Which Plans Are Cheaper: HMOs or PPOs?

By Todd Campbell Markets Fool.com

If you're struggling to pick a health insurance plan, you're not alone. A dizzying array of health-insurance options makes it hard to decide whether your best bet is a health maintenance organization (HMO) or a preferred provider organization (PPO) plan.

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HMOs and PPOs have important differences that can influence your choice, including prices, which can be a deciding factor. Read on to discover whether a HMO or PPO plan might be right for you.

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What's an HMO?

HMOs are network insurance plans that provide you with access to doctors, hospitals, and other care providers that have agreed to work with an insurer.

In order for healthcare providers to participate in an HMO network, they must meet certain qualifications, and agree to certain terms, including pay scales that might reimburse your care at rates that are lower than those they might otherwise receive.

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Doctors and other providers agree to lower fees in hopes of gaining access to more patients. HMO networks also limit the number of healthcare providers participating in certain areas, making it less likely that their patients will switch to other providers.

Because of limited in-network providers, and restrictions on out-of-network care, choice is usually one of the biggest drawbacks cited for HMOs. HMOs often require a primary-care referral prior to visiting a specialist, and they can set annual limits on the number of office visits, tests, and certain treatments. Most importantly, they usually won't pay for treatment received out-of-network, which could be a deal-breaker for some.

What is a PPO?

Unlike HMOs, PPOs offer patients more flexibility in choosing care providers.

Like HMOs, PPOs create networks of healthcare providers, but PPOs often make patients jump through fewer hoops when they want to receive care from specialists or providers who are out-of-network.

For instance, a prior referral is often unnecessary before visiting a specialist, and out-of-network healthcare might be covered.

Therefore, PPOs can offer more patient choice. However, PPO's usually reimburse for out-of-network care at patient-unfriendly levels, and a patient's share of out-of-network costs might not count toward the annual out-of-pocket maximum.

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Are HMOs or PPOs more expensive?

Patient cost-sharing has been increasing for years, and that makes it important to consider co-pays, coinsurance levels, and drug costs when comparing plans.

In terms of plan premiums, PPOs are typically more expensive than HMOs.

A recent survey by the Kaiser Family Foundation found that Medicare Advantage consumers pay more per month for PPOs than HMOs. In 2016, the average monthly premium for a Medicare Advantage PPO (not weighted by enrollment) has been $75 per month. That's significantly higher than the average $39-per-month premium paid for a Medicare Advantage HMO plan.

PPO plans usually cost more than HMO plans when they're bought through employers, too.

In a separate survey this year, the Kaiser Family Foundation found that the average annual cost of an employer-sponsored PPO plan is $6,800 and the average cost of an HMO plan is $6,576, both for singles. Family coverage averages $19,003 for PPOs and $17,978 for HMOs.

Things to consider

In terms of benefits, out-of-network care is arguably the most substantial difference between HMO plans and PPO plans. Because of that, it's important to make sure your doctor participates in an HMO before you sign up with it.

There can also be significant differences in how HMOs and PPOs reimburse for medicine. Since drug prices are negotiated with each insurer individually, the amount you could end up paying may vary widely from plan to plan. To avoid an unwelcome surprise at the pharmacy counter, always check to see if your medicines are covered before signing up with an HMO or a PPO.

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