Final answer:
Utilization review is the assessment of healthcare services to determine their medical necessity, appropriateness, and efficiency. It is commonly used in managed care environments such as HMOs, where providers have a fixed payment system and aim to control costs while providing necessary care. This management tool is essential to prevent unnecessary medical procedures and control healthcare expenditures.
Step-by-step explanation:
Utilization review is a key component of utilization management, a process used by health insurers and health maintenance organizations (HMOs) to evaluate the efficiency, necessity, and appropriateness of healthcare services proposed or provided to patients. This process involves a review of medical cases by healthcare professionals to ensure that the care given is necessary and meets established guidelines. For example, utilization review might be used when a patient is recommended for a complex surgical procedure; the review would assess whether the surgery is medically necessary and the most appropriate treatment option for the patient's condition.
Healthcare providers, whether operating in a fee-for-service system or being reimbursed through HMOs, face the challenges of adverse selection and moral hazard. Adverse selection occurs when individuals with a higher risk of requiring medical care are more likely to purchase insurance, potentially unbalancing the insurance pool. Moral hazard involves insured patients potentially consuming unnecessary medical care because it is covered by insurance, which healthcare providers are incentivized to limit under a fixed payment system like that of HMOs.