Health Insurance - HMO/PPO Comparing Costs

HMO and PPO cost comparisons are not a true apples-to-apples comparison. This is because HMOs, which stand for Health Maintenance Organizations, place a heavy emphasis on cost containment and control. Preferred Provider Organizations, or PPO, also emphasize cost containment but go about with a different approach.

About Health Maintenance Organizations

HMOs were created as a way to deal with rising health care costs. An HMO looks at ways to encourage prevention and healthy lifestyle choices as a way to reduce hospital admissions and costs. By placing a heavy emphasis on early prevention, physical exams, well-baby care, workplace health and wellness programs and other preventative measures, HMOs reduce the amount of paperwork associated with being sick and reduces the cost of unnecessary medical procedures and processes.

When an individual does become sick, an HMO gets involved with managing the care by working with the admitting physician and other providers to determine the medical necessity of certain procedures and processes. In many cases, a patient under an HMO requires precertification for admissions and certain recommended surgical procedures, where such procedures are not deemed essential or place the patient in harm.

This approach to delivering health care theoretically leads to lower health care costs and more availability of services to patients. It is argued that the approach taken by HMOs may take an opposite approach by discouraging individuals from seeking help when they need it for fear of being denied a claim or told to leave the hospital before full recuperation has taken place. Regardless of personal experiences, there is evidence that suggests that HMOs do a good job in holding costs down.

Preferred Provider Organizations

A PPO takes the opposite approach to cost containment. A PPO requires its subscribers to go to their doctors or face no coverage. They use a method of cost sharing in order to encourage insured individuals to stay within the PPO’s network of providers.  A PPO will pay a higher cost share for services provided within the PPO’s network than those services provided outside of the network.  Where a typical cost share for a PPO in-network services are 80/20, those same services may be 60/40 outside the PPO network.

PPOs cut healthcare costs as well since they negotiate fees with the providers within the PPO network as well as pay a scheduled fee for services outside the PPO’s network.  This fee-for-service arrangement, where the providers are paid directly by the PPO and the insured is only responsible for their pro rata share of the expense, allows the PPO to use their subscriber base as leverage in order to negotiate lower costs.  HMOs do this better because they are more restrictive in the services they will and will not pay for.  An HMO subscriber going outside the HMO provider group should not expect payment for the expense incurred whereas with a PPO, a lower cost share will be paid.

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