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PPO vs. HMO: Do You Really Need These “Health Plans”?

Today, most everyone has easy access to major medical health insurance in the form of an HMO or a PPO. It may not be affordable, but it is accessible, meaning that these plans are not hard to come by. I keep hearing and reading articles about which is better: a PPO or an HMO...and so I thought I'd share some information for those who are "on the fence" (if you are an employer) or those who aren't happy with their company's existing health insurance plan.

A PPO stands for "Preferred Provider Organization". An HMO is a "Health Maintenance Organization". These are the two most popular choices right now because the market for private insurance has all but been destroyed by Government intervention into the insurance industry. Before I tell you which is the better buy, a little history is in order so that you understand how we got to where we are today.

There used to be a time when private insurance was affordable, and so were medical bills. In the 1920s, a new company comprised of doctors wanted to change that. They wanted to create a "special" type of insurance that amounted to pre-paid medical care. They also wanted a tax break (and lobbied congress for it, and got it) and to be considered a non-profit company. 

In exchange, they agreed to abandon the sound principles of insurance (rating people based on their health) and instead adopted community-based rating. Essentially, this is a rating system which doesn't really take into account - as its major deciding factor for premiums - a person's health. Instead, everyone in the same community pays the same rate for insurance.

This might work fine if you are looking for pre-paid medical care, assuming that all of the rates in a given community can remain the same on the free market. If they can't, you've just entered into a game called price fixing. Since this company had been given special privileges by the Government, it paved the way for the crisis in the health insurance industry you see today. No other company could compete with this new health insurance company because it wasn't subject to the same laws of supply and demand that other companies without special favors were.

Other insurance companies could not afford to compete with this company. And so...the company grew (until other companies finally caved and accepted similar Government favors) into one of the most well-known insurance groups in the United States: Blue Cross and Blue Shield.

Fast forward to the 60's, when health care (and insurance) was still somewhat affordable, but getting expensive for some people - primarily older individuals - and was totally unaffordable for the poor. The Government, once again intervened and created Medicare and Medicaid (even though up until that time, private charity was taking care of these people)...then came HMOs...the rest is pretty much history.

So...back to the issue of a PPO vs. HMO. My suggestion is to do some research on Health Savings Accounts. These will usually be attached to a high deductible PPO. Don't be too afraid of the high deductible plans...when you work out the math, they usually come out to be much cheaper than just about every other type of health insurance (unless your employer is paying for 100% of the bill, and that is rare).

Unless you are the type of person who regularly uses your insurance, Health Savings Accounts combined with a good High Deductible Health Plan will have you paying only for health care services you use...which tends to make them cheaper than other plans...and you can build up a savings for medical bills that is tax-free. If you are interested in finding out more about these plans, you should check out a few health savings account providers to see if it makes sense for you.

This entry was posted on December 1st, 2008 by David C Lewis, RFC. Edits may have been made to keep this entry current. · 4 Comments · Insurance & Savings

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