PPO, EPO and HMO — what is the difference?

My company is in the middle of the 2015 product development cycle.  The actuaries are getting a viable clue, the medical management folks are starting to see populations that are large enough to draw reasonable inferences, and our finance folks are seeing the money come in and out.  The project managers are cooridinating and deconflicting and reconceptualizing and MBA buzzword bingoing with everyone else right now.  We’re at the what if stage of analysis.  Can we offer a PPO for the southern tier?  Does making Mayhew Narrow an HMO and an EPO make sense?  What if we only use three provider groups in Big Urban County as a super narrow network?

Can we get the state to approve those decisions?  Last year we filed over a dozen different network and plan design configurations to our state regulators.  We only advertised and sold half of them.

So what are the differences between a Preferred Provider Organization (PPO), Exclusive Provider Organization (EPO) and Health Maintenance Organization(HMO)?  Why should you care as a buyer of health insurance and what do these differences do to an insurance company?

The biggest difference between these three types of plan organization is the amount of control and choice available.  HMO’s tend to be the most restrictive while PPO’s tend to offer the most flexibility.  All else being equal, HMO’s tend to be significantly less expensive than an equivilent PPO because choice is costly as the HMO is a medical utilization control system while the PPO has always been about minimal hassle access to anything.

The Massachusett’s state employee web page has a good explainer:

If you are in an HMO, you must use network providers… An HMO requires the selection of a Primary Care Physician (PCP) to manage your care. Referrals are usually needed…

with an EPO you must use network providers… Unlike an HMO, you do not need to select a Primary Care Physician, nor do you need to contact your PCP for referrals to specialists…

With a PPO, you receive more comprehensive benefits by using network providers… You have the option of using non-network providers… With a PPO, you do not need to select a Primary Care Physician.

Network size is fundamentally irrelevant.  An HMO can have 100,000 providers in it while a PPO can have only 3,000 providers in that network.  The difference is the control and choice restriction.

HMO’s are the most restrictive and they tend to have different payment models than PPOs.  HMO’s since they restrict choice are able to tie patients to particular providers.  Patients are supposed to go through their primary care physicians (PCP) for all care. A patient who jacks up their ankle should see their PCP first.  If the ankle is truly jacked up, the PCP will write a referral for an orthopedist and PT.  If the ankle is only slightly jacked-up, rest, ice, compression and elevation would be the course of action.

The PCP is supposed to coordinate care between the PCP, specialist, and any ancillary/hospital services a patient needs.  Some HMOs will pay the PCP a fixed fee per patient per month and all other costs come out of that fee.  This theoretically aligns the treatment incentives so that patients only get the care they need at reasonably prices.

EPOs are have softer control mechanism.  Patients are not required to have a dedicated PCP.  Patients direct their own care with the advice of their PCP.  EPOs are popular because they tend to have lower costs than PPOs but have fewer restrictions than HMOs.  Under an EPO set-up, a patient who jacks up their ankle can go to straight to an in-network orthopedist instead of going to their primary care physician.

PPOs have minimal control over patient choices.  Patients can go anywhere.  In network providers get a better deductible and co-insurance rates.  The same person with a jacked-up ankle can go see an in-network orthopedist at low co-pay and low deductible.  However, if a patient wants to go see an orthopedist two time zones away who regularly fixes running backs, the insurance company will pay some of usual and customary charges of the out of network provider.

PPOs often a significant amount of flexibility.  But since they fundamentally don’t say no to any care choice, they tend to be much more expensive.

17 replies
  1. 1
    seabe says:

    But I was told we already have lots of choice in which doctors I see, and that UHC restricts choice! I’ll just be like the lady in AFP’s ad: I refuse to believe it. I can see any doctor I want, when I want.

