Health Maintenance Organizations

By Ciara Geoghegan, MPH | Last Updated: March 31, 2021

Image by: Brett Dashevsky

What are HMOs?  

Health Maintenance Organizations contract with providers and networks to treat patients at a prepaid cost.


Key Takeaways

  • HMOs are prepaid to incentivize the provision of cost-efficient, high-quality care.

  • HMOs are strict: patients can only see “in-network” providers. Also, patients must have a referral in order to see a specialist.


Why do HMOs exist?

In 1973, the federal government passed the HMO Act to improve patient care quality, decrease health care costs and prioritize preventative care. This provided funding to integrate health insurance and care delivery in the same organization by aligning the financial incentives of the health care payer and provider. HMO plans tend to be less expensive than other insurance types because primary care providers are gatekeepers to specialty care.

Gateway to specialty care?

All patients with HMOs must receive a referral from their primary care provider to receive insurance coverage for specialty care. The primary care setting can then be considered the “gateway” to a dermatologist or ENT specialist if deemed necessary by the PCP.

Types of HMOs

A group model HMO forms partners with providers and hospital groups to serve patients in the HMO. Similarly, a network model HMO forms contracts with providers and hospitals, but many network model providers also treat patients outside of the HMO. Independent practice association model HMOs form contracts with individual providers or with organizations representing solo practitioners, who treat patients regardless of HMO membership. Staff model HMOs directly employ providers and own the facilities where care is delivered.

What are the costs to patients?

Patients typically pay a monthly premium, as well as copays and deductibles for services. Here’s the catch: Care received outside of the HMO is NOT covered, unless approved as an emergency. HMOs are typically cheaper for patients due to lower premiums and out-of-pocket cost-sharing.

Do HMOs work?

HMOs are generally the cheapest plans insurance companies offer and often provide more integrated care that focuses on prevention and wellness. Since HMOs use a prepaid model of financing, organizations must predict future costs and revenue. This has caused some HMOs to underestimate claims and overestimate the funds they received, risking financial collapse. 

Despite the hope that lawmakers had in 1973 when they passed the HMO act, HMOs have not decreased healthcare costs in the US, which (spoiler alert) remains the most expensive healthcare system in the world. HMOs have also not improved the healthcare quality in the US, which ranks among the worst of developed nations across the globe.

How can we improve HMOs?

Innovation of HMOs over the years has led to the creation of Accountable Care Organizations, which are clinician groups that partner with insurers to provide quality, cost-efficient care, primarily for Medicare and Medicaid patients. Clinician groups in ACOs are paid more if patients have better health outcomes. As healthcare quality and increased costs continue to be the focus of federal policy discussions, HMO innovation and other managed care insurance plans will surely evolve in the coming years. 


Outside the Huddle


Reviewed by Geetika Rao, MPH | Edited by Nidhi Mahagaokar, MPH and Jared Dashevsky, M.Eng. | Fact checked by Julia Radossich, PA-C