Choosing which health insurance plans to offer your team can be one of the biggest benefits decisions you’ll make as an employer. It can affect your budget, how easily you can hire, and how your people get health care. Two of the most common health insurance options are Health Maintenance Organizations (HMOs) and Preferred Provider Organizations (PPOs).
The two work differently. HMOs keep costs lower by limiting care to a network of healthcare providers, while PPOs give your employees more freedom to choose a provider but usually cost more. In this article, we’ll break down how each one works, what else you could offer, and what to weigh on cost so you can choose a plan that fits your business and your team.
HMO (Health Maintenance Organization)
With an HMO, employees must choose a primary care provider (PCP—also sometimes referred to as primary care physician) from a network of doctors.
A PCP refers your employees to specialists, other doctors, and clinicians within the plan network. Coverage is generally limited to in-network providers, and out-of-network care is only covered in medical emergencies or for urgent care while travelling.
HMOs generally have lower monthly premiums and lower overall out-of-pocket costs than equivalent PPOs.
Can be a good fit if: You want to keep premiums low, and most of your team lives in the same area and is comfortable choosing a primary care provider (PCP) in the plan’s network.
PPO (Preferred Provider Organization)
Under a PPO, employees don’t need a PCP or referrals to see specialists. They can also use out-of-network providers, but will pay less for services from doctors and facilities that are in-network.
PPOs generally have higher monthly premiums and higher overall out-of-pocket costs than equivalent HMOs.
Can be a good fit if: You want to offer your team the flexibility to see specialists without referrals and to use out-of-network providers, and you can budget for higher premiums.
Cost considerations between an HMO and PPO
The plan type you choose is only part of the cost picture. Don’t forget to consider these health insurance costs as well.
Premiums
Monthly premiums are the price of coverage. As the employer, you decide how much of that you’ll cover, and employees pay the rest through payroll deductions. HMOs generally have lower premiums, and PPOs generally have higher ones. Many small businesses start by deciding how much they can contribute per employee, then pick the plan that fits.
What employees pay when they get care
A lower premium doesn’t always mean lower total cost. Employees may also pay:
Deductible: the amount they pay before insurance starts covering most services.
Copay: a flat fee for a visit or prescription.
Coinsurance: a percentage of the cost they pay after meeting the deductible.
Out-of-pocket maximum: the most they’ll pay in a plan year for covered, in-network care.
A plan with a low premium and a high deductible can leave employees paying more when they need care. That affects how they feel about the benefit you’re offering.
How to balance cost and value
Start with your budget, then look at your team: where they live, which doctors they use, and what they’d realistically use their coverage for. A lower-cost HMO can be a smart fit for a local team. A PPO might be worth the extra cost if you’re hiring in a competitive market or have remote employees. Many businesses offer both and let employees choose the more suitable option for their own situation.
How to choose a plan for your business
There’s no single best plan, only the best fit for your team and your budget. Work through these steps to help narrow down your options for choosing a group plan.
1. Start with your budget
Decide how much you can contribute per employee each month, and whether you’ll also help cover dependents. Your contribution sets the range of plans you can realistically offer. Build in room for renewal increases, since carriers typically adjust rates each year.
2. Look at where your team lives and works
HMO networks are often regional, so they work best when your employees are in the same area. If you have remote or multi-state employees, a PPO plan with a broader network may serve everyone better, or you may need more than one plan.
3. Understand what your employees need
If you don’t know what kind of plan your employees would prefer, ask them. Some may want a lower premium and a high-deductible plan paired with a Health Savings Account (HSA), while others will care most about which providers are in network. A short survey or a few conversations can tell you a lot.
4. Check the networks
Before you commit, confirm that the doctors, hospitals, and pharmacies your employees use are in the plan’s network.
5. Consider how competitive you need to be
If you’re hiring in a tight market, benefits can tip the decision for a candidate. A PPO or a choice of plans can help you stand out, especially against larger employers. If you’re established and your team is stable, a simpler, lower-cost option may be all you need.
6. Decide between plans—or don’t
Offering one plan keeps administration simple and costs predictable, but you don’t have to think strictly in terms of “HMO vs. PPO.” A common approach is offering one lower-cost option (an HMO) and one higher-flexibility option (a PPO) and let employees choose.
7. Get help comparing
You don’t have to compare plans alone. A broker or a benefits platform can show you the options available where your team lives, side by side, and handle enrollment and payroll deductions once you’ve chosen.
The right health plan is the one that fits your team
There’s no absolute answer to which is better in the “HMO vs. PPO” debate. Whether you offer one or both, it’s most important that you understand the nuances of each—and how they can serve your team. Do your research, talk to your team, and you’ll land on the right solution.
FAQs
What is the difference between in-network and out-of-network care?
In-network providers have contracted rates with the insurer, so employees generally pay less. Out-of-network providers don't, so employees often pay more, may be billed for the difference, and may not be covered at all on some plans.
What is a POS plan, and how does it differ from an HMO or PPO?
A Point of Service (POS) plan is a hybrid. Like an HMO, it usually requires a primary care provider (PCP) and referrals, but it may cover some out-of-network care at a higher cost, like a PPO. Availability and details vary by carrier and state.
Are small businesses required to offer health insurance?
Generally not. Under the Affordable Care Act, employers with 50 or more full-time equivalent employees must offer coverage or may owe penalties. Smaller employers aren't required to, but many offer it to compete for talent. Some states have their own rules.
How much of the premium does an employer have to pay?
Federal law doesn't set a minimum for small employers, but carriers and state rules often require the employer to cover a minimum share of employee premiums and to meet participation targets. Ask your broker or benefits platform what your carrier requires.
What is the difference between an EPO and a PPO?
An Exclusive Provider Organization (EPO) is similar to a PPO in that employees don't need a PCP or referrals to see specialists, but an EPO only covers in-network providers, except in emergencies. A PPO covers out-of-network care at a higher cost. EPOs typically have lower premiums than PPOs as a result.
What is the difference between an EPO and a PPO?
An Exclusive Provider Organization (EPO) is similar to a PPO in that employees don’t need a PCP or referrals to see specialists, but an EPO only covers in-network providers, except in emergencies. A PPO covers out-of-network care at a higher cost. EPOs typically have lower premiums than PPOs as a result.
