HMO vs. PPO: Is One Better Than the Other?

By Fool.com

Source: Flickr userDavid Goehring

Choices are usually good, but they can be tough, especially when it comes to something as complex as your health insurance.

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For instance, figuring out if you're better off picking a health maintenance organization, or HMO, rather than a preferred provider organization, or PPO, insurance plan can be downright confusing if you don't know the key differences between the two options.

Explaining HMOsHMOs give you access to doctors and hospitals that are within a network established by the insurance company.

Those HMO networks are made up of healthcare providers who meet certain qualifications and who have agreed to provide their services at prices negotiated with the insurance company.

Typically, this means that healthcare providers participating in an HMO are paid less than they might otherwise be paid by the insurer -- a concession that doctors and hospitals are willing to make in exchange for access to a greater number of potential patients.

Since HMOs only contract with a certain number of doctors and hospitals in any one particular area and insurers won't pay for healthcare received at out-of-network providers, the biggest disadvantages of an HMO are fewer choices and higher potential costs. Other drawbacks include the need to obtain a primary care referral before seeing a specialist and possible limits on office visits, tests, and certain treatments.

In exchange for accepting those limitations, patients usually pay lower monthly insurance payment premiums, and in some cases they may not have to pay certain deductibles.

Explaining PPOsPPOs offer patients a lot more flexibility than HMOs, but it comes at a price.

Like HMOs, PPOs establish networks of doctors and other healthcare providers, but PPOs have fewer restrictions on receiving care from people or facilities that don't participate in a PPO's network.

For example, PPO insurance plans will pay for out of network visits, and a referral isn't necessary before visiting a specialist, which can mean fewer visits to your primary care physician.

However, the amount your insurance plan will pay for out of network care is likely to be less than it would pay for in-network providers, and that can lead to surprising out of pocket expenses.

Additionally, a patient's out-of-pocket share of the cost for out of network visits often doesn't count toward a patient's annual out of pocket maximum for PPOs. That means there's no limit to how much you could end up spending on out of network visits each year.

Are PPOs really more expensive?Before choosing an insurance plan, people need to consider co-pays, co-insurance, drug coverage, and other plan costs -- but a look at the average monthly premium payments for Medicare Advantage HMOs and PPOs shows that Medicare recipients will pay a lot more for a PPO's flexibility.

According to the Kaiser Family Foundation, a Medicare Advantage PPO plan costs $70 per month, or more than twice the $32 per month that it would cost to purchase a Medicare Advantage HMO plan in 2015.

Although a PPO's monthly premiums are higher for Medicare Advantage recipients, they may not be higher for people who get their insurance through the Affordable Care Act exchanges or their employers.

After reviewing plan premiums in the 36 states relying on the healthcare.gov health insurance exchange, Kaiser discovered that HMOs, in fact, were priced higher than PPOs on average.

And because employers offering PPO plans tend to pay a bit more toward the total cost of insurance than employers who offer HMO plans, an employee's average annual out-of-pocket cost for a family plan was actually less for a PPO plan than it was for an HMO plan last year.

Tying it togetherHow out-of-network care is handled is the biggest difference between an HMO and PPO, but over time, that difference is blurring as more HMOs allow for some out-of-network benefits and more PPOs decrease how much they'll pay for out-of-network visits. Because the gap between HMOs and PPOs is closing, it's becoming even more critical to consider total out of pocket expenses beyond the monthly premium -- and unfortunately, that makes choosing a plan even more confusing for consumers.

The article HMO vs. PPO: Is One Better Than the Other? originally appeared on Fool.com.

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