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

Managed Care Fundamentals

Managed care controls cost and quality by integrating the financing and delivery of care. Rather than reimbursing any provider, managed-care plans contract with networks and steer members to them. The exam tests four structures, distinguished mainly by gatekeeping, network rules, and cost.

The general rule: more restriction means lower cost. HMOs restrict the most and cost the least; PPOs restrict the least and cost the most; POS plans and HDHP/HSA arrangements sit between.

HMO (Health Maintenance Organization)

The most restrictive, lowest-cost model:

• A Primary Care Physician (PCP) acts as the gatekeeper; members need a referral before seeing a specialist.
• In-network only — no coverage out of network except true emergencies.
• Emphasis on preventive care (the "maintenance" in HMO); routine checkups are covered to reduce later claims.
• Providers are often paid by capitation — a fixed per-member, per-month fee rather than fee-for-service.
• Members pay copayments instead of meeting large deductibles.

A key trap: an HMO member who sees a specialist without a referral generally has no coverage — not merely higher cost.

PPO and POS

A PPO (Preferred Provider Organization) is the most flexible network model:

• No PCP and no referrals — members self-refer to specialists.
• Covers both in- and out-of-network care, but out-of-network costs more.
• Providers are paid on a discounted fee-for-service basis.
• Higher premiums than HMOs in exchange for freedom of choice.

A POS (Point of Service) plan is a hybrid: the member chooses at the point of service whether to use the HMO side or the PPO side. It uses a PCP gatekeeper for in-network care like an HMO, yet permits out-of-network care like a PPO at higher cost — the "best of both worlds" phrasing the exam favors.

Comparison Table

If a question asks for specialist access without referrals, the answer is PPO. If it asks for the lowest-cost, in-network-only, preventive-focused plan, the answer is HMO.

HDHP + HSA (Consumer-Directed)

A High-Deductible Health Plan (HDHP) pairs with a Health Savings Account (HSA) to give consumers "skin in the game." The plan must meet IRS minimum-deductible and maximum-out-of-pocket thresholds, set annually.

The HSA offers a triple tax advantage: contributions are tax-deductible, growth is tax-deferred, and withdrawals for qualified medical expenses are tax-free. Funds roll over year to year and are portable — the account belongs to the individual, not the employer.

For 2025 the HSA contribution limits are $4,300 self-only and $8,550 family, with a $1,000 catch-up at age 55+. To open an HSA the insured must have qualifying HDHP coverage and no disqualifying coverage (general-purpose FSA, Medicare). Distinguish the HSA from the FSA (use-it-or-lose-it, employer plan) and the HRA (employer-funded and employer-owned).

HMO Organizational Models and Service Areas

HMOs differ by how physicians are organized, and the exam may name the model:

• Staff model — physicians are salaried employees of the HMO practicing in HMO-owned facilities.
• Group model — the HMO contracts with one multispecialty group practice paid by capitation.
• IPA (Independent Practice Association) model — the HMO contracts with independent physicians who keep their own offices and also see non-HMO patients.
• Network model — the HMO contracts with multiple groups, blending the above.

Every HMO operates within a defined service area; members who move outside it generally lose coverage except for emergencies. The open-enrollment period requires HMOs to accept applicants at least once a year regardless of health, supporting guaranteed access while limiting adverse selection through the in-network and gatekeeper rules.

Comparing the Tax-Advantaged Accounts

Consumer-directed health care relies on three accounts the exam routinely confuses:

The HSA is the only one the employee owns and keeps when changing jobs, and the only one with the triple tax advantage tied to a qualifying HDHP. The FSA lets employees set aside pre-tax salary for medical or dependent-care costs but forfeits unused funds at year-end (subject to a small carryover or grace period). The HRA is funded solely by the employer; the employee cannot contribute and the employer sets the rollover rules.

A worked trap: an employee who contributes $2,500 to a healthcare FSA but incurs only $1,800 in expenses generally forfeits the unused $700 under use-it-or-lose-it. The same shortfall in an HSA simply rolls forward and keeps growing tax-deferred.

Matching the Plan to the Insured

Exam scenarios describe a person's priorities and ask for the best plan. Map the priority to the model:

• Lowest premium and willing to use a gatekeeper and stay in network: HMO.
• Maximum freedom to choose any specialist or out-of-network provider without referrals: PPO.
• Wants the low cost of an HMO but occasional out-of-network access: POS.
• Healthy, wants to save tax-advantaged dollars and accepts a high deductible: HDHP with HSA.

Premium generally rises as restriction falls, so the PPO costs the most and the HMO the least. When two answers look correct, the deciding clue is usually the referral requirement or the out-of-network coverage the scenario demands.