9.3 Managed Care: HMO, PPO, POS, and HSA/HDHP

Managed Care: HMO, PPO, POS, and HSA/HDHP

Managed care controls cost and quality by linking financing to delivery — coordinating who provides care, when, and at what price. Five cost-control features recur across all managed-care models: a network of contracted providers, utilization review, gatekeeping (primary-care coordination), preventive-care emphasis, and prepaid/negotiated payment.

Health Maintenance Organization (HMO)

The HMO is the most restrictive, most cost-controlled model:

• Care is generally covered only inside the network; out-of-network care is not covered except emergencies.
• Members select a Primary Care Physician (PCP) who acts as a gatekeeper and must issue referrals to see specialists.
• Emphasis on preventive care; members pay small copayments rather than coinsurance.
• The HMO is paid (and pays providers) on a prepaid, capitated basis — a fixed amount per member per month regardless of utilization.

HMO structures tested: staff model (physicians are salaried employees), group model, IPA (Independent Practice Association), and network model.

PPO and POS

Preferred Provider Organization (PPO): a network of providers who agree to discounted fees. Members may go out of network but pay more (higher deductible/coinsurance). No PCP and no referrals are required — this freedom of choice is the PPO's defining advantage and a frequent exam answer.

Point-of-Service (POS): a hybrid. The member chooses at the point of service which model to use. Using the PCP/gatekeeper and network behaves like an HMO (low cost, referrals required); going outside the network behaves like a PPO/indemnity plan (higher out-of-pocket). POS = 'HMO with an out-of-network option.'

HDHP and the Health Savings Account (HSA)

A High-Deductible Health Plan (HDHP) pairs a qualifying high deductible with a tax-advantaged Health Savings Account (HSA). To open and contribute to an HSA the individual must be covered by a qualifying HDHP, have no other disqualifying coverage, and not be enrolled in Medicare or claimed as a dependent.

Key HSA rules (use IRS indexed figures; the exam tests the structure):

• Contributions are tax-deductible; growth is tax-deferred; withdrawals for qualified medical expenses are tax-free (triple tax advantage).
• Unused balances roll over year to year and are portable (owned by the individual, not the employer).
• Non-qualified withdrawals before age 65 are taxable plus a 20% penalty; after 65 they are taxable but penalty-free (like an IRA).

Do not confuse the HSA with the older FSA (use-it-or-lose-it, employer-owned) or HRA (employer-funded, employer-owned).

Comparing the Consumer-Directed Accounts

The exam pairs these three accounts to test ownership, funding, and rollover. Memorize the grid:

The HSA is the only one the employee truly owns and keeps after leaving the job. Because HDHP premiums are lower, the HSA pairing is a cost-containment strategy: members spend their own pre-funded dollars until the deductible is met, which discourages unnecessary utilization while still capping catastrophic exposure at the plan's out-of-pocket maximum.

The HMO model and gatekeeping

A Health Maintenance Organization (HMO) is the most tightly managed model: members choose a primary care physician (PCP) who acts as a gatekeeper, coordinating care and issuing referrals before a specialist visit is covered. HMOs emphasize preventive care, charge low copays, and generally pay nothing for out-of-network care except true emergencies. Providers may be paid by capitation (a fixed per-member-per-month amount regardless of services rendered), which shifts utilization risk onto the provider.

The exam contrasts the HMO with the PPO (no PCP, no referral, partial out-of-network coverage at higher cost) and the POS (a hybrid that uses a gatekeeper PCP but, like a PPO, still covers out-of-network care at a reduced level). Matching "referral required + no out-of-network benefits" to HMO and "no referral + see specialists directly + some out-of-network coverage" to PPO answers most managed-care items.

HSA mechanics with numbers

A Health Savings Account (HSA) must be paired with a qualifying High-Deductible Health Plan (HDHP). Contributions are tax-deductible, growth is tax-deferred, and withdrawals for qualified medical expenses are tax-free — a triple tax advantage. The account is owned by the individual and is fully portable. A worked penalty example: an HSA owner under age 65 withdraws $2,000 for a non-qualified expense; the $2,000 is included in taxable income and hit with a 20% additional tax = $400 penalty.

After age 65, non-qualified withdrawals are taxed as ordinary income but escape the penalty, making the HSA function like a supplemental retirement account. The exam wants you to remember the HDHP pairing requirement, the 20% pre-65 penalty, and that unused balances roll over year to year — unlike an FSA, which is use-it-or-lose-it.