Final answer:
Managed care plans involve an agreement between the insurer and a selected network of providers, offering financial benefits for using network providers. HMOs pay providers based on patient volume, managing care and resources efficiently. Adverse selection is a risk for insurers as high-risk individuals may be more attracted to these plans.
Step-by-step explanation:
All managed care plans involve an arrangement between the insurer and a selected network of health care providers, and they offer policyholders significant financial incentives to use the providers in that network. In contrast to a fee-for-service system where care providers are reimbursed based on individual service costs, managed care plans usually involve contracts with health providers to provide care for members at reduced costs. Health Maintenance Organizations (HMOs) are a type of managed care plan where providers are reimbursed based on patient volume, while these providers manage patient care and resources. This structure can create savings for both the insurer and the insured but may lead to a phenomenon called adverse selection, where individuals with higher health risks may find managed care plans more appealing than lower-risk individuals, potentially leading to increased costs for the insurer.