12.2 Medical Plans: HMO, PPO, POS, EPO, HDHP/HSA
Key Takeaways
- HMO is the most restrictive and cheapest; PPO is the most flexible and priciest.
- POS = HMO gatekeeper plus PPO out-of-network option; EPO = PPO network with no out-of-network benefits.
- HMOs use a PCP gatekeeper, capitation payment, and fixed copayments emphasizing preventive care.
- An HSA requires a qualifying HDHP and no other first-dollar coverage; balances roll over and are portable.
- Medicare enrollment ends HSA contributions; non-qualified withdrawals before 65 face a 20% penalty plus tax.
Managed-care plans control cost by combining financing and delivery of care. The exam expects you to compare the four main network models plus the consumer-directed High-Deductible Health Plan paired with a Health Savings Account. Network rules, referral requirements, and cost-sharing differ across each model.
A network is the group of doctors, hospitals, and providers contracted with the plan. In-network care is cheaper; out-of-network care costs more or is not covered at all.
Comparing the Network Models
| Plan | Primary Care Physician / Referral | Out-of-Network Coverage | Cost |
|---|---|---|---|
| HMO (Health Maintenance Organization) | Required gatekeeper; referrals needed | None (except emergencies) | Lowest premium |
| PPO (Preferred Provider Organization) | Not required | Yes, at higher cost | Higher premium |
| POS (Point of Service) | Required gatekeeper | Yes, at higher cost | Moderate |
| EPO (Exclusive Provider Organization) | Usually not required | None (except emergencies) | Moderate |
Memory hook: HMO = most restrictive/cheapest; PPO = most flexible/priciest; POS = HMO gatekeeper + PPO out-of-network option (a hybrid); EPO = PPO network rules but no out-of-network benefits.
HMO Characteristics
Health Maintenance Organizations emphasize preventive care and prepaid services. Key features:
- A Primary Care Physician (PCP) acts as gatekeeper and authorizes specialist referrals.
- Care is generally limited to network providers; out-of-network care is not covered except true emergencies.
- Members usually pay fixed copayments rather than coinsurance.
- HMOs operate on a capitation basis — providers are paid a set amount per member per month regardless of services used.
Consumer-Directed Health Plans: HDHP + HSA
A High-Deductible Health Plan (HDHP) pairs with a Health Savings Account (HSA) to let insureds save tax-favored dollars for medical costs. The IRS sets annual limits (figures used below are illustrative of recent thresholds):
| Item (illustrative) | Self-Only | Family |
|---|---|---|
| Minimum annual deductible | $1,650 | $3,300 |
| Maximum out-of-pocket | $8,300 | $16,600 |
| HSA contribution limit | $4,300 | $8,550 |
HSA worked example: An insured in the 24% federal bracket contributes the $4,300 self-only limit. Because HSA contributions are pre-tax, the federal tax savings is 0.24 x $4,300 = $1,032. HSA funds grow tax-deferred and are tax-free when spent on qualified medical expenses. Unused balances roll over year to year and the account is portable — it belongs to the individual, not the employer.
HSA Eligibility Traps
- To open or contribute to an HSA, the person must be covered by a qualifying HDHP and have no other first-dollar coverage.
- Enrollment in Medicare ends HSA contribution eligibility (you may still spend the balance).
- A catch-up contribution ($1,000) is allowed at age 55+.
- Non-qualified withdrawals before age 65 are taxed and hit with a 20% penalty; after 65 they are taxed but penalty-free.
Related Tax-Favored Accounts
Do not confuse the HSA with two look-alikes the exam pairs against it:
- Flexible Spending Account (FSA) — employer-sponsored, salary-reduction account for medical costs. Generally use-it-or-lose-it each plan year (a small carryover or grace period may apply). It is not portable and does not require an HDHP.
- Health Reimbursement Arrangement (HRA) — funded only by the employer; the employer sets reimbursement rules and the account is not owned by the employee.
| Account | Who Funds It | Portable | Requires HDHP |
|---|---|---|---|
| HSA | Employee and/or employer | Yes | Yes |
| FSA | Employee (salary reduction) | No | No |
| HRA | Employer only | No | No |
Choosing a Model: Scenario
A healthy young insured who rarely visits doctors and wants the lowest premium with tax-advantaged savings is a strong fit for an HDHP/HSA — low premium, high deductible, and a growing tax-favored account. By contrast, a family that frequently sees out-of-network specialists and dislikes referral hurdles values a PPO, accepting a higher premium for flexibility. Matching the model to utilization and risk tolerance is exactly the suitability reasoning the exam rewards.
Which plan requires members to choose a primary care physician as a gatekeeper but ALSO allows out-of-network care at a higher cost?
An employee enrolls in Medicare Part A. What is the effect on her Health Savings Account?
Copay vs. Coinsurance
Network plans split cost differently. A copayment is a flat dollar charge per service ($30 office visit) regardless of total cost. Coinsurance is a percentage the insured pays after the deductible (20% of the bill). HMOs lean on copays and a gatekeeper PCP; PPOs use deductibles and coinsurance with in- and out-of-network tiers. Knowing that a copay is fixed and coinsurance is proportional is a recurring distinction.
POS and EPO Positioning
A POS (Point of Service) plan is a hybrid: it uses an HMO-style gatekeeper PCP but allows out-of-network care at higher cost (like a PPO). An EPO (Exclusive Provider Organization) covers only in-network providers (like an HMO) but typically does not require a PCP referral to see specialists. Ordering the four by network restriction: HMO (most restrictive, lowest cost) -> EPO -> POS -> PPO (most flexible, higher cost) helps answer comparison questions.
Which plan type covers only in-network providers but generally does NOT require a primary care physician referral to see a specialist?
HMO Service Requirements and Capitation
HMOs emphasize prepaid, managed care delivered through a network for a fixed periodic payment. Providers are often paid by capitation (a set amount per member per month regardless of services used), aligning incentives toward prevention. HMO members select a primary care physician (PCP) who acts as a gatekeeper, coordinating care and issuing referrals to specialists. Out-of-network care is generally not covered except for emergencies, which is why HMOs have the lowest premiums but the least flexibility.