Health Maintenance Organization (HMO): What It Means for Employers

What it means in practice

What the term means. HealthCare.gov defines an HMO as a plan that usually limits coverage to care from doctors who work for or contract with the HMO, generally won't cover out-of-network care except in an emergency, and may require you to live or work in its service area to be eligible. Four related glossary terms explain how it works in practice. A network is the facilities, providers and suppliers the plan has contracted with. A primary care physician is a doctor (M.D. or D.O.) who directly provides or coordinates a range of services. A referral is a written order from the primary care doctor to see a specialist; HealthCare.gov notes that in many HMOs you need one before getting care from anyone except your primary care doctor, and the plan may not pay without it. A service area is the geographic area where the plan accepts members and, for plans that limit providers, generally where routine (non-emergency) services are available; the plan may end coverage if a member moves out of it.

The federal statutory definition. Section 1301 of the Public Health Service Act, codified at 42 U.S.C. 300e, defines an HMO for purposes of the federal HMO program as a public or private entity organized under state law that provides basic and supplemental health services to members. Basic health services are paid for by a periodic payment fixed without regard to how often or how much care is used, generally under a community rating system, and at least 90 percent of physician services must come through the HMO's staff, medical groups, individual practice associations or contracted physicians, with exceptions for unusual services and emergencies. The broader definition in 29 CFR 2590.701-2 also covers any organization recognized under state law as an HMO.

How an HMO differs from other plan types. HealthCare.gov's plan-types page compares four common designs. An exclusive provider organization (EPO) covers services only from network providers, except in an emergency. A point of service (POS) plan charges less for network providers and requires a primary care referral to see a specialist. A preferred provider organization (PPO) charges less in network but lets members go out of network without a referral for an additional cost.

ERISA still applies to the employer plan. ERISA section 3(1) defines a welfare plan as one an employer maintains to provide medical care "through the purchase of insurance or otherwise," so a private employer that offers an HMO option still sponsors an ERISA group health plan as part of its employee benefits. The HMO is the health insurance issuer: 29 CFR 2590.701-2 includes an HMO in the definition of an issuer required to be licensed in a state and subject to state insurance law, and defines health insurance coverage to include an HMO contract. ERISA section 514 preempts state laws that relate to employee benefit plans, but section 514(b)(2)(A) saves state laws that regulate insurance. In practice, the state regulates the HMO and its contract, while the employer keeps ERISA duties such as the summary plan description.

What the SPD must say about networks. For group health plans, 29 CFR 2520.102-3(j)(3) requires the SPD to describe cost sharing, provisions on the use of network providers and the composition of the network, whether out-of-network services are covered, any conditions or limits on choosing primary care providers or specialists, conditions on emergency care, and any preauthorization or utilization review rules. The provider list may be a separate document if the SPD gives a general description of the network and states that provider lists are furnished automatically, without charge.

Summary of benefits and coverage (SBC). Under 29 CFR 2590.715-2715, the plan and the issuer must each provide an SBC for each benefit package. The issuer must give the SBC to the employer no later than seven business days after an application or request. Participants must get it with enrollment materials, with renewal materials or at least 30 days before an automatic renewal, within 90 days of a special enrollment, and within seven business days of a request. For an insured plan, the plan's duty is met if the HMO provides a timely and complete SBC. A plan that maintains a network must include an internet address for the provider list. A material change that affects the SBC and is made outside renewal requires notice at least 60 days before it takes effect. A willful failure to provide an SBC can bring a fine of up to $1,000 per failure, adjusted for inflation, with each participant a separate failure.

Choice of primary care provider and OB-GYN access. For plan years beginning on or after January 1, 2022, 29 CFR 2590.722 says that a plan or issuer requiring a primary care provider must let each member designate any participating primary care provider available to accept them, and must let a parent designate an available participating pediatrician as a child's primary care provider. A plan that covers obstetrical or gynecological care and requires a primary care provider may not require a referral or authorization for that care from a participating OB-GYN professional. The plan must explain these rights whenever it provides an SPD or similar description of benefits. Earlier plan years were governed by 29 CFR 2590.715-2719A, which has the same rules.

Emergency services and the No Surprises Act. Under 29 CFR 2590.716-4, a plan that covers any emergency department services must cover emergency services without prior authorization, whether or not the provider or facility is in network. For out-of-network emergency care, the plan may not impose stricter administrative rules or higher cost sharing than for in-network care, and any cost sharing the member pays counts toward the in-network deductible and out-of-pocket maximum. The rule applies to plan years beginning on or after January 1, 2022.

