Which statement accurately describes the original concept of the HMO?

• A. Prepaid plans with fixed budget and provider networks
• B. Direct patient ownership of clinics
• C. Fee-for-service with flexible network
• D. Annual lump-sum payments with no provider networks

Answer: (A)

The statement tests how HMOs were originally designed to be financed and organized. The core idea is that HMOs operate as prepaid health plans where members pay a set premium upfront, and care is delivered within a defined, contracted network of providers. The financial arrangement is tied to a fixed budget, typically using capitation payments to physicians and facilities, which covers all or most of a member’s care under the plan. This prepaid, risk-sharing setup with a limited network was intended to control costs and emphasize preventive care and managed utilization, rather than paying for each service as it’s rendered. Direct ownership of clinics, fee-for-service with an open network, or lump-sum payments without a network would not capture that prepaid, budgeted, network-restricted model that characterizes the original HMO concept.