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What is an HMO?

By Brendan McGuigan
Updated Mar 03, 2024
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A health maintenance organization (HMO) is a specific type of healthcare plan in the United States. Unlike traditional healthcare coverage, a health maintenance organization sets out guidelines under which doctors can operate and restrictions for which healthcare professionals the patients can use. On average, healthcare coverage through the use of an HMO costs less than comparable traditional health insurance, with a trade-off of limitations on the range of treatments that are available.


The HMO has its roots in the early 20th century, when businesses began offering their employees prepaid medical programs under which their care was looked after as long as it fell within the scope of allowed procedures. This type of coverage did well throughout the mid-part of the 20th century, until its use began to decline in the late 1960s and early 1970s. In 1973, the U.S. Department of Health and Human Services passed the Health Maintenance Organization Act, which encouraged and sometimes required certain businesses to include HMOs among the healthcare options that they offered to their employees.

Costs for the Patient

Patients who are part of health maintenance organizations do incur certain costs in addition to the insurance premiums that they pay. They usually must pay small co-pays when they utilize certain services. In addition, if a patient chooses to use a healthcare provider or specialist who has not contracted with the HMO — an "out-of-network" provider instead of an "in-network" provider — the patient must pay the entire cost himself or herself.

Reduced Prices

The ways in which a health maintenance organization is able to offer cheaper healthcare are twofold. First, by contracting with specific healthcare providers and dealing with large quantities of patients, an HMO is able to negotiate lower prices than the patients would otherwise have to pay. Secondly, by eliminating insurance coverage for treatments that the HMO views as unnecessary and focusing on preventative healthcare with an eye toward the long-term health of its members, the HMO is able to reduce its own costs.

Using the Plan

When a person joins a health maintenance organization, he or she usually is asked to choose a primary care physician (PCP). This doctor then acts in part as the HMO's agent in determining which treatments the patient needs. When the primary care physician determines that the patient needs care that the PCP cannot offer, he or she will refer the patient to a specialist who can fulfill the patient's healthcare needs. For example, a patient who is experiencing chronic foot pain might be referred to a podiatrist, or a patient who has recurring chest pains might be referred to a heart health specialist. Emergency visits are exempt from this referral limitation, of course, and in many cases, women are able to choose their own obstetrician/gynecologist (OB/GYN).

Pros and Cons

The long-term benefits of health maintenance organizations are the subject of much debate. Proponents point out that HMOs offer low-cost healthcare to people who otherwise might be without health insurance. Critics argue that because restrictions are placed on treatments and doctors are encouraged to avoid referring patients whenever possible, the result is that many serious illnesses and medical conditions go untreated.

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Discussion Comments

By anon331912 — On Apr 25, 2013

I do not subscribe to HMOs as they do not pay for the best treatment. Though the company I work for pays a monthly fee to the so called healthcare provider, I have not used the hospital in the last four year. I seek for the best treatment for myself and family by paying with my money.

By anon309968 — On Dec 19, 2012

@Post 28: No, most health insurance companies offer an HMO option. There are Medicare, Medicaid and Private HMOs.

By anon282668 — On Jul 31, 2012

@Post 29: here is the answer:

Conversation between John Ehrlichman and Richard Nixon on Feb. 17, 1971 on magnetic tapes:

Ehrlichman: “We have now narrowed down the Vice President’s problems on this thing to one issue and that is whether we should include these Health Maintenance Organizations like Edgar Kaiser's Permanente thing.”

Nixon: “Now let me ask you -- you know I’m not keen on any of these damn medical programs.”

Ehrlichman: “This is a private enterprise one.”

Nixon: “Well, that appeals to me.”

Ehrlichman: “Edgar Kaiser is running his Permanente deal for profit, and the reason he can do it, I had Edgar Kaiser come in and talk to me about this. And I went into it in some depth. All the incentives are towards less medical care, because the less care they give them, the more money they make.”

Nixon: “Fine.”

Ehrlichman: “And the incentives run the right way”

Nixon: “Not bad.”

By anon256885 — On Mar 23, 2012

How does an HMO maximize the delivery of health care services to covered members?

By anon244332 — On Jan 31, 2012

Why do hmo's even exist? They are money hungry criminals who should be thrown in jail for life! Occupy please continue to occupy hmo! These hungry fools are living large off of dying people in need!

By anon173551 — On May 07, 2011

Do you have to be on Medicare to be on an HMO?

By anon162534 — On Mar 23, 2011

According to the California Patient's Guide, patients have the right to receive continuous care from your doctor and HMO. Patients also have the right to be referred to other health care providers, get a second opinion, and receive an authorization within three days from the insurance company for a referral to a specialist.

Patients also have the right to have their medical treatment options discussed with by them by a doctor, without any kind of interference or restrictions. For those of you who are having issues. hope it helps

By anon149509 — On Feb 04, 2011

Health Maintenance Organizations (HMO) charge high monthly premiums while forcing individuals to go to a doctor they contract with. If the individual goes to a non-contracted doctor, they are denied that care/treatment then left to pay for everything on top of their premium.

When an insurance company decides what is needed and what isn't that is considered rationed care! HMO's prey on elder people because they can get kick backs from the government for getting them off Medicare. If this was any other business it would be considered illegal. The health industry has been bullied by these insurance companies/HMO's and they are who has ruined our health care system.

Get rid of the insurance red tape and you are left with an amazing system that works better than any other country and has until insurance started dictating care. HMO's make money from all of the members paying their premiums and then not paying their claims. HMO's bring in more than they pay out! A one payer system and obamacare would work similar to HMO's! It's your health do the research!

