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The Health Maintenance Organization (HMO)

The Health Maintenance Organization (HMO)

Objectives After completing this module, you will be able to: summarize the key elements of HMO membership and benefits, describe HMO network arrangements, explain how HMOs are paid and pay their providers, and discuss utilization management and quality management in HMOs. A health maintenance organization (HMO) is a health plan that assumes or shares both the financial risks and the delivery risks associated with providing comprehensive medical services to a voluntarily enrolled population in a particular geographic area, usually in return for a fixed, prepaid fee. In other words, an HMO arranges for the delivery of medical care and provides, or shares in providing, the financing of that medical care. An HMO may be owned or sponsored by many different types of organizations and may be for-profit or not-for-profit. Historically, HMOs were called prepaid group practices, although they were formed as corporations. The laws of most states require an HMO to be organized as a corporation rather than a partnership or other legal entity. Most HMOs must be licensed in the states in which they are incorporated, and they must comply with statutory requirements for HMOs in each state in which they do business.

Background
Although predecessors to HMOs have been in existence for over 70 years, HMOs became popular during the 1970s as a result of federal legislation. The HMO Act of 1973 removed many of the market barriers that constrained the development of HMOs. The Act and its amendments also established requirements that an HMO could voluntarily meet to become federally qualified. Federal qualification preempted the application of certain state laws to HMOs. To be federally qualified, an HMO could not exclude preexisting conditions and had to offer the following: healthcare delivery in a geographic service area, both basic and supplemental healthcare services, and voluntary membership to an enrolled population. The Act also required dual choice in employer-sponsored health plans, which we discussed previously. Many HMOs pursued federal qualification because it gave them access to employers in their markets. Federal financial assistance, in the form of grants and loans, was made available from 1973 until 1981.

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The Health Maintenance Organization (HMO)

In 1995 federal law eliminated the dual choice requirement, and because of this change and the discontinuation of federal grants, HMOs now have fewer incentives to become federally qualified. However, federal qualification is still important for Medicare and large employer contracts. HMOs are heavily regulated at both the federal and state levels to ensure solvency and member access to quality medical care. An HMO may have to have a license as an HMO or insurance company (called a certificate of authority or COA) in each state in which it conducts business. Most HMOs are subject to state enabling statutes and the requirements of various state health departments or state departments of insurance.

Characteristics of HMOs
The following are key characteristics of HMO operation, organization, and provision of healthcare and insurance coverage: tight relationships with providers, an emphasis on the role of primary care providers (PCPs), the utilization of a referral management process, an emphasis on prevention and wellness, and often, an integration of insurance and the provision of healthcare services. These characteristics enable an HMO to provide access to quality, affordable care through a coordinated system. One measure of an HMOs quality is its accreditation by independent accrediting agencies such as NCQA (the National Committee for Quality Assurance). Employers and other purchasers and payors of healthcare benefits normally consult these agencies as part of their health plan selection process. What do employers consider in evaluating and selecting HMOs? Access to care, cost, and member satisfaction are almost always important. Most employers also take into account the financial strength of an HMO, the reputation of its networks, and the ease of doing business with it. Many also consider such things as care outcomes, the focus on prevention and wellness, NCQA accreditation, historic cost trends, the ability to approve health status, physician turnover, physician credentialing, and Healthcare Effectiveness Data and Information Set (HEDIS) reports.

Membership and Enrollment


Most commonly a person becomes a member of an HMO by enrolling in an employersponsored group plan. Under such a plan, a member has no contractual relationship with the HMO; the contract is between the HMO and the employer. But individuals may also join an HMO on their own, and this is a growing market for HMOs. These persons contract directly with the HMO and receive benefits on an individual basis. Members of an HMO include both subscribers (who are eligible to enroll directly) and their dependents (whose eligibility is contingent on that of the subscriber).