  2. 2
    boatboy_srq says:

    For the PPO/EPO options, it’s worth adding that a PCP is only as good as the potential for finding one still accepting a) patients and b) plan participants. A well-organized HMO (Kaiser springs immediately to mind) can guide a participant/member to a PCP without difficulty; PPOs/EPOs suffer from the well-documented deficiendies in reported-physician-participation and in assistance from the plan in helping locate and connect with PCPs. There may or may not be a dearth of GPs in the marketplace but there is a definnite disconnect between practicing GPs and availability to the market. It’s frequently more effective (as well as more cost-effective) to sign up with an HMO that can guide a participant to a GP with a practice open to new patients than to elect for more choice and find that there’s no “gatekeeper” GP/PCP available to get started.

  3. 3
    JoyfulA says:

    I’ll never sign up for an HMO because of my first knowledge of them. In Philadelphia, the first HMO sent patients wherever the cheapest service was. The newspaper reported a city man who needed three imaging studies was sent to three different locations in three different directions far out in the suburbs.

    That story is permanently imprinted in my brain and pops up every time I see “HMO.” Maybe I overempathize, seeing myself trying to find these far-flung locations while being sick enough to need the services.

  4. 4
    Richard Mayhew says:

    @JoyfulA: There are good HMOs (Kaiser, and most plans in Massachusetts) and there are some shitastic HMOs that are run by MBAs who barely passed their classes as that interrupted their coke binges.

  5. 5
    kindness says:

    Careful Richard. You can design a super narrow network but all it will take are transplant patients & other chronic conditions who have to be referred out of the network for you to toss your numbers out the window. Even when their copays are higher for out of network referrals, that still won’t cover the actual costs. If every member is healthy, it’s easy. But that is never the case.

  6. 6
    Yatsuno says:

    @Richard Mayhew: Group Health in Washington used to be craptastic. Then about ten years ago the state must have told them to knockthat shit off because their service greatly iimproved. Might have something to do with them being the preferred provider for state employees. Not sure. I have BC/BS up here which is excellent but I’m also a Fed. They cover shit well for Feds.

  7. 7
    Richard Mayhew says:

    @kindness: Narrowness or broadness of the network is fundamentally irrelevant to whether or not a plan design is HMO/EPO/PPO.

    The biggest network in my region is an HMO. It contains several world class transplant facilities, a couple of Level 1 Trauma Centers, a hyperbaric chamber for the quarry divers etc. One of the smallest networks is a PPO network.

    Size is irrelevant for the HMO-PPO distinction. It is a control function

  8. 8
    kindness says:

    @Richard Mayhew: Well I work for Kaiser and one of my area’s is Outside Referrals to the various transplant facilities we send members to.

  9. 9
    Richard Mayhew says:

    @kindness: Kaiser might have decided that sending members out of network for transplants makes more sense than building out the owned capability but Kaiser is a little different than most places as it is a fully integrated payer-provider system. Its networks are narrow to only Kaiser owned facilities and docs unless there is an extreme medical neccessity to go out of network (such as transplant)

    But at the same time, Harvard Pilgrim HMO (the #1 health plan in America according to NCQA) and TUFTS HMO #2 NCQA includes major transplant hospitals in their network. That is purely a business decision on network function and density, it is not a decision driven by plan characteristics.

  10. 10
    Don K says:

    My former employer (and source of my health insurance until I reach 65) offers four plans – three PPOs through Blue Cross/Blue Shield Michigan, and one HMO (HAP). The three PPOs differ in the deductible amount and OOP max. The HMO requires one to stay in network, but allows free choice of pretty much any hospital in SE Michigan (looking at the list, I’m not aware of any hospitals in the region that aren’t on it) for one’s network. HAP, however, pays for the expensive stuff (hospitalizations, rehab centers, durable medical equipment) 100% from the first dollar, so that’s the way my husband (diabetes and multiple sclerosis) and I (HIV and heart disease) have gone. In this case, the HMO is the expensive option in terms of the monthly premium, but it’s worth it not having to hassle with settling up with the hospital on discharge.

