Health Insurance Alphabet Soup HMO, PPO, or POS – What’s the Difference?
Most people participating in a health care plan through their employers, will be offered one or more of the following types of plan to choose from: a Health Maintenance Organization (HMO) plan, a Preferred Provider Organization (PPO) plan or a Point-of-Service Plan (POS) plan, each of which provide different levels of coverage for medical care with different out-of-pocket costs for the employee. Choosing the best plan at the best price is a usually confusing rite of passage for employees each year; and deciding which plan(s) to offer and at what cost to the employee is an annual headache for small business owners.
The annual increases in health insurance premiums for businesses cause sticker-shock at every renewal. In the face of rising premiums, small businesses should evaluate their plans annually to determine if they are offering the best combination of coverage and costs for their employees and for the business. Just signing off on the renewal and groaning isn’t a sensible or cost-effective approach for either the business owner or staff.
A solid understanding of the ABCs of HMOs, PPOs, and POSs is essential to ensure that the right plan is chosen and that, as a business owner, you understand the impact on your bottom line and your employee’s out of pocket costs. Small businesses usually have fewer choices, at a higher cost per person than large group employers and this makes the process of choosing an affordable plan very difficult.
Health insurance coverage is a strong tool for businesses to use in recruiting and retaining top notch staff members. And business owners and their families have the same coverage options as employees, so it’s important to understand the coverage you and your family will have as well.
Health Maintenance Organizations (HMO)
An HMO is usually the least expensive alternative of these three options and has the most restrictions. Medical services are provided by a network of doctors and medical providers from whom the patient must choose their physicians or other medical providers. Every HMO member selects a primary care physician (PCP) from among those in the network. In addition to providing regular medical services, the PCP is the point person for coordinating any specialized medical care. Visits to specialists, such as a urologist or an orthopedist generally must be arranged through a referral from your PCP. Any care provided by a specialist who is not in the HMO network will most likely result in charges not covered by the plan. If you use the network’s providers, your out of pocket costs are generally limited; if you go outside the network, it is unlikely that you will be reimbursed unless there is no existing specialist in the HMO’s network.
HMOs are generally evaluated based on the size of selection of the doctors and hospitals within its network. A network with a limited selection within a geographical area may not meet the needs of individuals living there. Because the HMO is able to dictate the list of providers, it can better control its costs through negotiated rates for medical services. These cost savings are passed on to the insured in the form of lower premiums. Typically HMO plans cover most types of medical care, including some types of preventive care.
Point-of-Service Plan (POS)
POS plans have many of the same characteristics as an HMO, but include coverage for using out of network providers. Like an HMO, a PCP must be selected from the network’s list of physicians. Referrals from the PCP are still required for many specialists or procedures, although some types of providers like dermatologists may be exempt from this requirement. It does allow you to go outside of the network to seek specialized care; however, you may have to bear a significant portion of the total cost. You may or may not need a referral to use an out of network medical provider.
POS plans usually cost more than HMO plans, but as they offer employees more flexibility as to providers and some coverage for out of network medical services, they are a popular alternative to HMOs.
Preferred Provider Organizations (PPO)
PPOs offer the insured much more in the way of selection than an HMO or a POS. While there still may be a prescribed network of doctors and hospitals, it tends to include a much wider selection and there are fewer restrictions on using out-of-network providers. PPO premiums tend to be more expensive than either HMO or POS plans. Individual co-payments tend to be higher, especially if the medical provider is not within the PPO network. One of the key differences with a PPO is in the greater flexibility of arranging visits with specialists, as PPOs do not require that a PCP referral be given.
Prescription plans are often included within HMO, POS and PPO plans. Benefit levels vary based on the amount of the co-pay the employee is asked to cover. Co-payments for generic drugs are the least expensive, with brand name drugs costing the most. In some cases, brand name drugs will not be covered at all if there is a generic equivalent available.
How to Choose
Like any aspect of financial management for the business, these plans should be weighed carefully to determine which are most cost-effective for your employees and the most affordable choice for your business. Working with a health insurance broker who has access to multiple companies and plans will usually give you the best range of options. Comparing plans and benefit levels is complicated and your insurance agent or broker should assist you in understanding the options thoroughly before you decide.