Editor’s Note: Hey guys, right now I’m sitting on the edge of a volcano looking down at the amazing caldera views of Santorini. Everything they say about the views, the food, the sunset, it’s all true. Stay tuned for my honeymoon trip review when I get back and I’ll tell you guys all about it!
In the mean time, we have a post from my friend Derek at FinanceQA. Derek has been blogging and working in the online sphere for almost 10 years so I hope you guys enjoy his answer to the following question:
Kathleen D. from Fairbanks, Alaska asked the following question
I am currently shopping for health insurance and frankly, I am overwhelmed by the different kinds of plans available. In particular, I am a little bit confused by two main terms, HMO and PPO. What is the difference between HMO and PPO?
Health Maintenance Organizations or HMOs and Preferred Provider Organizations or PPOs are two kinds of managed care plans in the realm of health insurance. A common feature of managed care plans is that they contract with a network of healthcare providers, such as physicians, clinics, hospitals, pharmacies and others to provide services to their policyholders. In both HMOs and PPOs, plan holders pay monthly premiums as well as a copayment for each visit. However, these managed care plans differ from each other in terms of how the services are dispensed.
In an HMO, you will be required to get your healthcare services from the plan’s specified network of providers. You will also be asked to choose your primary care physician who will act as your personal doctor and give you the basic healthcare services you need. Your primary care physician will also be responsible for referring you to specialists or other providers within the network or giving a request to have a laboratory test performed.
An HMO generally gives the most affordable and hassle-free coverage for policyholders. The downside with HMOs is that it limits your choice of physicians. If you also opt to get covered by a physician that is not included in your provider network, you can expect to pay more.
A PPO, on the other hand, operates by having a network of “preferred” providers that policyholders can select from. It differs from an HMO in that it does not require the plan holder to choose a primary care physician. If you have a PPO, you can also see any healthcare provider in the network without the need for a referral. One advantage of a PPO is that its network of doctors is often more extensive than that of an HMO. You can also see doctors outside of the network anytime you want to.
However, premiums in a PPO are generally higher compared to that of an HMO. Also, the out-of-pocket payments you make each time you visit a doctor is also typically more than if you were enrolled in an HMO. If you see providers that are outside the PPO network, you can expect to make higher payments as well. In addition to copayments some PPOs also require annual deductibles for services offered both in the network and out of it.
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HMOs and PPOs also differ in terms of how services obtained by policyholders out of the network are paid for. If you are enrolled in an HMO, you are basically not covered if you got services outside of the provider network unless these are care that the HMO does not offer. That means that you’ll have to be shouldering the cost on your own. If you signed up with a PPO, however, and you obtained care out of the PPO network, part of your care will be reimbursed for as long as you have met the annual deductibles and coinsurance. You will still need to pay the healthcare services provider upfront and then file a claim for reimbursement with your PPO.
My experience is the opposite when it comes to premiums and maximum outlays. Maybe it is because of where we live. Years and Years ago, the HMO premiums were affordable. But they became less and less so. Before we switched, the HMO premium was near $2000/mo for a family. That is $24,000 a year that you pay no matter what. If you stayed in the network, each visit would also cost $20 to $40 and Emergency room visits were $50.
When we switched to a PPO, the premiums were much less and so was the maximum amount we would have to pay. However, we weren’t prepared for the fact that with a PPO you are taking on some of the burden and didn’t have the money set aside to cover the initial deductibles.
We are now on an HSA/PPO and our maximum outlay is about $15,000 (including premiums). Quite a bit less.
If you happen work somewhere that basically covers your medical expenses and they offer an HMO, it will seem less expensive to you. But, I would imagine that is pretty rare these days. I work for a small company and they are only able to cover about 50% of the premiums.
Anyway, make sure you no matter which plan you choose you look at your maximum outlay and then whether or not you are prepared for any costs you might have to put out upfront. :O)
Harry Campbell says
Hmm generally the lower your premium, the higher your deductible and therefore max OOP. That makes sense to me but I’m not 100% sure because I’ve gone with the HSA for the past 5 years.
I think premiums and deductibles are the more important number if you are generally pretty healthy though. Unless you’re really unlucky the OOP max shouldn’t ever come in to play. I know it’s tough to go against human nature but you have to play the odds. And HSA’s make the decision even easier since if you hit your OOP max and don’t have the money in your HSA to pay for it you can pay cash and pay yourself back with tax free dollars 1,2,3 etc years down the road.
I guess I’m in the unlucky crowd. :O)
But, yes your logic is correct, the lower the deductible, the higher the premium which goes with my comment about HMOs being the most expensive these days. The insured, does not have a deductible with an HMO. Thus the insurer is taking a lot of risk, thus they charge a higher premium. Anyway, that is my experience.
Hey Harry sounds like your having a great vacation. Can’t wait to hear about it.
As far as health insurance goes I’ve been looking for ways to switch plans for a long time now. The problem is their is nothing better to switch to. I think what makes it so hard for me is that I have 3 younger kids and they can jack up your premium real quick.
If it were just me I would be happy with a high deductible plan because I hardly ever go to a doctor.
Kevin H @ Growing Family Benefits says
There is one odd quirk that makes HMO’s more appealing. The out-of-network coverage is so minimal that almost nobody uses these providers and gets caught in a trap. PPO’s often provide a higher level of reimbursement of “allowed charges”.
The trap is that out of network providers often charge above the “allowed charges”. These providers declined to discount their services in order to participate in the plan. They charge a retail rate, and patients are left paying 100% of the difference between retail charges and the allowed amounts.
No Nonsense Landlord says
Sounds like a great trip you are having! As someone who will be required to buy health care on my own soon, knowing the difference between an HMO and a PPO is important.
Juliana Smart says
Hi Harry! I stumbled upon this today and couldn’t believe that I saw your face at the bottom! If you don’t remember, we played some beer pong together many moons ago. Can’t wait to peruse the rest of your site!
Harry Campbell says
Hey Juliana! Yea I def remember, it was a while ago haha. How are you? Anyways, let me know if you have any questions or feel free to shoot me an e-mail too if you need any help!