    Just for reference, drug copays are the same for all of the plans, and don’t count towards the deductible or OOP max. Office visit copays are the same as well, and do count towards the deductible and OOP max. As a further complication, each of the plans is divided into Standard and Preferred subplans. Standard status increases the deductibles and OOP maxes, and imposes a deductible on the HAP plan. To achieve Preferred status, you have to visit your PCP and have her/him fill out a form with questions on smoking, BMI, H1C level, blood pressure, and cholesterol, and points assigned for each. You need 75 points for Preferred (and being a non-smoker is 30, so smoking means automatic Standard).

  11. 11
    Mnemosyne says:


    Are you with Kaiser in Northern or Southern California? If it’s northern, then this is why all of your transplant patients are being sent out of network.

  12. 12
    Kay (not the front-pager) says:

    What happens if you have an HMO or EPO and are injured/become ill while traveling? I have gone with the more expensive PPO for my employee coverage because my son lives in another state and we visit fairly often. I worry that something will happen while we are out-of-area and it will be as if we have no coverage. I really should contact the various insurers offered by my employer, but since you are here… How do HMOs and EPOs handle travelers?

  13. 13
    elftx says:

    If possible can you explain what Opti-Med is? It claims it has an “assignment of benefits” and mentions finding providers within their PPO network, yet it apparently is not ACA compliant and looks to only pay a certain fee for any services provided and that is all.

    The network they provide is abysmal..only found one physician listed as being in it and they had moved out of the area 6 years ago.

    This is what my son is dealing with and unfortunately I just do not understand well enough how this works other than to think it is crap.

  14. 14
    Stella B. says:

    If you choose an HMO, it’s far more effective to establish with a PCP right away rather than waiting until you have a problem. Then, when you do have a problem,you’re in the system and everything is ready to go. It’s okay to make an appointment “to get acquainted” if you don’t need a Pap or a med refill or something.

    I worked for a big group for a long time and referrals out of the system were never a problem when they were truly needed. If you developed some sort of exotic cancer, we were happy to send you off to the fancy specialists, however, if you had some sort of common problem and you wanted to see the doctor who was so good to your sister, that might or might not have been a problem. We would occasionally contract with new doctors at patient request, if they had a good reputation, etc. We actually took adding new docs to our network really, really seriously and didn’t hesitate to bounce the ones that sucked. Heck, management even fired our own docs when they couldn’t come up to standard. In a lot of ways an HMO provides good quality assurance that patients just can’t get any other way.

  15. 15
    mclaren says:

    Let’s deconstruct ultrawealthy one-percenter Richard Mayhew’s latest post:

    My company is in the middle of the 2015 product development cycle.

    TRANSLATION: My company is trying to figure out how to strip-mine private profit from public services like Medicaid.

    The actuaries are getting a viable clue, the medical management folks are starting to see populations that are large enough to draw reasonable inferences, and our finance folks are seeing the money come in and out.

    TRANSLATION: We can privatize the profit from public health programs like Medicaid if we gin up elaborate schemes to prevent patients from going to doctors outside our network of greedy crony-capitalist physicians.

    The project managers are cooridinating and deconflicting and reconceptualizing and MBA buzzword bingoing with everyone else right now. We’re at the what if stage of analysis. Can we offer a PPO for the southern tier? Does making Mayhew Narrow an HMO and an EPO make sense? What if we only use three provider groups in Big Urban County as a super narrow network?

    TRANSLATION: Crony capitalism works! If we collude with greedy doctors and greedy hospitals and greedy medical devicemakers, we can make a killing by charging $1080 for a service like MRI that costs only $250 in France with the exact same machine.

  16. 16
    Nutella says:

    My employer plan’s type is not HMO, PPO, or EPO. It’s POS. I’m not sure what that stands for but it is amusing.

    The plan seems to be very good, as insurance plans go.

  17. 17
    yourpooruncle says:

    @mclaren: I think it was when I got to the words “Big Urban County” that my conclusion was that Richard Mayhew is postulating a hypothetical scenario based on a suppositional company. Also, Mayhew Narrow kind of jumps out at you. All in all, he provides a very accurate thumbnail sketch of the networks’ layouts and the decision-making process for both the carriers and the subscribers. He may not be as ultra-wealthy as a cursory reading of his article could imply.

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