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Health maintenance organizations (HMOs) are the most common type of managed healthcare programs. HMOs enroll members who pay fees and receive medical care from participating physicians, hospitals, pharmacies, and other healthcare providers.


HMOs are a type of managed healthcare organization that first started in the 1930s. They began to gain in popularity in the mid 1970s, especially among employers who offered healthcare plans to employees. They started to replace tradition insurance plans because HMOs generally cost employers less money. Traditional insurance plans pay a part of a member's healthcare costs either by paying the healthcare provider directly or by reimbursing the patient. Insurance plan members are generally free to choose their own doctors, hospitals, and other medical providers and services. Also, healthcare decisions are generally left to the healthcare practitioners, such as what type of treatment to provide and what medicines to prescribe. Managed care organizations, especially HMOs, operate differently. An HMO enters into a contract with specific physicians, groups of physicians, hospitals, pharmacies, and other healthcare providers who together form a provider network. HMO members receive health care at discounted rates in exchange for paying a monthly premium. Most HMO plans also require members to pay an annual deductible and co-payments (co-pays) for services. HMOs originally were appealing to doctors, hospitals, and other healthcare providers because they were guaranteed a constant stream of patient referrals from HMOs. The disadvantage was that HMOs either contracted for health care at a group rate, so doctors and hospitals received an annual lump sum regardless of the number of HMO patients they saw or paid a low flat fee per member seen. To maintain their income levels, many doctors had to see more patients in a day, thus reducing the amount of time spent with each patient. Some critics of managed care refer to it as assembly-line health care.

There are disadvantages to HMO plans compared to traditional insurance plans. HMO members can only see providers that are in the HMO network. Members select a primary care physician (PCP) who is usually a family practice doctor, general practitioner, or internist. The PCP coordinates and arranges all aspects of the patient's medical care. In order to see a specialist, such as a cardiologist, endocrinologist, or oncologist, an HMO member must be referred by their PCP to the specialist, who must be part of the HMO network. HMOs are the most restrictive type of healthcare plan because their members have the least choices in selecting healthcare providers. However, HMOs generally provide members with a greater range of healthcare benefits for lower costs to members, such as low co-pays, which often have to be paid to the provider at the time of service.

Types of HMOs

As of 2006, an estimated 77.7 million Americans were enrolled in an HMO, according to the National Center for Health Statistics (NCHS). California had the highest number of HMO members with 17.1 million, followed by New York with 6.5 million, and Florida with 4.8 million. California, New York, Pennsylvania, and Texas showed slight drops in the number of residents enrolled in HMOs in 2006 compared to 2005 whereas Florida showed an increase. HMO member costs vary widely, with higher costs generally associated with increased services. Since 1988, HMO annual rate increases have averaged between 18% to a 1% decrease. Overall rate increases for 2007 were projected to be between 6% and 12%, according to the NCHS.

There are five types of HMOs. They are:

  • Group model HMO—An HMO that contracts with a single multi-specialty medical group to provide healthcare services to the HMO members. The group practice may work exclusively with the HMO or may provide services to non-HMO members as well. The HMO pays the medical group a negotiated per capita rate, which the group distributes among its physicians, who are usually employed on a salaried basis.
  • Staff model HMO—A type of HMO whose members can receive services only through a limited number of providers, in which physicians are employees of the HMO. The physicians see patients in an HMO-owned facility.
  • Network model HMO—An HMO that contracts with multiple physician groups to provide services to HMO members.
  • Individual practice association—A type of healthcare provider organization composed of a group of independently practicing physicians who maintain their own offices and who contract their services to HMOs, other managed care plans, and insurance companies. The physicians' groups can provide services to HMO members and non-HMO patients.
  • Mixed HMO—An HMO that combines features of more than one HMO model.

A Medicare HMO is an HMO that has contracted with the federal government under the Medicare Advantage Program to provide healthcare benefits to persons eligible for Medicare who opt to enroll in the HMO instead of receiving their benefits through the traditional Medicare program. Medicare primarily serves Americans aged 65 and older and Americans on federal disability.


