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HMO vs. HDHP: Which Plan is Best for You?

Leslie Harding · November 6, 2020 · 8 min read


As you research health insurance, you are probably wondering what makes each type of health plan unique. If you’re considering a high deductible health plan(HDHP), that can make your research a little more tricky, as the answer isn’t as straightforward as HMO vs. HDHP or PPO vs. HDHP. An HDHP is defined by its higher deductible, and it can be any type of health plan. That’s right—an HDHP can be an HMO, PPO, or another type of health plan. Luckily, all health plans have some unique features that can help you decide if they are right for you.

What you need to know about high deductible health plans

High deductible health plans (HDHPs) are plans that can have any kind of network: HMO, PPO, POS or EPO. What makes them unique is their deductible and maximum out-of-pocket-costs, which are usually higher than other plans on the market.

The IRS determines the parameters for HDHPs, which can change annually, and have different minimum deductibles and maximum out-of-pocket costs for individuals and families.

One of the pros of HDHPs is that they usually come with the most affordable premiums. They also give you the ability to open up a Health Savings Account (HSA). The HSA is a pre-tax savings account you can use to pay for qualified medical expenses like your deductible, copays, or any other out-of-pocket costs. With an HDHP, preventative care is free even if you haven’t met your deductible, and you won’t be charged a copay.

What are the benefits of an HSA

HSAs are triple tax-advantaged savings accounts. That means that you can contribute funds tax-free, funds will grow tax-free, and you can withdraw funds tax-free for qualified medical expenses. This makes HSAs a great tool to use for medical spending.

The IRS lays out rules for what makes someone eligible to have an HSA, and one of the major requirements is being enrolled in a high deductible health plan. They also set HSA contribution limits for individuals and families each year. You may contribute to your HSA every year that you are eligible. If you are over age 55, you can make an additional $1,000 catchup contribution.

What is an HMO?

Health Maintenance Organizations (HMOs) are a type of health plan that offer lower premiums, lower deductibles, and a more limited network of healthcare providers. Often HMOs consist of a network of providers limited to one geographical area or company. Traditional HMOs also offer lower premiums and deductibles than many other plans, which can make them a good option for people with a more limited budget.

HMOs and limited networks

HMOs generally aim to reduce overall medical costs by requiring you to get a referral from your primary care provider (PCP) before you see a specialist, have a test done, or receive just about any other type of care. Under all HMOs, the PCP will manage patients’ care, so there is little to no paperwork for the patient to complete. This makes HMOs an efficient, streamlined option for many people.

A possible drawback is that you have less choice in terms of the doctors you’d be able to see. If you found a doctor you liked outside of the HMO network, it’s likely you would have to pay for any services completely out-of-pocket. If you see a lot of specialists, you may have to spend more time than you’d like getting referrals from your PCP.

Considerations when shopping for insurance

It can feel overwhelming to shop for health insurance. If you get health insurance through your employer, you may be faced with multiple types of health plans and tiers as you choose. If you are shopping in the private marketplace, your options may seem limitless, as you can choose from many different providers.

The best thing to do before you sit down to make your choice is to identify your needs and research how the plans on offer could meet them. If you know what is important to you, it can be easier to rule out plans that don’t align with your goals and to home in on plans that are a good fit.

Questions to ask while looking over options

Here are some key questions to ask yourself as you choose your next health insurance plan:

  1. What medical conditions, if any, do I manage on an ongoing basis?

  2. Do I anticipate having any larger medical expenses this year, like surgery or pregnancy?

  3. How much do I typically spend on medical expenses in a given year?

  4. How much can I realistically spend on premiums each month?

  5. Do I have a primary care doctor I like? Do I want my new insurance to cover visits with them?

  6. Do I see any specialists? Do I want my new insurance to cover visits with them?

It’s worth taking the time to really think about your health insurance needs. Take stock of the medical providers you already see, your current health situation, and how much you can afford. Then match those needs with the plans on offer to find the right fit for your situation.

When to choose an HMO or HDHP

While we’ve already discussed the fact that an HDHP can be any type of health plan, including an HMO, many people still find it valuable to compare a typical HDHP with a traditional HMO. Choosing between a traditional HMO and HDHP will largely depend on your expected healthcare needs. Take a look at some of the scenarios below to help figure out which plan might align best with your needs.

Scenario 1: Your primary care physician belongs to an HMO, and you’d like to keep seeing them. Consider: HMO

If your preferred PCP belongs to an HMO, it makes sense to choose an HMO plan so you can continue receiving care from them. The fact that you have already had a good experience with this PCP is good news, as it means that you likely won’t find it to be burdensome to have check-ups or get referrals from them.

Scenario 2: You don’t usually see the doctor for anything except preventive care, and your employer offers an HSA match. Consider: HDHP

If you are not a big healthcare user, an HDHP could be the right fit. Preventive care is covered at no cost, and you likely won’t incur high healthcare costs if you don’t go to the doctor much. Plus, this gives you an opportunity to contribute to an HSA and have your employer match it. This is a great way to save money for medical costs that come up anytime in the future.

Scenario 3: You have a medical condition that requires ongoing treatments and doctor’s visits. You aren’t sure if your specialists are part of an HMO network. Consider: Multiple Options

When you have a medical condition that requires ongoing treatment, it often isn’t as clear cut which plan may be the best fit for you. HDHPs are a good option if you know you will meet the high deductible quickly, because all expenses after that will be covered by coinsurance. Plus, an HDHP will give you the ability to contribute to an HSA, which can be a great tool for paying for planned medical expenses. An HMO could be a good option if you know that the doctors and specialists you see are part of an HMO network, or if you are comfortable seeking a lot of care from an HMO network. If higher monthly premiums are worth it to you to get the doctors you need in-network, then you may want to consider a traditional PPO plan.

Making an informed decision

When it comes to health insurance, it can feel like everyone has an opinion. Your mom loves her HMO, your coworker thinks the PPO is the best plan on offer, and your best friend can’t stop raving about their HSA. It can be overwhelming to sort through all these differing opinions as you shop, especially when insurance companies don’t always have the most intuitive offerings.

But when it comes to buying health insurance the only thing you need to keep in mind is finding the right plan for you. You may want the cost savings offered by an HMO. Or you may want the flexible network found with a PPO. Or your employer offered HDHP may come with an HSA that aligns with your retirement goals. Whatever your situation, focus on defining your needs and understanding what different plans have to offer. When you match your needs with the right plan, you can feel confident knowing you’ve made an informed decision and will reap the benefits as you use your new insurance.

Get started with Lively

If you are looking to open an HSA to complement your high deductible health plan and want to enjoy the triple-tax advantage that HSAs provide, along with industry-leading customer service, no hidden fees, and an easy to use platform, open an account with Lively today.

Leslie Harding

Leslie Harding

Leslie is a Freelance Content Specialist who focuses primarily on the backend of start-up life. With experience in things ranging from healthcare to payroll, Leslie has brought her experience to many start-ups, including Brex, Gusto, Homebase, and Wonolo. When she's not writing, you can find her reading or out on a hike.

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Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.



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