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Health Maintenance Organizations (HMO)

Because of escalating health-care costs, cost containment has become a major concern, both for the individuals and the government. In the last two decades, the assurance of lower costs and an proficient heath care system has led to an explosion of Health Maintenance Organizations (HMO) throughout the US. These HMOs are a type of Managed Care Organization that provide cheaper health care coverage to many individuals, families and companies. This type of Managed care is available through a network of contracted hospitals, doctors and other health care professionals.

The major feature of a HMO healthcare plan is that the health services provided are rigorously regulated. The HMOs usually contract with a group(s) of physicians and they in turn provide patients to these providers for a set fee. The HMOs provide insurance for many patients and offer cheaper health care at very low costs.

In almost all HMOs, the individual is either assigned or allowed to select his physician to serve as the patient’s primary care doctor. This primary care doctor monitors the health, provides the majority of medical treatment, plays a major role in referral to specialists and other health care professionals as needed. One is not allowed to see a specialist without a referral from the primary care doctor who is expected to manage the care you receive. This is one way that HMOs can limit your choice of medical treatment.

There is absolutely no doubt that HMOs do offer low health care coverage compared to the traditional insurance companies. However, the majority of patients receive incomplete and less care for their money.

The last decade has seen a number of lawsuits embattling the HMOs across the nation. The majority of lawsuits have claimed that HMOs have limited the patient’s right to access appropriate health care. However, since most HMOs are only involved in the financial part of the doctor-patient relationship, they have so far been able to get away with most lawsuits. HMOs only become liable when the medical aspects of a patient’s care are neglected due to their monetary limitations. In most cases, it is the doctors working for the HMO who become liable and are prone to lawsuits.

How do HMO's work?

An HMO is a Mega Corporation which only allows you to choose your primary health care provider from a long list of doctors, all of whom who work for the HMO. All the physicians are contracted by the HMO to provide health care at a decreased cost. The system offers almost no freedom for the patient in terms of what type of health care he wants. As an insured member, the individual or his family pay a monthly premium to obtain the health care coverage. This monthly fee is generally reasonable and most fall into the trap that complete health care coverage will be available at low cost. The HMO promises all the essential doctor’s visits, hospital admissions, the necessary laboratory tests and radiological investigations that may be required in the event of an illness. The HMO, however, usually places limitations on whom the individual can see and referrals to other consultations are only available if cleared by the gate keeper physicians. Exceptions to these rigid guidelines are only made in cases of emergencies or when no HMO contracted consultation is available.

Types of HMOs

There are numerous models of HMOs. The majority of HMOs are independent of each other and have various criteria for screening and management of their physicians and patients.

Some HMOs are based on staff models, whereby physicians work for the Company and have their offices within the HMO buildings. All the physicians are direct employees of the HMO and are fully salaried by the HMO. These physicians are not allowed to work elsewhere and their practice is limited to HMO patients only.

Some HMOs are based on group models, where the HMO employs a group of physicians to work for them. The group receives a lump sum of money from the HMO and the providers are at liberty how to distribute it among themselves. These physicians dedicate some days of their practice to seeing HMO patients and are at liberty to continue with their own practice.

Another HMO models involves working with individual physicians who have joined an independent practice association (IPA), who in turn contract with the HMO. Here the physician can maintain his own office and is at liberty to see patients not associated with an HMO.

There is also a network model, whereby the HMO contracts with numerous IPAs and individuals physicians. This is the most common type of model used in most United States.

How do HMO reduce costs?

Managed care reduces costs by keeping a number of primary care physicians but a very limited number of consultants. Laboratory and radiological tests are only ordered when necessary and kept to a minimum, hospital admissions are only made in emergencies and patient discharges are made early. The principle is that the less the number of patients admitted, the fewer tests obtained, and earlier discharge means that money is saved. A partially empty hospital requires less staff to maintain and thus money is saved.

