This article is the third in a series that explores different care and reimbursement models. In this series, William Rusnak, MD, provides some quick insight into several models and discusses the pros and cons of each. William's last article focused on Capitation.
Health maintenance organizations (HMOs), a type of managed healthcare system, were created by the 1973 Health Maintenance Organization Act as a way to decrease costs for healthcare consumers. As the name implies, HMOs tend to place importance on preventative measures and are willing to spend money to keep their populations healthy (and to avoid higher costs later). Although this style of healthcare has had its issues in the past, some systems have made it work very well. One of the most successful examples is the Kaiser Permanente system. Interestingly, Edgar Kaiser was supposedly good friends with Richard Nixon, who passed the act mentioned above. He must have had some influence.
How HMOs work
Geared towards bigger companies needing to offer health insurance to large numbers of people, HMOs include primary care physicians (PCP), specialists, and hospitals, clinics, and other facilities at which its members receive care. The primary care physician acts as a “gatekeeper” in that s/he refers patients to specialists. Additionally, patients who belong to an HMO are required to obtain health care at specific facilities and/or from specific providers who are under contract and have agreed to adhere to the HMO’s guidelines and restrictions. The exception to this rule is emergency care, which can be obtained from any facility.
Financially, HMOs operate by receiving a fixed payment for its services per patient per period of time, generally a month. Remember from my previous article that this style of payment is called capitation. This differs from the fee-for-service model, in which providers are compensated for each individual service. In this way, physicians are relieved of the temptation to prescribe unnecessary medical services in order to maintain a healthy revenue cycle. In fact, in HMOs, providers are compared to their peers to verify that s/he is not prescribing significantly more or less services than everyone else.
Benefits of HMOs
Commercial HMOs that involve both Medicaid and privately insured patients can reduce healthcare costs due to the large number of people covered by the HMO. As mentioned, because patients need referrals by PCPs, only those services that are deemed medically necessary are approved, thus costs are contained. For the patient, HMOs require a copay for prescriptions, hospital stays, or doctor’s visits, but these are generally kept to a minimal amount.  Also, many HMOs don’t require a deductible, which saves patients hundreds of dollars per year. Last, because HMOs receive a flat fee for each person they cover, patients can have the comfort knowing that their monthly payments will remain the same regardless of their utilization of the healthcare system.
Limitations of HMOs
Patients are used to having a choice when selecting a medical provider, so the in-network restriction of HMOs did not sit well with many patients at first. A study conducted in 2007 found that HMO enrollees were less satisfied with the quality of their care and with doctor-patient interactions.  Additionally, the capitation model, which was mentioned as a benefit, can also lead to restrictive practices, since the organizations profit more by doing less (the opposite of fee-for-service). Some less-than-ethical providers may withhold performing exams or prescribing expensive drugs or treatments in order to increase their bottom line. Additionally, these same providers will likely not prescribe experimental drugs due to extreme costs attached to such products. 
Concluding, HMOs have been successful at achieving a cost-containing model that focuses on prevention. Although they have had their issues, HMOs will likely thrive in the future, especially since systems like Kaiser Permanente have found such success. Like most models, these organizations depend on the thorough peer review to avoid detrimental practices like withholding care to achieve higher profits.
William Rusnak, M.D. (@RusnakMD) is a resident physician in family medicine, financial investor, and entrepreneur. He's passionate about empowering patients, the business behind medicine, and innovation in healthcare.
1. Adler, Andrea. (2001, May 1). HMOs explained. CBS News. Retrieved from http://www.cbsnews.com/news/hmos-explained/
2. Pho, K. (2007, April 10). Single Payer Myths. Retrieved from http://www.kevinmd.com/blog/2007/04/single-payer-myths.html