO Subscribers to Follow

HMO subscribers pay a monthly or annual fee to access healthcare services within the network. While subscribers usually must receive in-network care, most HMOs cover emergency or urgent treatments like dialysis even if provided out-of-network.

Those insured under an HMO may need to live or work within the plan's geographic area to be eligible for coverage. However, if a subscriber requires urgent care—an illness or injury that needs prompt treatment, typically within 24 to 48 hours—most HMOs will cover out-of-network providers if the subscriber is outside the plan’s geographic area. Subscribers who receive other nonemergency, out-of-network care, including routine urgent care, will have to pay for it [out of pocket](https://www.investopedia.com/terms/o/outofpocket.asp).

> **Important**
>
> In addition to low premiums, there are typically low or no deductibles with an HMO. Instead, the organization charges a co-pay for each clinical visit, test, or prescription.

### The Importance of Primary Care Physicians in HMOs

The insured party must choose a PCP from the network of local healthcare providers under an HMO plan. A PCP is typically an individual’s [first point of contact](https://www.investopedia.com/ask/answers/08/gatekeeper.asp) for all health-related issues. This means that an insured person cannot see a specialist without first receiving a referral from their PCP.

However certain specialized services may not require a referral. For example, annual mammograms for women over the age of 40 will not require doctor referrals.

Specialists to whom PCPs typically refer insured members are within the HMO coverage network, so their services are covered under the HMO plan after co-pays are paid. If a PCP leaves the network, subscribers are notified so they can choose another PCP from within the HMO plan.

### Regulatory Framework Governing HMOs

Health insurance regulation, including HMOs, was primarily state-controlled, but the 2010 [Patient Protection and Affordable Care Act (PPACA)](https://www.investopedia.com/terms/a/affordable-care-act.asp) introduced federal regulation.

State regulation in health insurance remains strong due to the [McCarran-Ferguson Act of 1945](https://www.investopedia.com/articles/financial-theory/08/american-insurance.asp#toc-new-risks-new-types-of-insurance), which lets states control the industry unless federal law explicitly says otherwise.

Other legislation, such as the HMO Act of 1973 and the [Employee Retirement Income Security Act](https://www.investopedia.com/terms/e/erisa.asp) (ERISA) of 1974, has also brought certain aspects of the health insurance business under the federal government's purview.

The federal role in insurance expanded through laws like the 2010 [Dodd-Frank Act](https://www.investopedia.com/terms/d/dodd-frank-financial-regulatory-reform-bill.asp), which created the [Federal Insurance Office](https://www.investopedia.com/terms/f/federal-insurance-office.asp) (FIO). Although the FIO's authority does not extend to health insurance, it reflects the broader expansion of federal regulation and oversight across the insurance industry.

### Note

The [Affordable Care Act](https://www.investopedia.com/terms/a/affordable-care-act.asp) of 2010 created the [ACA Health Insurance Marketplace](https://www.investopedia.com/terms/h/health-insurance-marketplace.asp), which provides access to affordable health insurance for individuals, families, and small businesses. The ACA Marketplace offers a variety of health insurance plans, including HMOs and PPOs among others, to fit individual needs and budgets.  

## Comparing HMOs with Preferred Provider Organizations (PPOs)

[Preferred provider organization (PPO)](https://www.investopedia.com/terms/p/preferred-provider-organization.asp) plans are the most common type of plan among U.S. workers who are covered through their employers, according to research firm KFF. Approximately 47% of covered workers are enrolled in a PPO in the most recent survey, versus 13% enrolled in an HMO. Another 29% were covered by a [high-deductible health plan](https://www.investopedia.com/terms/h/hdhp.asp) and 10% by point-of-service plans. Just one percent of workers are still covered by traditional [indemnity](https://www.investopedia.com/what-is-indemnity-health-insurance-8656770) plans.  

A preferred provider organization is a type of managed-care health insurance plan. PPO medical and healthcare providers are called preferred providers. Medical and healthcare personnel who are part of the PPO network are called preferred providers.

PPO participants are free to use the services of any provider within their network. Out-of-network care is available, but it costs more to the insured. In contrast to PPO plans, HMO plans require participants to receive healthcare services within an assigned network. Medical and dental [PPO plans usually have deductibles](https://www.investopedia.com/dental-insurance-hmo-vs-ppo-whats-the-difference-8553452), while HMO plans typically do not.

Both programs allow for specialist services. However, in an HMO, the designated PCP must provide a referral to a specialist. Although HMOs are the oldest type of managed healthcare plan currently in use, PPO plans have long been popular due to their flexibility, including the option to see out-of-network providers and visit specialists without referrals.

However, [compared to HMOs](https://www.investopedia.com/hmo-vs-ppo-6745273), PPOs often come with higher premiums and out-of-pocket costs. PPO benefits have lessened as insurers have shrunk networks and implemented cost controls.

