PPO's are the more traditional insurance which is provided by a company (such as Blue Shield, HealthNet, Anthem/Blue Cross and so on), and it is typically paid for by your employer with costs to you in terms of deductibles and co-payments. The PPO is made up of doctors and offices and hospitals that are willing to take your insurance and have a contract with your insurance company. When doctors who accept your insurance see you, they send a claim (or bill) to your insurance. If your insurance allows it, you may at some point later get a bill from the doctor, lab or hospital for the balance of what they billed but your insurance didn't cover. Mind you, some insurances do not permit such "balance billing".
In other words, in a PPO your doctor gets reimbursed to treat you and does not get reimbursed to not treat you. It therefore means that PPO doctors have an incentive to do the most they can to keep you healthy and also happy with the office and your care. Admittedly, there is an element of trust that when your PPO doctor wants to see you back or get some tests done, it is in your best interest and not because it's profitable.
HMO's were invented in the 1980's as an alternative designed to reduce costs of health insurance. Insurance companies offer doctors "capitation" contracts. In such an agreement, instead of a doctor agreeing to accept certain amounts of money for certain services provided, the agreement is to accept a certain amount of money every month for every HMO member who has selected him or her as their primary doctor (PMPM = per member/per month).
HMO's take a variety of forms. In some, they are almost like socialized medicine insofar as the health insurer directly employs all the doctors and owns all the facilities. Kaiser is an example of this. In others, the HMO is a collection of doctors, groups and hospitals willing to accept capitated payment contracts. Western Health Advantage and Anthem/Blue Cross HMO are examples of this.
In any of these forms, the HMO offers real trade-offs compared to traditional PPO's. HMO's are usually a bit cheaper in terms of monthly premiums and also in terms of exposure to deductibles and co-payments. On the other hand, you are required to receive your care from a restricted panel of doctors and hospitals and there is no option to receive care outside the HMO. To be sure, seeing a doctor not in your PPO costs you more money, but it is an option which is helpful when you need a second opinion or a surgery that is not performed at your local or preferred hospital.
From the doctors' point of view, HMO's are radically different from PPO's. The actuarial risk; the risk of losing money on sick patients requiring expensive care, is on the insurance company in a PPO. If they take on a lot of sick people, or pay too much to doctors, or run their business poorly they lose money. In an HMO, that financial risk is now taken on by the doctor. If the doctor takes on too few HMO patients, a few HMO patients getting sick can cause the doctor to lose money. In order to hedge against this, the doctor has to take on a LOT of HMO patients. Remember, in an HMO the doctor is paid monthly to be your primary doctor even if the two of you have never met!
This shift in who carries the financial risk has some impacts that are important to the patient. In an HMO, the element of trust now is that if the doctor does not need to see you, it is in your best interest and not because seeing you causes your doctor to lose money. Also, it shifts the party who is most concerned about the money from the provider of your health insurance to the provider of your actual health care. I would not go so far as to say this is immoral, but it does require patients to be aware of and comfortable with this arrangement and its implications.
In short, PPO's are usually more expensive, but optimize choice on the part of the patient as to where they can go. They also do not require you to go to your primary doctor to get to a specialist, unless you prefer to or the specialist happens to prefer it.
In comparison, HMO's are often cheaper, but you are fully limited to being able to see only the doctors or hospitals in the HMO. You must see your primary care doctor in order to be referred to a specialist.
In a PPO, the financial risk is on the insurance company. Since your doctors only gets paid to see you, you are trusting that they are not over-seeing or over-testing you in order to make money.
By contrast, in an HMO, the financial risk is on doctors. Since your doctor gets paid every month for having you as a patient even if you have never met, you are trusting that your doctors are not under-treating you to save money.
Personally, I have trained or worked in both HMO's and PPO's, and I have had both kinds as my insurance. I definitely prefer PPO's for their focus on choices provided to me and my family.
I mistrust HMO's because I know that the doctors who work in them are under an enormous amount or pressure to take on large numbers of patients to make the HMO arrangement financially viable to them.
Long story short, you get what you pay for with health insurance!
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