What Is an HMO and How Does It Work?

What to Expect When You Join a Health Maintenance Organization

Asian health care worker in front of an HMO emergency room.
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Understanding what an HMO is and how they work is critical when choosing a health plan during open enrollment as well as when using your HMO after you're enrolled.

What Is an HMO?

HMO stands for health maintenance organization, a type of managed care health insurance. As the name implies, one of an HMO’s primary goals is to keep its members healthy. Your HMO would rather spend a small amount of money up front preventing illness than a lot of money later on trying 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.

How Does It Work?

1. You must have a primary care physician.

Your primary care physician, usually a family practitioner, internist or pediatrician, will be your main doctor and will coordinate all of your care. Your relationship with your primary care physician is very important in an HMO. Make sure you feel comfortable with him or her or make a switch.  You have the right to choose your own primary care physician as long as he or she is in the HMO’s network. If you don’t choose one yourself, they will assign you one.

2. Your primary care physician has to refer you for any special treatment. 

Your primary care physician will be the one who decides whether or not you need other types of care and must make a referral for you to receive it. Examples are seeing a specialist, getting physical therapy or medical equipment such as a wheelchair.

 Requiring a referral ensures the treatments, tests and specialty care you’re receiving are medically necessary. Without a referral, you don’t have permission for those services and the HMO won’t pay for them.

3. You must use in-network providers.

Every HMO has a list of health care providers that are in its provider network.

Those providers cover a wide range of health care service including doctors, specialists, pharmacies, hospitals, labs, x-ray facilities, and speech therapists. If you get care out-of-network, the HMO won’t pay for it; you’ll be stuck paying the entire bill yourself.

Accidentally getting out-of-network care can be a very expensive mistake 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-network with your HMO. This isn’t very complicated with an HMO like Kaiser Permanente where the network providers are all in the same building and see no one but Kaiser patients. But, if you have an HMO with an insurer like United Healthcare, Aetna, or WellPoint, its in-network providers won’t always be at the same location and often see patients that aren’t HMO members. You can’t assume that, just because a lab is down the hall from your doctor’s office, that lab is in-network with your HMO. You have to check.

There are three exceptions to the requirement to stay in-network:

  1. True emergencies.
  2. The HMO doesn’t have an in-network provider for the specialty service you need. This is rare. But, if it happens to you, pre-arrange the out-of-network specialty care with the HMO—keep your HMO in the loop.
  1. 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 physician on a case-by-case basis.

4. Your cost-sharing requirements in an HMO are usually low.

Cost-sharing like deductibles, copayments, and coinsurance is kept to a minimum with an HMO. Many HMOs don’t require any deductible and only require a small copayment for some services. Because of their low cost-sharing and low premiums, HMOs are considered one of the most economical health insurance choices.

5. You don’t have to hassle with bills and claim forms with an HMO

You don't have to go through the mass of record-keeping and paperwork involved with many health plans. You show your membership card, and either pay the copayment at the time of service or get a single bill. By paying most providers based on the number of members (whether they use services or not) rather than the number of visits or procedures, they eliminate dealing with claims.  This method of paying providers cuts back on office visits, treatments, tests or procedures that aren’t necessary.

HMO vs. Other Health Insurance Types

All types of managed care health insurance have some things in common.  For example, no managed care health plan will pay for care that isn’t medically necessary, and all managed care plans have mechanisms in place to help them figure out what care is medically necessary, and what care isn’t.

Managed care plans like PPOs, EPOs, and POS plans differ from HMOs in several ways. Some permit out-of-network care, and some don’t. Some have low cost-sharing requirements while others have hefty deductibles and require significant coinsurance. Some require a primary care physician, but others don’t.

You can learn more about the differences between health plan types in, HMO, PPO, EPO & POS—What’s the Difference & Which Is Best?