Employees join an HMO during "open enrollment," in which they select the health plan they want and complete the enrollment forms. HMO contracts generally last one year, with the premium rates guaranteed not to increase during that period.

To join an HMO, an employee must reside in the HMO's service area. If not, he or she must elect an alternate health care plan offered by the employer.

After enrolling, the employee, designated as the subscriber, must choose a primary care physician or medical group from the HMO's provider network. The primary care physician is then responsible for coordinating medical treatment, including routine care, referral to specialists, and hospitalization.

All members, including subscribers and their dependents, are assigned member identification numbers which are used to record and link all claims and all information for those members.

Dependents can enroll after the open enrollment period has ended if their status is the result of a change in the family, such as marriage or the birth of a child, or a change in employment.

If coverage is terminated, an employee may, under certain conditions, elect to pay for continuation of benefits under COBRA provisions. Coverage is available also to dependents. This could occur if an employee dies and the spouse elects to continue coverage. Under those circumstances, federal law limits how much the premium can exceed the premium charged to the employee for the same benefits package.

Many states require that an HMO offer a continuation of benefits or conversion option to members who lose their HMO eligibility through their employers. Generally, however, they must pay higher premiums and receive lower benefits than what was offered through their employer. In many states, a member can convert to this option after exhausting his or her COBRA benefits.

Employers are usually billed monthly for employee and dependent premiums. HMOs are a prepaid plan, and the premium is due by the first day of the month of coverage. Indeminty insurance coverage usually provides a 30-day grace period before the payment is delinquent.

Provider Contracting
How providers are paid, how providers are qualified and monitored

Provider contracts include agreement provisions that relate to reimbursement for services and for risk-sharing arrangements. A common method of reimbursement is capitation, an amount paid to a physician or medical group based upon a certain rate per member per month. The rate is usually a fixed amount, generally determined by the member's age and sex, but it can also include a percentage of the employer group's premium. Capitation is most often used for primary care physicians.

The principal advantage of a capitation agreement is that the physician has no incentive to provide more services than are medically necessary. The fee is paid whether or not services are rendered, and it provides a consistent source of revenue, enabling the provider to easily budget the anticipated income.

For hospitals and providers other than primary care physicians, discounted fee-for-service or per diem arrangements are normally used. These methods of reimbursement are based upon utilization and demand; the more services that are provided, the more income that is derived. And because utilization is not fixed and is difficult to predict, fee-for-service and per diem arrangements are the most difficult to control. Capitation is also used for reimbursement to hospitals and other providers.

For staff model HMOs that employ full- and part-time physicians, salary reimbursement is used almost exclusively. The HMO pays the physician an annual salary.

In all these contractual arrangements, risk-sharing and incentive agreements between the HMO and provider are frequently included. These provisions generally specify how excess health services costs, including physician and hospital costs, are absorbed by both the HMO and the provider. Conversely, if any health care services fall below expected costs, the provisions also define how the savings are to be distributed.