Health Insurance PPOs, HMOs, CDHPs Explained

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1. The Three Parts of an Insurance Policy

Every policy has three main components for the consumer:

  • Premium: The monthly cost to have the insurance.

  • Payout: How claims are paid (deductibles, coinsurance, etc.). This is the focus of “Plan Design.”

  • Fine Print: The specific details of what is and isn’t covered.

2. Plan Design Types

PPO (Preferred Provider Organization)

  • Structure: Has a network of preferred doctors/hospitals with negotiated discounts.

  • In-Network vs. Out-of-Network:

    • In-Network: Lower costs due to negotiated rates.

    • Out-of-Network: Higher deductibles, higher coinsurance (e.g., you pay 40% instead of 20%), and no negotiated discounts.

  • Cost Sharing:

    • Copays: Fixed dollar amounts for office visits (e.g., $25 for Primary Care, $50 for Specialists). Copays often do not count toward the out-of-pocket maximum.

    • Deductible: Amount you pay before insurance kicks in for major services (labs, imaging, surgery).

    • Coinsurance: Percentage you pay after the deductible is met (e.g., plan pays 80%, you pay 20%).

  • Family Plans: Use an “Embedded Deductible,” meaning each individual must meet their own deductible, or two individuals must meet the family deductible limit.

POS (Point of Service)

  • Similar to PPO: Has in-network deductibles and coinsurance.

  • Difference: No out-of-network coverage except for “real emergencies” (as defined by the insurance company, not the patient). If you go out-of-network for non-emergencies, you pay 100% of the cost.

  • Benefit: Lower premiums than PPOs due to this restriction.

HMO (Health Maintenance Organization)

  • Gatekeeper Model: You must see a Primary Care Physician (PCP) first. The PCP must refer you to a specific specialist (e.g., a specific dermatologist).

  • No Referral = No Coverage: If you self-refer to a specialist, the claim is denied.

  • Cost Structure: Typically lower premiums and low, fixed copays for almost everything (e.g., $200 for hospitalization, $50 for ER).

  • Restriction: Like POS, there is generally no out-of-network coverage except for emergencies. Common examples include Kaiser Permanente.

CDHP (Consumer Directed Health Plan)

  • High Deductible: Typically has a much higher deductible (e.g., $2,500+) and no copays. You pay the full negotiated rate until the deductible is met.

  • HSA (Health Savings Account):

    • A tax-advantaged savings account owned by the employee.

    • Employers often contribute seed money (e.g., $800).

    • Unused funds roll over year-to-year and can be invested or used for retirement healthcare costs.

    • If you quit, you keep the money.

  • HRA (Health Reimbursement Arrangement): Similar to HSA, but the employer owns the account. If you quit, you lose the funds.

3. Price Transparency

  • Allowed Amounts Vary: The “negotiated rate” for the same service (e.g., MRI, knee surgery) can vary by 400% between different hospitals in the same network (e.g., $4,000 vs. $16,000).

  • Shoppable Services: For elective procedures (imaging, labs, colonoscopies, orthopedic surgery), patients on CDHPs or PPOs should shop around.

    • Imaging: Independent centers are usually much cheaper than hospitals.

    • Labs: Independent labs (Quest, LabCorp) are cheaper than hospital labs.

    • Surgery: Ambulatory Surgery Centers (ASCs) are often cheaper than hospital outpatient departments.

4. Reference-Based Pricing (RBP)

  • No Networks: Used by some self-funded employers. There is no list of “in-network” doctors.

  • Pricing Model: Instead of negotiating discounts off a high “billed charge,” the plan pays a set percentage above Medicare rates (e.g., 150-200% of Medicare).

    • Example: Hospital bills $20,000. Insurance discount price is $10,000. Medicare price is $2,000. RBP pays $4,000 (200% of Medicare).

  • Risk: Balance Billing. If a hospital refuses the RBP payment, they may bill the patient for the difference (e.g., billing the patient the remaining $16,000). Patients often need a navigation service to find friendly facilities that accept this pricing.

“Health Insurance” is the monetization of the (unenforceable) promise of future performance of non-disclosed ‘allowed’ goods and services by non-obligated contractors (licensed medical providers) at unknown prices. To be clear: the monetization flows only to the seller of this financial contract aka ‘Insurance’, and benefits neither Buyer or Seller in the actual healthcare transaction.

Pricing “transparency” sounds good but is not what it seems. I just tried obtaining the info from three of my local hospitals. First off, finding the link on their websites is not straightforward. Once found, each hospital’s downloaded file was in a different format, one a csv, one a json and one xml. The csv was no problem.

Just open in Excel. The other two forget about it. I’m fairly tech savvy but could not open either of them to be usable. The file I was able to open revealed how wildly the prices vary based on what insurance plan you happen to be on. It’s ridiculous.

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