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The Health Maintenance Organization (HMO)

Traditionally HMOs were marketed to employer groups with more than 100 employees. But today HMOs serve large groups, small groups, and individuals. Members range from the very young to the very old, and from the very healthy to the chronically ill. Many Medicare and Medicaid beneficiaries join HMOs. Employers sponsoring HMOs usually have an annual open enrollment period, usually 30 days, during which employees select their healthcare coverage. During this period the HMO automatically accepts those employees who wish to enroll or to switch to the HMO from another plan offered by the employer. Employers and HMOs also allow new employees to enroll during an initial enrollment period. Federally qualified HMOs and some state-licensed HMOs must cover preexisting conditions for all eligible employees and dependents who enroll during their initial enrollment period. However, under the Affordable Care Act (ACA, commonly called healthcare reform), all health plans (not just some HMOs) will have to cover preexisting conditions (effective 2014).

Benefits
HMOs provide comprehensive medical benefits. By law federally qualified HMOs must provide a stipulated minimum set of benefits, and some states require HMOs to offer certain benefits to meet licensing requirements. In addition to medical coverage, most HMOs cover special services and products such as vision care, dental care, mental healthcare, and prescription drugs. HMOs typically require lower member cost-sharing than other plan types. HMOs historically have focused on preventive care and wellness. While they also rely on disease management and other approaches to controlling costs, they recognize that prevention is the best method of healthcare cost containment. The preventive care programs of HMOs are typically extensive. Routine physical examinations, 24-hour telephone access to a nurse, prenatal care, well-baby care, and childhood immunizations are common preventive care services offered. And because HMOs strongly emphasize prevention, these services are often covered in full, although a small copayment for an office visit may be charged. (However, under ACA, as of 2014 most health plans will no longer be allowed to charge cost-sharing for preventive services.) HMOs may also provide members with medical information through seminars, newsletters, and self-help medical booklets. HMOs often give their members access to wellness programs, such as for smoking cessation, weight management, and stress management. Some HMOs contract with local health clubs to make exercise facilities and equipment available and affordable to members. By offering a comprehensive set of benefits, an HMO promotes comprehensive care. And by coordinating care across various areas, an HMO ensures that its members receive quality, cost-effective, and appropriate medical care on a timely basis. An HMO also provides convenient, usually local, access to preventive care without significant financial cost.

Networks
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The Health Maintenance Organization (HMO)

HMOs deliver comprehensive medical care to their members by entering into negotiated contracts with providers to form a network. Alternatively, an HMO may own the facilities and employ the physicians in its network. The network providers, including physicians, hospitals, and ancillary service providers, deliver medical care to HMO members in exchange for negotiated compensation. Unlike the financing of healthcare, which may be conducted on a national or regional basis, the delivery of healthcare is primarily local. Providing members with convenient, local access to an HMOs provider network is therefore critical to the relationship between the HMO and employers and other purchasers or payors. Some HMOs operate in only one geographic region, but others are national organizations that own or sponsor separate HMOs in different regions. In building and maintaining a provider network, an HMO considers the following: AccessHow many and what types of providers are needed? In what locations within the service area? CredentialingWhat credentials should be required and verified? How often should recredentialing and peer reviews be conducted? Contractual relationshipsShould the HMO own facilities or contract for their use? Should it employ providers or contract for their services? How should providers be compensated (for example, salary, capitation, discounted fee-forservice)? By contracting with specific providers to deliver care, an HMO seeks to increase quality control over medical care and decrease costs. Let us now examine the relationships between an HMO and the three key provider groups: physicians, hospitals, and ancillary service providers. Physicians The relationship between an HMO and its participating physicians is a contractual one, either direct employment or an independent contractor arrangement. As noted earlier, to establish a network that provides members with adequate access to medical care, an HMO must contract with sufficient numbers and types of physicians. An HMO determines the number of primary care and specialty care physicians needed in its network in part by considering the size and location of the geographic service area, criteria for network adequacy, the medical needs of its members, and employer or other purchaser requirements, including provider education, board certification, and work history. Before an HMO contracts with a physician, the HMO first verifies his or her credentials. After becoming part of the network, the physician is subject to recredentialing and ongoing peer review. Credentialing, recredentialing, and peer review enable an HMO to establish and maintain quality standards of clinical competence, professional conduct, and practice management. The Role of Primary Care Providers

