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

Managed care controls cost and quality by combining the financing and delivery of care. Instead of reimbursing any provider after the fact, managed care contracts with a network of providers and steers members to them. The exam tests the distinguishing features of each model, especially gatekeeper referrals, out-of-network coverage, and provider payment method.

HMO (Health Maintenance Organization)

HMOs emphasize prevention and cost control. Defining traits:

• Members select a Primary Care Physician (PCP) who acts as a gatekeeper — referrals are required to see specialists.
• Care is generally covered only in-network; out-of-network care is not covered except true emergencies.
• Providers are often paid by capitation (a fixed monthly amount per member regardless of services used), which shifts utilization risk to providers.
• Low or no deductibles; small copays.

Trap: "copayment, gatekeeper PCP, in-network only, capitation" is the HMO fingerprint.

HMO Models and Service-Area Rules

HMOs are organized in several models the exam may reference:

• Staff model — physicians are salaried employees of the HMO, practicing in HMO-owned facilities.
• Group model — the HMO contracts with one multi-specialty physician group.
• IPA (Independent Practice Association) model — the HMO contracts with associations of independent physicians who keep their own offices.
• Network model — the HMO contracts with multiple groups.

Two concepts recur: HMOs operate within a defined service area (members must generally live or work there), and HMOs must provide or arrange basic health care services with an emphasis on preventive care. Because the HMO both finances and delivers care, it is more than an insurer — it is an organized delivery system, which is why HMO regulation often falls under a separate state HMO act rather than the standard insurance code.

PPO and POS

PPO (Preferred Provider Organization):

• No gatekeeper and no referrals needed — members self-refer to specialists.
• Both in-network and out-of-network care are covered; out-of-network costs more (higher deductible/coinsurance).
• Providers paid on a discounted fee-for-service basis.

POS (Point of Service): a hybrid. Members choose at the point of service whether to use the HMO side (PCP gatekeeper, lowest cost) or go out-of-network like a PPO (higher cost). It combines HMO referral structure with PPO out-of-network flexibility.

HSA Paired With an HDHP

A Health Savings Account (HSA) is a tax-advantaged account that must be paired with a qualifying High-Deductible Health Plan (HDHP). The exam tests three rules: eligibility, triple tax advantage, and contribution limits.

• Eligibility: covered by an HDHP, not enrolled in Medicare, and not claimed as a dependent.
• Triple tax advantage: contributions are tax-deductible, earnings grow tax-deferred, and qualified medical withdrawals are tax-free.
• Non-qualified withdrawals before age 65 are taxed and hit with an additional 20% penalty; after 65 they are taxed but the penalty disappears (like an IRA).
• The account is owned by the individual and is fully portable — it stays with the person across jobs and rolls over year to year (no "use it or lose it," unlike an FSA).

Trap: an FSA is employer-owned and forfeitable; an HSA is individually owned and portable. An HDHP has higher deductibles but lower premiums, and it must cover preventive care without first meeting the deductible.

Other Consumer-Directed Accounts

The exam contrasts HSAs with two employer-funded cousins. Know who funds, who owns, and whether funds roll over:

A Flexible Spending Account (FSA) uses pre-tax salary deferrals but is employer-owned and largely forfeited at year end (limited carryover/grace period). A Health Reimbursement Arrangement (HRA) is funded solely by the employer, reimburses qualified expenses, and the employer decides whether unused amounts carry over. An Archer MSA is a legacy account similar to an HSA but limited to small employers and the self-employed.

Trap: only the HSA (and legacy MSA) requires an HDHP and is owned and portable by the individual. FSAs and HRAs are employer-controlled.

Why Consumer-Directed Plans Exist

The design theory is to make members cost-conscious. Because the member spends their own account dollars before the high deductible is met, they have an incentive to shop for value and avoid unnecessary care — the same incentive that drives down premiums. The trade-off is higher exposure to first-dollar costs, mitigated by the tax-advantaged account and the out-of-pocket maximum. On the exam, link the lower premium of an HDHP to its higher deductible, and remember that qualified preventive services are still covered before the deductible so the cost-sharing does not discourage prevention.