## HMOs Compared to Point-of-Service (POS) Plans

A [point-of-service (POS) plan](https://www.investopedia.com/terms/p/pointofservice-plan-pos.asp) is like an HMO plan in that it requires a policyholder to choose an in-network PCP and get referrals from that doctor if they want the plan to cover a specialist’s services. A POS plan is also like a PPO plan: it still provides coverage for out-of-network services, but the policyholder has to pay more for those services than if they used in-network providers.

A POS plan may offer better cost-sharing for out-of-network services if the policyholder obtains a referral from their PCP, compared to going without a referral. However, without a referral, some POS plans may not cover the costs at all. The premiums for a POS plan fall between the lower premiums offered by an HMO and the higher premiums of a PPO.

POS plans require the policyholder to make co-pays, but in-network co-pays are often just $10 to $25 per appointment. POS plans also do not have deductibles for in-network services, which is a significant advantage over PPOs.

Some POS plans may offer out-of-network coverage, which can benefit patients who travel frequently. A disadvantage is that out-of-network deductibles tend to be high for POS plans. Patients who use out-of-network services will pay the full cost of care out of pocket until they reach the plan’s deductible. However, a patient who never uses a POS plan’s out-of-network services probably would be better off with an HMO because of its lower premiums.

> **Important**
>
> If you don’t travel frequently, you’ll be better off with an HMO plan than a POS plan because of the lower costs.

## Evaluating the Pros and Cons of HMOs

Consider the pros and cons of HMO plans before making a choice of healthcare coverage. We’ve listed some of the most common pros and cons of the program below.

Pros

*   Lower out-of-pocket costs
    
*   Primary care physician directing your treatment
    
*   Higher quality of care
    

Cons

*   Must use medical professionals in the plan’s network
    
*   No specialist visits without a referral
    
*   Emergencies must meet certain conditions
    

### Pros Explained

**Lower out-of-pocket costs**: You’ll pay fixed monthly or annual premiums that are lower than traditional forms of health insurance. These plans tend to come with low or no deductibles, and your co-pays are generally lower than those found in other plans. Your out-of-pocket costs will also be lower for your prescriptions. Billing tends to be less complicated.

**Primary care physician directing your treatment**: You will choose a PCP who is responsible for managing your treatment and care. This professional will also advocate for services on your behalf, such as making referrals for specialty services for you.

**Higher quality of care**: The quality of care is generally higher with an HMO plan because patients are encouraged to prioritize preventive care, such as annual physicals, and to seek treatment early.

### Cons Explained

**Must use network professionals:** You must choose an in-network doctor responsible for your care and referrals. If you see someone out of network, you are typically responsible for all costs incurred, although some HMOs may cover certain out-of-network services in emergencies or if no network providers are available."

**No specialist visits without a referral**: You’ll need referrals for any specialists if you want your HMO to pay for those visits. If you need to visit a rheumatologist or a dermatologist, for example, your PCP must make a referral before you can see one for the plan to pay for your visit. If not, you’re responsible for the entire cost.

**Emergencies must meet certain conditions**: There are usually very strict definitions of what constitutes an emergency. If your condition doesn’t fit the criteria, the HMO plan won’t pay.  

## FAQs

## What Are the Benefits of an HMO?

The main benefits are cost and quality of care. People who purchase HMO plans enjoy lower premiums than traditional forms of health insurance. The plan's focus on preventative medicine allows insured parties to get a higher quality of care from providers who are contracted with the organization. HMOs typically come with low or no deductibles and relatively low co-pays.

## What Are Examples of HMOs?

Almost every major insurance company provides an HMO plan. For instance, Cigna and Humana provide their own versions of the HMO. Aetna offers individuals two options: the Aetna HMO and the Aetna Health Network Only plan.

## What Is the Difference Between an HMO and a PPO?

Both an HMO and a PPO use a network of physicians and specialists to help control costs. HMOs tend to have lower premiums and require you to obtain a referral from your primary care physician to see an in-network specialist. PPOs allow you to see any specialist without requiring referrals, but the fees and deductibles for out-of-network services are higher.

## How Does an HMO Differ From Traditional Health Insurance?

Coverage under an HMO is generally fairly restrictive and comes at a lower cost to insured parties. Traditional medical insurance charges higher premiums, higher deductibles, and higher co-pays. However, non-HMO plans are much more flexible. People with health insurance don’t need to have a primary care physician to outline treatment. Health insurance also pays some of the costs for out-of-network providers.

## The Bottom Line

An HMO is a type of health insurance that offers lower premiums and out-of-pocket costs but requires you to stay within a network of providers. The primary care physician coordinates all care, making referrals to specialists within the HMO network. HMOs typically have lower costs than other healthcare options and focus on preventive care. But they also have limitations, like restrictive provider networks and requirements for referrals for additional care. Individuals should assess their healthcare needs and preferences for flexibility versus cost savings as part of their research into [choosing healthcare coverage](https://www.investopedia.com/how-to-choose-health-insurance-7504819).  

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