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The Health Maintenance Organization (HMO)

Most HMOs require their members to select a primary care provider (PCP) from the HMOs network. Recall that a PCP is usually an internal medicine or family medicine practitioner for adults and a pediatrician for children. Some HMOs also utilize nurse practitioners or physician assistants in the primary care function. In addition to providing primary care services, in HMOs the PCP serves as the members point of entry into the healthcare system. Usually to see a specialist an HMO member must obtain a referral from her PCP. But some HMOs allow members with specified conditions to contact certain specialists such as obstetricians directly instead of going through the PCP first.

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The Health Maintenance Organization (HMO)

Out-of-Network Services Traditionally, an HMO did not cover medical care obtained outside its provider network. However, in response to member requests for greater provider choice and timely access to quality medical care, many HMOs now offer options, such as a point-of-service (POS) product, in which members may choose out-of-network providers, usually at a higher cost to the member. Some of these HMOs require members to obtain a referral and/or prior authorization to obtain coverage for out-of-network services. Hospitals HMOs negotiate contracts with hospitals and other inpatient facilities to provide medical services to their members. Again, the issues of access, credentialing, and contractual arrangement cited above come into play. Accreditation by The Joint Commission (TJC, formerly the Joint Commission on Accreditation of Healthcare Organizations or JCAHO) and verification of the existence of a state license are typically minimum requirements for a hospital to participate in an HMO network. Other factors that an HMO considers in contracting with hospitals include the level and cost of hospital services, the quality of the physicians on the hospitals medical staff, the type of specialty facilities and services offered by the hospital, and member access within a geographic area. Ancillary Service Providers An HMO also contracts with ancillary service providers. Ancillary services are auxiliary or supplemental services that support the diagnosis and treatment of a patients condition. They include laboratory, radiology, and other diagnostic services; home health care; and physical and occupational therapy. An HMO contracts with the appropriate number and types of ancillary service providers so that its provider network includes the healthcare services that are commonly needed by plan members. An HMO may provide some ancillary services, such as laboratory services, in the facility where its PCPs see plan members. Other ancillary services are provided at separate facilities. Ancillary service providers must provide adequate access to their services and participate in an HMOs quality management program. In a typical HMO, a PCP refers a member to ancillary providers for all services covered by the plan. And for certain ancillary services, such as physical or occupational therapy, an HMO may require a member to obtain prior approval from her PCP to continue the therapy beyond a specified number of treatments. Some HMOs use a specialty care provider for mental health and chemical dependency services. These specialists may be psychologists and social workers who complete initial assessments and conduct referrals to specified facilities.

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The Health Maintenance Organization (HMO)

Financing
Now lets look at how an HMO finances healthcare. We will examine first how an HMO is paid for providing healthcare by its members, sponsoring employers, and other payors (prepaid care), and then how the HMO pays its providers for delivering that care (provider compensation). Prepaid Care An HMO usually has a prepaid care arrangement. Typically a monthly premium of a fixed amount is paid in advance of delivery of care. This premium may be paid by members, sponsoring employers, other payors such as the government, or a combination. The premium generally covers most healthcare services that a member might need, no matter how many services the member uses or how often. Although HMOs typically do not have deductibles or coinsurance, they usually have small copayments for some services. For instance, an HMO may require its members to pay a $10 or $15 copayment for each doctors office visit or prescription or $50 for an emergency room visit. Provider Compensation An HMO negotiates compensation arrangements with its providers, and there are a variety of reimbursement methods. Compensation arrangements are one of the features that distinguish the various HMO models from one another. Lets look at the compensation arrangements typically used with physicians, hospitals, and ancillary service providers. Physicians Typical compensation arrangements for physicians include capitation, several forms of fee-for-service (FFS), and salary. Capitation is widely used for primary care providers. To gain the active involvement of PCPs in risk-sharing and utilization management, many HMOs use withholds or risk pools for nonprimary care. An HMO may have a risk pool for each broad category of care (such as specialty care, inpatient care, and others), with the risk-sharing and reward-sharing arrangements usually differing among these pools. In some HMOs physicians are employees and are paid a salary. Salaried physicians expect to earn an income, including benefits, equivalent to that available in the local market. Benefits that may be considered in physician contract negotiations include: salary, short-term sick leave, vacation leave, profit-sharing plans, retirement plans, professional dues and membership fees, reimbursed business-related expenses, disability income insurance, malpractice insurance, and life and health insurance. Nonfinancial benefits available to salaried physicians include access to patients and may include time off for research or volunteer work, compensatory time, and limitations on on-call time or total weekly or monthly work hours. Hospitals