By anon134967 — On Dec 16, 2010

"Ignorance is not an excuse, it is ignorance." Yes but when there are so many variables it does get confusing. And false advertising plays a part as well. Most people are working full-time jobs and have family obligations and just don't have the time to be a health "detective" to figure all of these things out.

Of course, if one digs deeper, he/she will find out that the whole industry is a scam anyway. It's not meant to help people. It's meant to ignore them and make money. Compared to many countries, we're actually at the bottom of the list as far as health care goes. The U.S. is supposed to be the best country in the world but it sure doesn't seem that way today.

Some "third world" countries have a better system as far as health care - no waiting, suffering, dying, no ridiculously expensive medications, etc etc. Why is that?

By anon100131 — On Jul 28, 2010

I work for the state of Michigan, in particular with low-income Medicaid recipients. When our office of personnel continued to raise our premiums, I switched to a HMO to save money.

This HMO requires surgery at another hospital out of my town, has limited the amount of supplies for sleep apnea, and has delayed any medical procedure for one to two months, since I began with them.

People on Medicaid seem to be able to move from doctor to doctor, have breast reductions and stomach tucks, and have mountains of pain medications with no oversight?

I admit that I previously had two BCBS coverage and ended up with medical malpractice anyway. What is wrong with this country? Is it going to change?

By anon92152 — On Jun 26, 2010

Could someone please explain to me what an HMO CO45 (Charges exceed your contracted/legis.) means?

By anon75684 — On Apr 07, 2010

who started the HMO Plan first?

By anon69999 — On Mar 11, 2010

Simple question? Why is it that an HMO wants to fight on nearly everything on prescription drugs. Delay after delay, month after month. Is anyone at HMO caring or sensitive. Is there an advocate somewhere who can help, instead of being stubborn and uncaring. A good human being would be nice. People are hurting and dying. Is anyone listening?

By anon66578 — On Feb 20, 2010

HMO's require one to accept their choice of providers. Many would prefer to obtain their doctor, hospital, scrips etc. from those sources recommended by relatives, personal experience or just cause they don't like being held to corporate requirements limiting their selection.

All of you praying for Obamacare hold up your pc.

By anon65380 — On Feb 12, 2010

what are the HMO members that are accredited by DOH?

By anon49536 — On Oct 21, 2009

HMO's are a covered benefit which pays for all your medical 100 percent. Some HMO's now are making subscriber pay a portion. That is not what an HMO is.

By anon42669 — On Aug 23, 2009

what is the definition of an exclusio?

By anon42159 — On Aug 19, 2009

Why is there no mention that HMOs receive large monthly payments that vary by county from Medicare for each person in the HMO? Any one should realize that their health care cannot be covered by the small monthly premium that they pay to the HMO.

By anon41294 — On Aug 14, 2009

HMO are health misery organizations who make large profits and ration care.

By anon38129 — On Jul 23, 2009

Hmo's have diluted the delivery of health care. The physicians are usully second rate physciains who could not make it on their own or have other problems. They are encouraged and sometimes rewarded for keeping people out of the hospital and not doing the appropriate tests to evaluate patients. Many HMO physicians are forced to see a certain number of patients in a very limited time which means they spend as little time as they have to with each patient. HMO medicine is a second level of medicine and patients need to be aware of that. Many people are forced into HMO's because of cost. You get what you pay for. --Drydoc

By anon37926 — On Jul 22, 2009

i don't understand what an HMO is. Can someone please "dumb" it down for me? whats the positives and negatives of HMO's? can someone simply list them without their opinion? please?

By anon31415 — On May 05, 2009

Do we foresee HMO accepting and recognizing Medical Tourism as it brings down their cost?

By anon30229 — On Apr 15, 2009

HMO, as far as I understand it, is a company that maintains organization for the health care providers. They are not providers themselves.

By co840 — On Dec 26, 2008

An HMO is a provider of health care services. As with any health care provider, its expenses are those of providing health care - medical and administrative. As it is a member organization, it's income is derived from member payments. You will find no literature that states payments to an HMO are premiums. Effectively, an HMO is a prepaid medical plan. I suspect that many HMOs purchase insurance to cover annual expenses that significantly exceed their expected expenses. By purchasing insurance, it doesn't make them insurance companies. Just because an organization operates using a mechanism that mirrors the insurance mechanism, that doesn't make it an insurance company unless it is incorporated as one.

In regard to the comment by anon21056 about the Supreme Court, that court can no more make an HMO an insurance company than it can make a cucumber an apple. Functioning like an insurer does not create insurance. I think that jicama tastes like fresh sugar snap peas, that doesn't mean it is sugar snap peas. The court did not state HMOs are insurers or insurance companies.

By anon23359 — On Dec 22, 2008

How does it impact on finance?

By anon21056 — On Nov 09, 2008


While you may think there is a "significant difference" between health insurance and health care providers, the United States Supreme Court disagrees. According to the Court in Rush v. Moran, an HMO "provides health care, and does so as an insurer." An HMO functions like an insurer because it underwrites and spreads risk among participants. Also, in most states, HMOs are regulated by their department of insurance.

By co840 — On Mar 05, 2008

An HMO is not necessarily insurance. Only Insurance Companies can sell insurance. HMOs are health care providers. If they are not incorporated as insurance companies they may not sell their product as insurance. Kaiser is the largest HMO, and it does not offer health insurance. It offers membership in a health care plan. There is a significant difference. Many complaints about smaller HMOs are directed at the insurance industry, when the insurance industry has nothing to do with them. Many PPOs are likewise, not insurance plans. Ignorance is not an excuse, it is ignorance.

By anon7989 — On Feb 06, 2008

how does the HMO earn its revenues and what are its expenses, basically how does this company earn its profits?

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