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

From Indemnity to Managed Care

Traditional indemnity (fee-for-service) plans let the insured choose any provider; the plan reimburses on a usual, customary, and reasonable (UCR) basis after a deductible and coinsurance, with no network. Indemnity gives maximum freedom but the weakest cost control. Managed care plans trade some freedom for lower cost by contracting with a network of providers and adding authorization rules.

The exam tests four managed-care designs plus the consumer-driven high-deductible model. The fastest way to keep them straight is to ask two questions about each: Do I need a referral? and Is out-of-network care covered at all?

Comparing the Four Network Designs

Mnemonic: HMO = most restrictive/cheapest, PPO = most flexible/priciest, POS = HMO inside + PPO outside, EPO = PPO without out-of-network benefits.

How HMOs Pay and Operate

HMOs emphasize preventive care and typically pay contracted providers by capitation—a fixed per-member-per-month amount regardless of services rendered—which shifts financial risk to the provider and discourages unnecessary care. Care must be received from network providers, and the PCP acts as a gatekeeper who authorizes specialist referrals. An HMO member who self-refers to an out-of-network specialist for non-emergency care generally pays the entire bill.

Key HMO features tested:

• Prepaid, comprehensive care for a fixed premium.
• Geographic service area — care is built around a defined region.
• Emergency exception — out-of-area emergencies are covered.
• Goal: keep members healthy to reduce expensive claims.

High-Deductible Health Plans and Health Savings Accounts

An HDHP (High-Deductible Health Plan) pairs a qualifying high deductible with a Health Savings Account (HSA). For an HSA contribution to be allowed, the HDHP must meet IRS minimum-deductible and maximum-OOP thresholds set annually; the plan generally cannot pay non-preventive benefits until the deductible is met. HSAs are triple-tax-advantaged: contributions are deductible (or pre-tax), growth is tax-deferred, and qualified medical expense withdrawals are tax-free.

Rules candidates must know:

• The account holder must be covered by a qualifying HDHP and have no other disqualifying coverage (limited exceptions like dental/vision).
• Non-qualified withdrawals before age 65 are taxable plus a 20% penalty; after age 65 they are taxable but penalty-free (like a Traditional IRA).
• Unused HSA balances roll over year to year and are portable—they belong to the individual, not the employer.

HSA vs. FSA vs. HRA — Common Trap

Do not confuse the consumer accounts:

• HSA — owned by the individual, paired with an HDHP, funds roll over and are portable.
• FSA (Flexible Spending Account) — employer-sponsored, generally use-it-or-lose-it (limited carryover/grace period allowed), not portable.
• HRA (Health Reimbursement Arrangement) — funded only by the employer, reimburses qualified expenses, employer sets rollover rules.

Worked numeric: An individual with HDHP self-only coverage contributes the annual maximum to an HSA and later takes a $1,000 non-qualified withdrawal at age 40. They owe ordinary income tax on $1,000 plus a 20% penalty ($200).

PPO Mechanics and Provider Contracts

A PPO (Preferred Provider Organization) contracts with a network of preferred providers who agree to discounted, negotiated fees. The member is free to use any provider with no referral, but in-network care carries a lower deductible and coinsurance, while out-of-network care is covered at a reduced benefit level. PPOs pay providers on a fee-for-service (discounted) basis rather than capitation, so providers do not bear the same financial risk as in an HMO.

Because PPOs allow self-referral and out-of-network access, they are the most flexible managed-care design and typically the most expensive. An EPO (Exclusive Provider Organization) resembles a PPO's no-referral freedom but, like an HMO, pays nothing for out-of-network non-emergency care—the member is locked to the network in exchange for lower premium.

HSA Contribution and Eligibility Details

HSA eligibility is strict and frequently tested. To open or contribute to an HSA, an individual must (1) be covered by a qualifying HDHP, (2) have no other first-dollar coverage that would disqualify them, (3) not be enrolled in Medicare, and (4) not be claimed as a dependent on another person's return. Enrolling in Medicare (typically at 65) ends HSA contribution eligibility, though the existing balance remains usable.

Contributions may come from the employee, the employer, or both, and an annual IRS limit applies with a catch-up contribution allowed at age 55 and older. Because the account is individually owned and portable, it follows the worker between jobs—unlike an FSA, which is forfeited (subject to limited carryover or grace period). The HDHP's required deductible means the plan does not pay ordinary claims until the deductible is met, but the ACA still requires preventive services (screenings, immunizations) be covered first-dollar even under an HDHP.