HMO: A Leading Managed Care Model in U.S. Healthcare

Nowadays, the sharp rise in healthcare costs has become a global concern. How to establish a reasonable national health insurance system without becoming a burden on state fiscal expenditure is the focus of attention worldwide. Here, we take managed care in the United States as an example to introduce this type of healthcare security model, which primarily aims to control medical expenses. Specifically, managed care is a healthcare security model that integrates the provision of medical services with fund management. In the United States, many health insurance companies adopt managed care, including Health Maintenance Organizations (HMOs).



What is HMO?
HMO, short for Health Maintenance Organization, is one of the most common forms of healthcare in the United States. An HMO is a health maintenance organization that closely integrates health insurance companies with healthcare providers. Enrollees are required to prepay only a small portion of the costs, allowing them to receive comprehensive medical services from hospitals without additional out-of-pocket payments at the time of visit.

The Development History of HMOs
The original prototype of HMOs was the prepaid health plan. In 1910, a clinic in Washington State promised to provide medical services to local logging company owners and workers on the condition that each person paid a monthly fee of 50 cents. By the 1920s, dozens of clinics in Washington and Oregon were already providing medical services to certain companies through employee prepayment models. This is considered the earliest precursor to HMOs in the United States.

In 1973, driven by the U.S. Department of Health, Education, and Welfare, Congress passed the Health Maintenance Organization Act, thereby institutionally ensuring the development of this form of health insurance. Subsequently, the U.S. government introduced a series of regulatory guidelines for HMO plans, further accelerating the rapid growth of this managed care model.

How HMOs Operate

 HMO Medical Payment System
After undergoing investigation and screening, individuals can become HMO members by paying a fixed monthly premium as stipulated in the contract. Under traditional insurance payment systems, policyholders receive financial compensation from the insurer in the event of accidental injury or property loss. In contrast, HMOs do not provide direct monetary reimbursement to members; instead, they offer comprehensive medical services, including outpatient care, hospitalization, and preventive care, through designated physicians and healthcare facilities.

Here, we need to understand the two primary organizational models of HMO operations.

1. Group Model: The HMO signs cooperation agreements with various hospitals to renegotiate medical service prices. When insured members require medical care, they receive services directly from hospitals partnered with the HMO; in addition to insurance payments, a portion of the premiums is rebated to the partner hospitals.

2. Staff Model: Under this model, physicians are direct employees of the HMO and receive salaries from the organization. When enrollees require medical care, they can directly visit HMO-affiliated physicians to obtain the corresponding medical services.

 Referral System of HMOs
When enrolling in an HMO plan, members are required to select a primary care physician (PCP), also known as a first-contact physician, to serve as their general practitioner. This role is somewhat analogous to that of the traditional family doctor. When a member falls ill, they must first consult this general practitioner. In most cases, minor and common ailments can be fully managed at this primary care level. Referral to a specialist for further treatment occurs only if the patient’s condition changes or worsens. Thus, the general practitioner is a key figure in the HMO plan, acting as a “gatekeeper.” This “triage-based medical care” model effectively prevents the overuse of medical resources.

HMO’s Designated Physician or Hospital System
In HMO plans, members have a fixed choice of healthcare providers; they can only receive care without out-of-pocket costs (except in emergencies) from hospitals or physicians contracted with the HMO. Additionally, if members seek care at non-network hospitals with prior authorization from the HMO, they are typically responsible for a portion of the medical expenses; however, if they do so without HMO approval, they must bear the full cost of care.

• The principle of prioritizing prevention
HMOs not only provide emergency care to their members but also emphasize preventive healthcare in daily life. The fundamental reason for the emergence of HMOs was to control soaring healthcare costs; if patients fall ill less frequently, healthcare expenses will naturally be kept in check. Therefore, HMOs encourage members to strengthen preventive care, adopt healthier lifestyles with the assistance of primary care physicians, undergo regular health screenings, and actively prevent diseases.

Pros and Cons of HMOs

 The HMO service model aligns well with mobile healthcare.For example, each member is assigned a dedicated general practitioner who, through long-term interaction, gains a comprehensive understanding of the member’s health status, ensuring that medical records from each visit are complete and continuous. This approach facilitates disease treatment, particularly in the management of chronic conditions and postoperative rehabilitation.

The closed-loop model of healthcare providers and insurers formed by HMOs can effectively curb soaring medical service costs without compromising patient health.In HMO plans, the more enrollees a hospital has, the greater the capitated payments it receives. Meanwhile, fewer patient visits—indicating lower operational costs—translate into higher profits for both hospitals and physicians. This virtuous cycle incentivizes doctors to focus on genuinely improving patients’ health by preventing illness, rather than prescribing expensive medications or ordering excessive tests.

However, one point to note is that although general practitioners play a significant role in "triage," adhering strictly to the referral process from general practitioners to specialists in cases of urgent conditions may still lead to delays in treatment. Recently, there have also been concerns that members may demand more unnecessary medical services simply because they have paid insurance premiums.

The Pioneer of HMOs—Kaiser Permanente



The history of Kaiser Permanente dates back to the pre-World War II era, when low-income individuals could not afford private health insurance. A California physician proposed a prepaid monthly model to provide coverage, marking the inception of Kaiser Permanente.

Kaiser Permanente is the largest managed care organization in the United States, with 9.6 million members, 170,000 employees, approximately 20,000 specialist physicians, and 50,000 nurses. It operates 38 medical centers and 620 independent clinics in California, Oregon, Colorado, Hawaii, and other regions.

Kaiser Permanente consists of three components: the nonprofit Kaiser Foundation Health Plan, the nonprofit Kaiser Foundation Hospitals, and the independent Permanente Medical Groups.

As one researcher stated, “The core of Kaiser Permanente lies in physicians retaining control.” The high degree of integration among these three elements tightly couples health insurance with medical services, forming a community of shared interests. Physicians do not increase their earnings by seeing more patients, providing more treatments, or accepting more cases; instead, they maximize surplus profits by doing everything possible to keep patients healthy and control hospital costs. Consequently, reducing disease incidence and containing healthcare costs have become common goals for both patients and providers. Kaiser Permanente also provides members with free access to fitness centers and enhances health awareness through community outreach, thereby preventing diseases at their source.

Text | Zhou Yanxun

Editor: Huang Jia