Choosing Flickr User David Goehring

Source: Flickr user David Goehring

This article was updated on Dec. 15, 2016, and originally published on July 16, 2015.  

Choices are usually good, but they can be tough, especially when it comes to something as complex as your health insurance.

For instance, figuring out if you're better off picking a health maintenance organization, or HMO, rather than a preferred provider organization, or PPO, insurance plan can be downright confusing if you don't know the key differences between the two options.

Explaining HMOs

HMOs give you access to doctors and hospitals that are within a network established by the insurance company.

Those HMO networks are made up of healthcare providers who meet certain qualifications and who have agreed to provide their services at prices negotiated with the insurance company.

Typically, this means that healthcare providers participating in an HMO are paid less by the insurer than they might otherwise be paid -- a concession that doctors and hospitals are willing to make in exchange for access to more potential patients.

Since HMOs only contract with a certain number of doctors and hospitals in any one particular area, and insurers won't pay for healthcare received at out-of-network providers, the biggest disadvantages of HMOs are fewer choices and potentially, higher costs. Other drawbacks to HMOs include needing to obtain a primary care referral before seeing a specialist, and annual limits on the number of office visits, tests, and certain treatments.

In exchange for accepting the limitations of an HMO, patients usually pay lower monthly insurance payment premiums, and in some cases they may not have to pay some deductibles.

Explaining PPOs

PPOs offer patients more flexibility than HMOs, but that flexibility comes at a price.

Like HMOs, PPOs establish networks of healthcare providers, but PPOs have fewer restrictions on receiving healthcare from care providers or facilities that don't participate in their network.

For example, PPO insurance plans will pay for out of network visits, and a referral isn't necessary before visiting a specialist, which can mean fewer visits to your primary care physician.

However, the amount your insurance plan will pay for out of network care is likely to be less than it would pay for in-network care, and that can lead to surprising out of pocket expenses.

Additionally, a patient's share of costs for out of network visits often doesn't count toward a patient's annual out of pocket maximum for PPOs. That means there's no limit to how much money you could end up spending on out of network healthcare each year.

Are PPOs really more expensive?

Before choosing an insurance plan, people should consider co-pays, co-insurance, drug coverage, and other plan costs, however, a look at the average monthly premium payment for Medicare Advantage HMOs and PPOs shows that Medicare recipients can pay a lot more for a PPO's flexibility.

According to the Kaiser Family Foundation, the average Medicare Advantage regional PPO plan in 2016, unweighted by enrollment, cost $75 per month, or nearly double the $39 per month that it cost for a Medicare Advantage HMO plan. 

Although PPO monthly premiums are higher for Medicare Advantage recipients, they may not be higher for people who get their insurance through the Affordable Care Act exchanges. Premiums vary from region to region and state by state, so consumers should shop around.

Similarly, if you're getting insurance through an employer, premium rates can also vary widely; however, the Kaiser Family Foundation reports that PPOs are still typically pricier than HMOs. In 2016, the average annual cost of an employer sponsored PPO plan was $6,800, while the average cost of a HMO plan was $6,576. 

Tying it together

How out-of-network care is handled is the biggest difference between an HMO and PPO, but over time, that difference is blurring as more HMOs allow for some out-of-network benefits, and more PPOs decrease how much they'll pay for out-of-network visits. Because the gap between HMOs and PPOs is closing, it's becoming even more critical to consider total out of pocket expenses beyond monthly premiums -- and unfortunately, that makes choosing a plan even more confusing for consumers. 

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