Final answer:
HMOs must provide basic services to members without service limitations, offering a viable alternative to fee-for-service systems by reimbursing providers based on patient numbers and reducing moral hazard and adverse selection concerns.
Step-by-step explanation:
A federal qualification of HMOs is that they must provide or arrange for basic services for members as needed and without limitations on time, cost, frequency, extent, or nature of services provided. In contrast to the fee-for-service health financing system, Health Maintenance Organizations (HMOs) reimburse medical care providers based on the number of patients rather than the cost of services. This approach aims to reduce moral hazard and combat adverse selection in insurance markets, where the likelihood of care needed is unevenly known between insurance buyers and the company. Healthcare providers, thus, have the incentive to allocate resources efficiently and prevent overutilization while ensuring the quality of care.
Under HMOs, providers receive a fixed payment per person enrolled, encouraging them to limit unnecessary services while managing care responsibly. As healthcare provision shifts, many doctors are now compensated through a combination of managed care and fee-for-service, which includes a flat amount per patient with additional payments for specific health conditions.