Merritt Personal Lines Manual: The Mechanics of HMOs

Nearly 38 million members enrolled in a total of 550 HMOs in 1991 -- up from 6 million in 1976, according to the Group Health Association of America. Why would so many people join? To save money on their premiums.

HMOs were formed to control skyrocketing medical costs and provide preventative health care before members got sick. (It's a lot less expensive to pay for hypertension medication than a heart transplant, after all.)

They keep their costs down by getting hospitals, doctors and other medical personnel to join the HMO. These providers offer health care to the HMO's members in return for a pre-paid monthly charge. So, you can go to the provider as often as you need to for the same monthly premium -- plus an additional small fee (or co-payment) per office visit or per prescription. Most other medical services are fully covered by an HMO, such as hospital stays.

However, in exchange for lower premiums, you give up your freedom of choice (unless of course, your doctor is part of the HMO and listed as your primary physician). Rather than being penalized by getting less of a reimbursement, as in a PPO plan, with an HMO you'd have to pay the whole bill yourself. (Clearly, this is a strong incentive to see only providers within the HMO.) Today, many HMOs have added options to their plans which allow you to see a doctor of your choice who is out of network -- of course, this, too, will cost considerably more than a co-payment.

HMOs usually sell their plans to businesses, which offer them to employees. But these days, with the increase in the number of independent contractors, it is becoming easier to join an HMO on your own.

Federal employee benefit law passed during the 1970s requires employers who offer health care benefits to offer enrollment in an HMO as an alternative to an indemnity plan. Employers falling under this Act are those that:

• have 25 or more employees and are within the service area of a federally qualified HMO;
• are paying at least minimum wage; and
• offer a health plan to their employees.

HMOs are sometimes owned and controlled by commercial insurance companies, however, many are independently owned. Blue Cross and Blue Shield plans -- or their affiliates -- own and operate several dozen of the largest HMOs in the U.S. Other organizers of HMOs include governments, hospitals, employers, unions, consumer groups and local communities.

HMOs must operate within a specified geographical area known as the service area.

The service area must be approved by the State Department of Insurance and all members of the HMO must reside in the prescribed service area. The service area is usually a city or a part of a city and occasionally an entire state. In the later 1990s, service areas began to play a diminished role.

HMOs must be state qualified (able to provide services within a single state or states) or federally qualified (able to provide services in specified areas throughout the nation for national contracts like the United Auto Workers, Teamsters or government employees). If an HMO is federally qualified, it must also be state qualified in the states where it serves members obtained through a national contract.