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

Managed Care Models

Managed care controls cost and quality by linking financing and delivery of care. The exam tests how each model handles networks, gatekeepers, referrals, and out-of-network coverage. Memorize the contrasts — distractors swap one model's rule for another's.

Health Maintenance Organization (HMO)

An HMO delivers care on a prepaid, service basis: members pay a fixed premium and receive services from the HMO's network for low copays. Defining features:

• Primary care physician (PCP) gatekeeper — the member selects a PCP who coordinates all care and issues referrals to specialists.
• Network only — generally no out-of-network coverage except true emergencies; care outside the network is the member's expense.
• Emphasis on prevention — the HMO bears the cost of illness, so it invests in wellness, screenings, and early treatment.
• Capitation — the HMO often pays providers a fixed per-member-per-month amount regardless of services used, shifting utilization risk to the provider.

PPO and POS

A Preferred Provider Organization (PPO) contracts with a network of providers who accept discounted fees. Members may go out of network but pay more (higher deductible/coinsurance). There is no gatekeeper and no referral requirement — members can self-refer to specialists. PPOs trade higher cost for greater freedom of choice.

A Point-of-Service (POS) plan is a hybrid: it uses a PCP gatekeeper like an HMO for in-network care but, like a PPO, allows out-of-network care at a higher cost. The "point of service" is the moment of care — the member chooses in- or out-of-network each time.

Health Savings Account (HSA) and the High-Deductible Health Plan (HDHP)

An HSA is a tax-advantaged account paired with a qualifying High-Deductible Health Plan (HDHP). The HDHP carries a higher deductible and lower premium; the HSA funds out-of-pocket costs with pre-tax dollars.

Eligibility and tax rules tested on the exam:

• The individual must be covered by a qualifying HDHP and have no other disqualifying coverage (with limited exceptions such as dental, vision, and certain preventive care).
• HSA contributions are tax-deductible (or pre-tax via payroll); growth is tax-deferred; withdrawals for qualified medical expenses are tax-free.
• Non-qualified withdrawals before age 65 are taxed as income plus a 20% penalty. After age 65, non-medical withdrawals are taxed as income but the penalty no longer applies (it functions like a traditional retirement account).
• HSA funds roll over year to year and are owned by the individual — unlike a use-it-or-lose-it FSA.

Distinguishing HSA from FSA and HRA

• HSA — individual-owned, requires an HDHP, portable, funds roll over.
• FSA (Flexible Spending Account) — employer-sponsored, use-it-or-lose-it (limited carryover/grace period), no HDHP requirement, generally not portable.
• HRA (Health Reimbursement Arrangement) — employer-funded only; the employer owns it and sets reimbursement rules; employees cannot contribute.

Worked example: an HDHP enrollee under 65 takes a $1,000 HSA distribution to pay a non-medical expense. The $1,000 is taxed as ordinary income and incurs a 20% penalty = $200 penalty plus income tax. Had the same distribution paid a qualified medical bill, it would be entirely tax-free.

HSA Contribution and Penalty Mechanics

The HSA's triple tax advantage — deductible contributions, tax-deferred growth, tax-free qualified withdrawals — is the exam's favorite managed-care tax topic. Eligibility requires enrollment in a qualifying HDHP and no other disqualifying coverage.

Worked penalty example: A 50-year-old HSA owner withdraws $1,000 for a non-medical expense. Because she is under 65, the distribution is taxed as ordinary income PLUS a 20% penalty = $200 penalty on top of income tax. Had the same $1,000 paid a qualified medical bill, it would be entirely tax-free. After age 65, the 20% penalty disappears — non-medical withdrawals are then taxed only as ordinary income (like a traditional IRA), while qualified medical withdrawals stay tax-free.

HMO Service vs. Reimbursement Approach

A defining exam contrast: an HMO operates on a service (prepaid) basis — it arranges and delivers care through its own network for fixed copays — whereas a PPO operates on a reimbursement basis, paying discounted fees to contracted providers. The HMO's capitation payment shifts utilization risk to providers and explains its prevention emphasis; the PPO's discounted fee-for-service preserves member choice at higher cost. Labeling the HMO "reimbursement" or the PPO "prepaid service" is a classic wrong answer.

Gatekeeper, Referral, and Network Comparison

The fastest way to answer managed-care questions is a side-by-side of the three core models:

Worked model-match example: A member wants the lowest premium and is willing to use a gatekeeper and stay in-network — that points to an HMO. A member who wants to self-refer to specialists and occasionally go out-of-network accepts higher cost — that points to a PPO. A member who wants an HMO's low in-network cost but an escape hatch to go out-of-network points to a POS. Matching consumer priorities to the model is the recurring question pattern.

HDHP/HSA Eligibility Edge Cases

To contribute to an HSA the individual must have a qualifying HDHP and no disqualifying coverage — notably, enrollment in Medicare ends HSA eligibility, and being claimed as a dependent also disqualifies. Permitted alongside an HSA are dental, vision, disability, LTC, and specific-disease coverage. These eligibility edge cases (Medicare and dependent status as disqualifiers) are frequent distractors.