12.2 Medical Plans: HMO, PPO, POS, EPO, HDHP/HSA

The Two Axes of Managed Care

Every managed care plan can be placed on a grid by answering two questions: Do I need a referral from a primary care physician (PCP)? and Is out-of-network care covered? Master this grid and the plan-type questions become easy.

Memory Hook: POS = HMO inside, PPO outside. It has the HMO gatekeeper but, like a PPO, will still pay something for out-of-network care if a referral is obtained.

Health Maintenance Organization (HMO)

An HMO delivers prepaid health care for a fixed monthly premium. Key exam characteristics:

• Members select a primary care physician (PCP) who acts as a gatekeeper controlling specialist referrals.
• Care is covered in-network only; out-of-network services are not paid except for true emergencies.
• Emphasis on preventive care to reduce later claims.
• Often the lowest premium of the managed care options.

HMO models you may see named: the staff model (physicians are HMO employees), the group model (HMO contracts with one large physician group), and the Independent Practice Association (IPA) model (HMO contracts with independent physicians who keep private practices).

PPO, POS, and EPO

Preferred Provider Organization (PPO): The insurer contracts with preferred providers who accept discounted fees. Members may go out-of-network but pay a higher deductible and coinsurance. No PCP and no referral are required, which is why PPOs are popular despite higher premiums.

Point-of-Service (POS): A hybrid. Members choose a PCP gatekeeper as in an HMO, but may step out of network for a higher cost-share, like a PPO, provided they obtain a referral. The cost depends on the point at which the member decides to seek care.

Exclusive Provider Organization (EPO): Covers in-network providers only, like an HMO, but does not require a PCP referral, like a PPO. An EPO is the mirror image of a POS plan.

High Deductible Health Plan (HDHP) and the HSA

An HDHP trades a lower premium for a higher deductible. To pair with a Health Savings Account (HSA), the plan must meet IRS minimums. The figures below are illustrative recent IRS thresholds and shift annually.

The HSA offers a rare triple tax advantage:

1. Contributions are tax-deductible (or pre-tax through payroll).
2. Earnings grow tax-deferred.
3. Withdrawals for qualified medical expenses are tax-free.

Additional rules tested on the exam:

• Account holders age 55 or older may add a $1,000 catch-up contribution.
• The HSA is owned by the individual and is fully portable between jobs.
• Withdrawals for non-qualified expenses before age 65 are taxed as income plus a 20% penalty; after age 65 the penalty disappears but income tax still applies.
• You may not contribute to an HSA once enrolled in Medicare.

Worked example: A 56-year-old with self-only HDHP coverage may contribute $4,300 plus the $1,000 catch-up, for $5,300 total in the illustrative year.

Choosing Among the Plans

Producers match plan type to a client's priorities. The trade-off is always between premium cost, provider freedom, and administrative friction (referrals and prior authorizations).

Related tax-favored accounts the exam contrasts with the HSA: a Flexible Spending Account (FSA) is employer-owned, generally use-it-or-lose-it, and is not tied to an HDHP. A Health Reimbursement Arrangement (HRA) is funded only by the employer and is also employer-owned. Only the HSA is individually owned and portable, which is its defining advantage.

Trap: An individual enrolled in any non-HDHP coverage, or in Medicare, may not make new HSA contributions, even though they may continue to spend an existing HSA balance tax-free on qualified expenses.

Gatekeeping, referrals, and the HMO prepaid model

The HMO is built on a prepaid, capitated model: the plan pays contracted providers a fixed amount per member, so the HMO emphasizes prevention and cost control. Members choose a primary care physician (PCP) who acts as a gatekeeper, and specialist care generally requires a referral. HMOs usually cover in-network only, except for emergencies. This gatekeeping is the single most tested HMO distinction.

Where each managed-care model lands

• PPO: no PCP or referral required; both in- and out-of-network covered, with higher cost-sharing out-of-network. Maximum flexibility, higher premium.
• POS: a hybrid — uses a PCP/gatekeeper like an HMO but allows out-of-network care (at higher cost) like a PPO.
• EPO: like a PPO with no out-of-network coverage (except emergencies), but typically no referral requirement.

Service-area and emergency rules

Managed-care plans operate within a defined service area; out-of-area non-emergency care is usually not covered, but emergency care must be covered regardless of network under ACA rules.