Your understanding is incorrect, actually.  HMOs do charge higher insurance rates for people who are less healthy on the aggregate. You are using the word, &quot;penalize,&quot; but it has nothing to do with penalties, it has to do with market offerings, as HMOs offer insurance to employers based upon the risk pools. If we use your word, &quot;penalty,&quot; to mean &quot;higher pricing,&quot; - then less healthy workforces get penalized with higher rates for being unhealthy, sort of like group punishment. Of course using the word penalty or punishment makes it sound like there is some kind of unfair aggressor involved, like a parent punishing their kid for having cancer. In reality it&#x27;s a cold, heartless, unfeeling robot assigning values based upon what it predicts will happen.  See my other response for more explanation on that.