The key difference between an HMO and an insurer is that HMOs provide the promised coverage to the member (either directly or indirectly) while traditional insurance simply pays for care that the policyholder has obtained, after the care was rendered. In today’s world, the differences between HMOs and regular insurance can be blurry, because insurers may have restrictive practices or policy terms, or may offer financial incentives to use providers who have agreed in advance to provide care for a discounted fee.

Traditional insurance usually allowed a policyholder to obtain treatment from any medical provider. The insurer would then agree to pay a certain amount, and if that was not enough to cover the provider’s fee, the policyholder would be responsible for paying the balance. In order to cut costs, insurers began to enter into contracts with providers in advance, in which the providers agreed to accept a discounted fee in exchange for being listed in the plan’s provider network. Some plans encourage their policyholders to seek care from these “preferred providers” by paying less for care given by non-preferred providers. Some plans simply provide that there is no coverage for care outside of the plan’s network. This type of plan in some ways resembles an HMO.

Another difference between HMOs and insurance is that with HMOs a member cannot usually “self refer” to a specialist. So, if a member wakes up one morning unable to bend her elbow, she cannot make an appointment directly with an orthopedic surgeon. Rather, she must first be seen by her primary-care physician or “PCP.” If the PCP determines that the member should be seen by a specialist, the PCP will give her a “referral.” Without the referral, the plan will not pay for treatment by a specialist. Some plans require a new referral from the PCP every time care by a specialist is sought.

It depends. HMOs were designed to hold down the cost of health care, and so they tend to charge lower premiums than traditional insurers. Some HMOs can provide excellent care. But there are also many examples where HMOs have not provided the care that their members required.

One key difference between HMOs and traditional insurance is the direction in which the incentive structure points. In the simplest terms, insurance tends to create incentives for providers to provide treatment, because payments are based on the service rendered to the patient — the more services rendered, the higher the bill and the higher the payment. The downside of this incentive structure is that patients may be overtreated, which causes costs to rise and which can harm the patient.

By contrast, the incentive structure for HMOs creates incentives to withhold care. The medical group or doctor working with an HMO is paid a fixed amount each month, whether or not care is provided. Therefore the most profitable situation for the HMO is when no care is provided. When a member requires care, the group must use some of the money it has already been paid to provide that care. In many cases, the HMO structure forces the doctor to decide what care to provide to the patient when the doctor or the doctor’s group will have to pay for the care.

Another difficulty that HMO members may experience is that the providers with whom the HMO has entered into contracts may not be the most qualified providers. But part of the HMO “bargain” is that, with some exceptions, the HMO member must receive care from the providers that the HMO has contracted with. This lack of choice can mean that the patient is asked to accept whatever level of care is provided by the HMO, even if far better care is available out of network from doctors or facilities who specialize in treating the member’s condition, or who use new techniques or equipment that produce demonstrably better outcomes.

In the pursuit of profit, HMOs have negotiated ever-declining rates with their providers. As a result, many medical groups and hospitals have gone bankrupt in the last few years. Doctors are ultimately human, and may succumb to the economic incentive that the HMO structure provides to withhold care.

The kind of HMO horror stories that make the newspapers occur when the economic incentives that HMOs create to withhold care end up harming patients. For example, it was recently reported that Kaiser Permanente was facing criticism for refusing to pay for organ transplants performed at non-Kaiser facilities. Instead, it required its members to obtain their transplants at a new Kaiser hospital, where the waiting list for organs was the longest in the country.

Another common example of HMO bad faith occurs in situations where a patient is not given diagnostic tests because the “odds” are that their problem is not serious.

We are currently working on a case where an HMO member sought care from her PCP for recurring headaches. The PCP believed that the headaches were caused by anxiety, so he prescribed anti-anxiety medications and eventually referred the patient to a psychiatrist. Even after the symptoms persisted for months, the PCP refused to authorize an MRI. Finally, the patient was referred to a neurologist, who authorized the MRI, which showed that the patient had a golf-ball sized tumor behind her left eye. Had the PCP been less resistant to ordering the expensive MRI, the tumor would have been diagnosed long before it had grown so large.

This pattern is something we have seen time and again with HMOs.

It depends. HMOs are obligated by law to make medically necessary care available to their members within a reasonable time. So, if the HMO has a qualified doctor in the network, but the doctor is so busy that the member cannot obtain an appointment within a reasonable time, the HMO must provide another doctor, or pay for the member to be seen “out of plan.”