Since the mid-1990s, there have been an increasing number of physicians and physician groups—especially specialists—who refuse to associate with an HMO or any managed care organization, primarily because of dissatisfaction in the amount of money that HMOs pay healthcare providers. This pattern is especially evident among younger physicians, several surveys have shown.

Privately insured adults consistently give high ratings to their own health plans. However, people in managed care plans , such as HMOs, give their plans lower ratings, according to a Kaiser Family Foundation report. The report found that a majority of HMO members believe managed care has decreased their access to specialists, decreased the amount of time doctors spend with patients, and decreased the overall quality of care sick patients receive. Also, 60% of adults surveyed said managed care and HMOs had not resulted in significant reductions in the cost of health care for them. The only positive response the report found was of increased access to preventive healthcare services.


Cardiologist —A physician who specializes in cardiovascular (heart) conditions.

Endocrinologist —A physician who specializes in diseases of the endocrine (gland) system, including diabetes and thyroid conditions.

Managed care —Health plans that coordinate a member's health care through a network of healthcare providers that participate in a specific plan, such as a health maintenance organization (HMO).

Oncologist —A physician who specializes in cancer treatment.

Primary care physician —A family practice doctor or general practitioner who diagnoses and treats a variety of conditions and who refers patients to a specialist when appropriate.

In one survey of nearly 30,000 physicians in the United States, about 70% said they opposed managed care programs and 75% said they were frustrated by HMO bureaucrats who were making healthcare decisions instead of doctors, which interfered with physicians' practice of medicine. The study found five major areas of dissatisfaction from physicians about managed care and HMOs: financial reimbursement, administration, limits on patient care, policies that reflect poor quality of care, and support for doctors' medical decisions. The survey was conducted by the MEDSTAT Group and J. D. Powers and Associates.

A controversy arose in 2007 when an HMO lobbying group supported legislation in the California State Assembly that would legalize assisted suicide . CAPG is composed of large pharmaceutical companies, including GlaxoSmithKline, Merck, and Pfizer, and large HMOs, including Northern and Southern Permanente Medical Groups, Sutter Medical Groups, and Sharp Medical Groups. Opponents of the California measure said HMOs were putting profit ahead of people's lives. Randy Thomasson, president of Campaign for Children and Families, a pro-life organization, was quoted as saying, “Because HMOs are the controlling force for so many physicians, it's inevitable that hospitals and hospices would soon view patients as more expensive alive than dead.” (His remarks appeared on the Religious Tolerance Web site, http:/ The California bill, AB 374, died in the State Assembly on February 4, 2008.



Coombs, Jan Gregoire. The Rise and Fall of HMOs: An American Health Care Revolution. Madison: University of Wisconsin Press, 2005.

Mars-Proietti, Laura, and Richard Gottlieb, eds. HMO/PPO Directory 2008. Millerton, NY: Sedgwick Press, 2007.


Chan, Gilbert. “Annual California Review Finds Dramatic Variation in HMO Quality.” Knight Ridder/Tribune Business News(September 28, 2006): N/A.

Gillies, Robin R., et al. “The Impact of Health Plan Delivery System Organization on Clinical Quality and Patient Satisfaction.” Health Services Research(August 2006): 1181(19).

Lê Cook, Benjamin. “Effect of Medicaid Managed Care on Racial Disparities in Health Care Access.” Health Services Research (February 2007): 124(22).

Lee, Jaimy. “Kaiser, Health Net Rank at the Top on HMO Report Card.” San Diego Business Journal (October 29, 2007): 11.

Walker, Tracey. “HMO Pharmacy Co-pay Comparison.” Managed Healthcare Executive (July 2007): 38.

Walker, Tracey. “Top 20 States by HMO Enrollment.” Managed Healthcare Executive (August 2007): 42.


America's Health Insurance Plans, 601 Pennsylvania Ave. NW, Washington, DC, 20004, (202) 778-3200, (202) 331-7487, [email protected],

California Association of Physician Groups, 915 Wilshire Blvd., Suite 1620, Los Angeles, CA, 90017, (213) 624 2274, [email protected],

Ken R. Wells