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What's the difference between an HMO and a PPO?

A health maintenance organization (HMO) and a preferred provider organization (PPO) are both managed care plans. A managed care plan is a method of paying for and providing health care for a set fee using a network of hospitals, doctors, and other health-care professionals. The managed care plan monitors (and sometimes limits) the care that its doctors provide to members. Its goal is to ensure that unnecessary and expensive services to its members are minimized.

HMOs are the most popular form of managed care. Here, all health services and financing go through one organization. Services include inpatient and outpatient care and prescription drug benefits. The HMO offers a network of hospitals and health-care professionals that its members must use. These health-care professionals are either employed by or under contract to the HMO. Members pay a monthly fee that does not change (unless, for example, the entire fee structure changes annually) regardless of the care they may need.

PPOs are far less restrictive than HMOs. A PPO consists of a group of hospitals and health-care professionals who agree to provide care to members at a reduced cost. A PPO is designed to provide affordable health care while maintaining flexibility for its members, who do not have to use the services within the network but are encouraged to do so. Staying within the network means that their costs are lower. If members go outside the network, they are still covered but must pay a higher deductible and contribute a higher co-payment.