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The Health Maintenance Organization (HMO)

HMOs reimburse hospitals in several ways, including FFS, discounted FFS, DiagnosisRelated Groups (DRGs), per diem rates, and capitation. Often included in the compensation agreement between an HMO and a hospital are financial incentives such as service bonuses, quality bonuses, and risk pools. Sometimes HMOs use financial disincentives when providers exceed utilization goals. Hospitals that are reimbursed under capitation or DRGs (as well as physicians who are capitated) may negotiate a stop-loss provision in their HMO contracts. This specifies that, once a providers total costs have reached a certain level, additional costs will be reimbursed under a different payment method, such as discounted FFS. Factors that determine an HMOs compensation arrangements with hospitals include state laws and regulations, market competition, hospital ownership of the HMO, and the level of predictability, supported by valid data, associated with hospital utilization. Ancillary Service Providers Compensation arrangements for ancillary service providers include capitation and discounted FFS. For discrete services such as diagnostic testing, capitation may be best; for more open-ended services, such as home health care and hospice care, a combination of capitation and discounted FFS fees may be more appropriate. Capitation enables an HMO to share risk with providers and to manage costs. In exchange for accepting capitation, ancillary service providers receive a large referral base and a stable income flow.

Utilization and Quality Management


Utilization Management An HMO manages physician utilization through capitation, risk pools, and physician practice guidelines. These techniques shift part of the utilization management function to providers. To manage member utilization of healthcare services, HMOs use referral management (monitoring specialist referrals), copayments, and alternatives to emergency care, such as nurse advice lines and subacute clinics. For utilization management in a hospital setting, HMOs employ precertification for inpatient hospitalization, concurrent and retrospective reviews of admissions, inpatient utilization review, discharge planning and readmission prevention (including posthospitalization follow-up), and case management. A key to ensuring efficient and appropriate utilization and quality care is informationsharing among PCPs and other providers within an HMO. Federal regulations may require HMOs to adhere to certain utilization standards. For example, an HMO that enrolls Medicare or Medicaid beneficiaries must comply with the utilization management requirements set forth by the federal Centers for Medicare and Medicaid Services (CMS). Accreditation organizations and state enabling statutes may also require an HMO to provide evidence of its utilization management program.

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The Health Maintenance Organization (HMO)

Under ACA, as of 2012 there will be another potential role for HMO-like organizations in the Medicare program. Accountable care organizations (ACOs) that voluntarily meet quality thresholds will share in the cost savings they achieve for Medicare. ACOs are similar to HMOs because they focus on narrow provider networks to incentivize quality outcomes. To qualify as an ACO, organizations must meet accountability standards related to overall care of Medicare beneficiaries, define evidence-based medicine, have adequate PCP participation, and report on their quality and cost outcomes. Quality Management HMOs use many quality management techniques. These include credentialing, recredentialing, and peer review for PCPs and specialists; accreditation standards for hospitals and ancillary services providers; and accreditation standards for the HMO itself. Because HMOs were among the first health plans, they are subject to strict regulation in regard to quality standards at both the state and federal levels. State enabling statutes require HMOs to submit evidence of a quality assurance program as part of the state licensing process. HMOs that enroll Medicare and Medicaid beneficiaries must comply with CMS quality assurance requirements (and Medicaid requirements vary by state.) Employers also review an HMOs accreditation status and its HEDIS measures to evaluate plan quality. Upcoming modules discuss utilization management and quality management in greater depth.

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