What is the difference between “health insurance,” a “health-care service plan,” and a “health-maintenance organization (“HMO”)?

Types of health care plans

Health-care coverage generally comes in three major forms:

• Insurance plans, that are subject to the provisions of the Insurance Code and are supervised by the California Department of Insurance;

• Health-care service plans, that are subject to the provisions of the Health & Safety Code, and are supervised by the Department of Managed Health Care; and

• Self-funded plans, which are usually set up by an employer who pays the plan benefits. These plans are usually administered by a company called “third-party administrator.” Frequently, health-insurance companies will make contracts with self-funded plans to serve as the plan administrator. Self-funded plans are not subject to state regulation as a result of ERISA.

A health-care service plan is the same as an HMO. The California Health & Safety Code calls these plans “health care service plans,” while the Federal Health Maintenance Organization Act calls them HMOs. Sometimes, it makes more sense to call all these plans “health plans.”

It used to be easy to distinguish between the various kinds of plans. An “insurance” plan paid your medical bills after you incurred them. Technically, it “indemnified” you (paid you back) for the medical costs you incurred if you received health care. These plans were referred to as “indemnity plans.” Under indemnity plans, you chose your medical providers, you incurred the liability for paying them, and the plans reimbursed you. In some cases, the step of the patient paying for the treatment first and being reimbursed was skipped, and the medical provider would bill the insurer directly, and the insurer would pay the bill.

HMOs, by contrast, involved a contract in which plan enrollees agreed to receive all their care from health-care providers who were employed by the plan. They paid the plans in advance each month to be enrolled, and the plans provided all care for this price — there were no bills and nothing to reimburse. The most familiar example was the standard Kaiser plan. Members joined Kaiser, saw Kaiser doctors, and received their treatment in Kaiser hospitals.

The distinction between these kinds of plans has become blurred, however. First, many HMOs stopped actually hiring their own doctors and running their own hospitals. Rather, they would form “networks” of doctors, hospitals and other providers, by entering into contracts. The plans would pay the doctors and hospitals a fixed amount each month for each patient enrolled, and the doctor and hospital would agree to provide care for this amount. This is called a “capitated” system, because compensation to the providers is made “per capita” or “per head” enrolled in the plan.

But insurance plans also started to make establish networks of providers. They would negotiate contracts in which the providers would agree to provide care to the insurance company’s policyholders for lower rates than for patients who did not belong to a plan that had a contract with the provider. These providers were often called “preferred providers” and the plans would lower the co-payment for insureds who received care from preferred providers. Plans that offered this options were often called PPO plans (for “Preferred Provider Organizations”.)

Today, there are all manner of plans, with puzzling acronyms. Some companies, like Blue Shield, offer some plans that insured plans, and others that are health-care service plans. It can be almost impossible to tell which is which.

Which are better — HMOs or insured plans?

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.

But it should not be overlooked that because HMOs make money when they do not have to provide care, they have a direct financial incentive to keep their members healthy. Healthy members = less care = more profits. In theory, this incentive means that HMOs are more likely to encourage members to receive preventative care, such as immunizations, physicals, and disease screenings. Also, because members in HMOs are usually assigned to a particular primary-care doctor who is responsible for coordinating their care, members may benefit from having a single doctor who is familiar with their health history and needs.

Related Reading: Common Reasons Plans Deny Care and Some Options When Care is Denied

Los Angeles HMO Insurance Appeals Attorney

While much of our practice involves work we do for other lawyers, we also handle cases for people and businesses involved in disputes with their insurance companies. If you, your business, or a member of your family is involved in an insurance-related dispute, we might be able to help.

Our analysis of insurance issues is so well respected that we are sometimes consulted by insurance companies themselves. We were recently asked by a major insurer to advise it on whether to make a $17 million claim to its own insurance company.

We do not handle litigation on a high-volume, assembly-line basis, and we are therefore very selective about the cases we take. But when we do take a case, we devote considerable thought, care, and attention to it, so that it moves as quickly through the courts as the judicial system permits.

Southern California civil appeals attorney, Jeffrey I. Ehrlich, is an appellate specialist certified by the State Bar of California’s Committee on Legal Specialization.