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

Managed care integrates the financing and the delivery of health care to control cost and emphasize prevention. Instead of reimbursing any provider after the fact, managed care organizations contract with networks of providers, manage utilization, and steer members toward cost-effective care. The three classic models - HMO, PPO, and POS - differ mainly in network strictness, the role of a gatekeeper, and out-of-network coverage.

Health Maintenance Organizations (HMOs)

HMOs are the most restrictive and most prevention-focused model:

• Members select a primary care physician (PCP) who acts as a gatekeeper, authorizing referrals to specialists.
• Care is generally covered only in-network; out-of-network care is not covered except true emergencies.
• Providers are typically paid by capitation (a fixed per-member, per-month fee) rather than per service.
• Emphasis on preventive care: routine physicals, immunizations, and screenings are covered with low copays.

PPO and POS Models

Preferred Provider Organizations (PPOs) offer more flexibility:

• No gatekeeper; members may self-refer to specialists.
• Both in-network and out-of-network care are covered, but out-of-network carries higher deductibles and coinsurance.
• Providers are paid on a discounted fee-for-service basis negotiated with the network.

Point-of-Service (POS) plans are a hybrid:

• Members choose a PCP gatekeeper (HMO-like) for the lowest cost.
• They may still go out-of-network (PPO-like) at higher cost-sharing.

Model Comparison

Why the Models Differ in Cost

The trade-off across managed care models is freedom vs. price. HMOs deliver the lowest member cost because they tightly control access: capitation removes the volume incentive, the gatekeeper screens out unnecessary specialist visits, and the closed network lets the plan negotiate the deepest discounts. PPOs cost more because members keep the freedom to self-refer and to go out-of-network, and discounted fee-for-service still rewards volume somewhat. POS plans price in the middle - members get HMO economics when they use the gatekeeper and PPO flexibility when they pay more to step outside.

A frequent exam distinction: in an HMO the provider is often paid per member regardless of services, while a PPO provider is paid per service at a discount. That single difference explains most of the behavioral and cost contrasts the exam tests.

HSA / HDHP Pairing

A Health Savings Account (HSA) is a tax-advantaged account that must be paired with a qualifying High-Deductible Health Plan (HDHP). The HDHP keeps premiums low by using a high deductible; the HSA lets the insured set aside pre-tax dollars to pay that deductible and other qualified medical expenses.

For 2025, the IRS requires an HDHP minimum deductible of $1,650 self-only / $3,300 family, with out-of-pocket maximums of $8,300 / $16,600. HSA contribution limits are $4,300 self-only / $8,550 family, plus a $1,000 catch-up at age 55+.

HSA triple tax advantage: contributions are deductible, growth is tax-deferred, and qualified withdrawals are tax-free. Funds roll over year to year (no "use it or lose it") and are portable. Trap: non-qualified withdrawals before age 65 incur income tax plus a 20% penalty; after 65 only income tax applies.

Other Account-Based and Tax-Favored Arrangements

Beyond the HSA/HDHP pairing, the exam tests three more account types and their key distinctions:

The most-tested contrast: an HSA is employee-owned, portable, and rolls over indefinitely, while an FSA is employer-sponsored with a use-it-or-lose-it rule and is forfeited at termination.

HMO Mandated Benefits and Open Access

HMOs must emphasize preventive care — annual physicals, immunizations, well-baby care, and screenings — usually with low or no copay, because prevention lowers long-run cost. Some HMOs offer open-access designs that drop the gatekeeper referral requirement for in-network specialists, blurring the line with PPOs while retaining the closed network. Recognizing that the defining HMO trait is the closed network plus capitation, not the gatekeeper alone, helps eliminate distractors.

Worked HSA Tax Example

Account-based plans reward pre-tax saving. Suppose a 50-year-old with family HDHP coverage contributes the full family HSA limit and is in a 24% marginal tax bracket.

• Contribution is above-the-line deductible, so a $8,550 contribution saves roughly $2,052 in federal income tax that year.
• Funds grow tax-deferred; qualified medical withdrawals are tax-free — the triple tax advantage.
• A $1,000 catch-up is allowed at age 55+, raising the limit.
• Withdraw for a non-qualified purpose before 65 and the amount is taxed plus a 20% penalty; after 65, only ordinary income tax applies (the account effectively behaves like a traditional IRA for non-medical use).

This worked sequence captures why HSAs are the most tax-favored health account and why pairing is mandatory: the HSA only exists alongside a qualifying HDHP.