12.2 Medical Plans: HMO, PPO, POS, EPO, HDHP/HSA

Medical Plans: HMO, PPO, POS, EPO, HDHP/HSA

Managed-care plans differ along three axes the exam tests constantly: whether you need a primary care physician (PCP), whether you need a referral to see a specialist, and whether out-of-network care is covered. Memorizing those three answers for each plan type lets you eliminate wrong choices quickly.

The oldest model, the Health Maintenance Organization (HMO), emphasizes prevention. The insured selects a PCP gatekeeper, must obtain referrals for specialists, and—except for true emergencies—has no coverage out of network. HMOs often use capitation to pay providers and charge low copays.

Comparison Table of Plan Types

The POS plan is the classic hybrid: it uses a gatekeeper like an HMO but, with a referral, pays for out-of-network care like a PPO. The EPO flips this—no referrals needed, but the network is exclusive, so out-of-network care is not covered.

High-Deductible Health Plans and HSAs

A High-Deductible Health Plan (HDHP) pairs a low premium with a high deductible and is the only plan type that qualifies a person to fund a Health Savings Account (HSA). The IRS sets minimum deductibles and maximum out-of-pocket limits annually; for an HDHP, preventive care may be covered before the deductible, but most other care is subject to the full deductible first.

An HSA is a tax-advantaged account owned by the individual:

• Contributions are tax-deductible (or pre-tax through an employer).
• Earnings grow tax-deferred.
• Withdrawals for qualified medical expenses are tax-free.
• The balance is portable and rolls over year to year—there is no use-it-or-lose-it rule.

HSA Eligibility Traps

To contribute to an HSA, the individual must be covered by a qualifying HDHP and must not have other disqualifying coverage. Common exam traps:

• Enrollment in Medicare ends HSA eligibility (you may still spend an existing balance, but cannot contribute).
• Being claimed as a dependent on another taxpayer's return disqualifies HSA contributions.
• Coverage under a spouse's general-purpose Flexible Spending Account (FSA) disqualifies HSA contributions.

Withdrawals for non-qualified expenses before age 65 are taxed as income plus a 20% penalty. After age 65, non-qualified withdrawals are taxed as income but the penalty disappears—similar to retirement-account treatment.

HSA vs. FSA vs. HRA

The HRA (Health Reimbursement Arrangement) is employer-funded only; the employee never contributes and unused funds generally stay with the employer. The FSA is the use-it-or-lose-it account, though plans may allow a small carryover or grace period.

How Each Plan Pays Providers

The payment model behind a plan shapes the insured's choices. HMOs historically use capitation or salaried staff models, paying providers a fixed sum regardless of utilization, which aligns the provider's incentive toward prevention. PPOs pay on a discounted fee-for-service basis: network providers agree to reduced rates in exchange for patient volume, and the insured saves by staying in network.

A POS plan blends these—capitated or contracted in-network care plus indemnity-style out-of-network reimbursement after a referral. Understanding the payment model helps you predict the cost-share answer: capitated HMO care usually means low fixed copays and no out-of-network benefit, while fee-for-service PPO care means deductibles and coinsurance that rise sharply out of network.

Choosing a Plan: Scenario Logic

When a question describes a client's needs, match the priority to the plan:

A young, healthy, high-income client who rarely uses care and wants to save is the textbook HDHP/HSA candidate, because the low premium and triple-tax-advantaged account reward low utilization. A client with chronic conditions who values predictability and any-provider access leans toward a PPO.