HDHP and HSA compatibility. An HMO can be a high deductible health plan if it meets the IRS limits. Publication 969 sets the 2026 minimum annual deductible at $1,700 for self-only and $3,400 for family coverage, and the maximum deductible plus other out-of-pocket expenses at $8,500 and $17,000. For a plan with a provider network, only in-network deductibles and out-of-pocket expenses count toward that maximum. An HDHP may cover preventive care with no deductible, and P.L. 119-21 lets an HDHP have no deductible for telehealth and other remote care for plan years beginning after 2024. Rev. Proc. 2026-24 sets 2027 figures of $1,750 / $3,500 and $8,700 / $17,400. See health savings account (HSA) for the account rules.

Service area changes during the year. A move or job transfer can take an employee outside the HMO's service area. In 26 CFR 1.125-4, Example 4, an employee transferred from the HMO #1 service area to the HMO #2 service area has a change in status, and the cafeteria plan may let the employee switch to the indemnity option or HMO #2, or cancel coverage. A change in residence is also a listed change in status. Separately, 29 CFR 2590.701-6 treats loss of group HMO coverage because a person no longer lives, resides or works in the service area, with no other benefit package available, as a loss of eligibility that triggers special enrollment; the plan must allow at least 30 days to request enrollment. See qualifying life event.

COBRA and relocation. DOL's employer guide says COBRA generally applies to private employers with at least 20 employees on more than 50 percent of typical business days in the prior calendar year, and that continuation coverage must be identical to coverage for similarly situated active participants. Usually a qualified beneficiary may continue only the coverage held before the qualifying event, even a region-specific HMO that no longer serves them. The exception in 26 CFR 54.4980B-5, Q&A-4(b): if the HMO will not serve the beneficiary's needs in the area they are relocating to, for any reason, they must be offered, within a reasonable period after asking, alternative coverage the employer makes available to active employees that can be extended to that area. It must start no later than the relocation date or, if later, the first day of the month after the request. No alternative is required if every option the employer offers is region-specific and does not serve that area. COBRA beneficiaries also get the same open enrollment rights as active employees.

Where states differ. HMO licensing and consumer rules come from state law, and the regulator is not always the insurance department. Two examples: the Texas Department of Insurance HMO guide says members must live or work in the HMO's service area, must choose a primary care physician, and usually need a referral to see a specialist, but not for emergency care or OB-GYN visits; it offers an HMO-by-county search. The California Department of Insurance says HMOs and managed care plans in California are regulated by the Department of Managed Health Care, not the Department of Insurance, and that self-insured private employer plans follow ERISA and are regulated by the U.S. Department of Labor's EBSA.

Step by step for an employer. (1) Confirm which counties or ZIP codes the HMO serves and whether your employees live or work there. (2) Get the HMO's SBC and certificate of coverage, and confirm it will deliver SBCs to participants on time. (3) Update the SPD with network, primary care, referral and emergency rules, and the PCP and OB-GYN notice. (4) If the HMO is offered as an HSA-qualified plan, check its deductible and in-network out-of-pocket limit against the year's IRS figures. (5) Write cafeteria plan election change rules for moves and transfers. (6) Tell your COBRA administrator which options are region-specific.

Example 1 (illustration): HDHP check. For 2026, an HMO has a $2,000 self-only deductible and a $7,000 in-network out-of-pocket maximum. The deductible is at least $1,700 and the maximum is no more than $8,500, so it passes both Publication 969 tests.

Example 2 (illustration): COBRA relocation. A former employee on COBRA in an HMO moves to another state where the HMO has no service. If the employer also offers active employees a plan that can extend to that state, the beneficiary must be offered it. If the move is June 10 and the request is June 20, coverage must start by July 1.

Question: Does an HMO have to pay for out-of-network emergency room care? If the plan covers emergency department services, 29 CFR 2590.716-4 requires coverage of emergency services without prior authorization and with in-network cost sharing.

Question: Can an HMO make a member get a referral to see an OB-GYN? Not for a participating OB-GYN professional, when the plan covers that care and requires a primary care provider (29 CFR 2590.722). It may still require prior authorization for an out-of-network provider.

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