HMO gatekeepers

HMOs were planned to offer quality medical care for a lower price and in return reduce the unnecessary medical services that have plagued traditional insurance companies. To achieve this, HMOs usually employ primary care physicians as their gate keepers. All individuals are asked to select a primary health care provider from a list. These gatekeepers are usually family physicians, internists, pediatricians or hospitalists. All individuals must see one of these doctors before they can be referred to a specialist or require any fancy/expensive tests. Without prior authorization from the gate keeper, the patient cannot get any additional medical therapy. Only in cases of emergencies are individuals allowed to bypass these gatekeepers. Another exception is for pregnant females who are allowed to select an obstetrician without referral from a gate keeper. This gate keeper program limits unnecessary referrals, tests and prevents waiting lists of patients wanting to see specialists. However, if the clinical judgment of the gate keeper is incorrect, the individual will either not have any additional required therapy or have delayed therapy- which happens quite often.

In the past, physicians were permitted to make treatment plans based on their medical knowledge and training, assessment the patient's needs and the available specialties. However, under HMO guidelines, physicians are obligated to make recommendations based on HMO rules.

How do HMOs monitor costs?

Utilization Reviews

HMOs regularly monitor how much money is being spent on each patient. The dollar amount on each patient is continuously monitored. This monitoring is designed to not only oversee doctors but also how much “dollar” care each patient is receiving. If the dollar amount per patient per month is high, then routine questions are asked if the patient is either very sick or receiving an extra amount of unnecessary medical services.

The concept behind an HMO medical plan is that by preventing illness, the cost is much cheaper than the management of an acutely sick patient who has never had any preventive care. Looking after a healthy patient enables the HMO to save more money. So most HMOs like to enroll healthy patients and try and keep them healthy.

During the evolution of HMOs, preventive medicine was not emphasized but once it was realized that the cost of looking after an acutely sick patient was astronomical compared to a healthy patient, the concept of preventive medicine was initiated. Many HMOs offer preventive coverage for healthy individuals. Services such as immunizations, mammograms, flu vaccines, regular baby checks and physical examinations are regularly covered.

There are other more chronic disorders for which most HMOs provide limited coverage because the treatment is prolonged and life long. Out patient psychiatry care is often provided on a limited basis. HMOs almost never cover any experimental or the latest treatments available and all types of elective plastic surgery are not covered.

Case management Reviews

To manage a grip on the costs of medical care, case management reviews are routinely done. The purpose of case management teams is to identify patients with chronic disorders like diabetes, hypertension, coronary artery disease or cancer. In all such chronic disorders, a case manager closely follows the medical treatment and ensures that the patient is correctly receiving therapy and follows up with all consults- all steps to ensure that the disorder does not worsen acutely.


Frequently HMOS utilize a system called capitation to control costs. In such a system, certain providers receive a fixed sum of money to look after a fixed number of families or patients in a particular area. For each patient, the HMO pays a fixed amount of dollars per month. In return, the providers are required to provide medical care within the limits of this fee. In this arrangement, the providers routinely provide the most basic care and no unnecessary treatments are provided. Because of the fixed sum of money the providers receive from the HMO, they have no incentives to provide further care. Whatever money is not spent on the patients is saved up to be divided among the providers. In addition, some HMOs provide an extra bonus for providers who manage to control costs and maintain a certain level of care.

Gag rules

All physicians who work with HMOs have to abide by gag rules. All the different types of treatments available, the best radiological test and the most expensive treatments are rarely discussed with patients.  The majority of patients are simply not educated on their illness and possible treatments. Even when patients do require surgery or other expensive treatments are needed, a pre approval is required to determine the medical necessity. In all cases, the financial costs outweigh whatever illness the patient may have.

Should I choose an HMO?

There is no doubt that one saves money by joining an HMO. But it severely limits the freedom when it comes to selecting a specialist, treatment or even an investigation. Before you decide to join an HMO, below are just some questions that should be asked?

  1. Can you select doctors from a list of contract physicians or from the available staff of a group practice?
  2. Is it difficult to change doctors if you are unhappy with the present MD
  3. is it easy to see a specialist
  4. for routine visits, how long does it take to see a doctor
  5. how is a emergency room visit handled and is one able to see a specialist while in the ER
  6. What type of limits are set on laboratory tests and radiological  investigations
  7. what happens if a specialist is not provided by the HMO
  8. how is coverage affected when one goes out of town
  9. are there any co-payments for office visits, emergency care or other services
  10. are there any limitations on prescription drug and how much coverage is offered

In the end, remember that HMO's are profit-driven organizations, thus all policies, guidelines and decisions are based on not what is best for a patient, but how money can be saved.