Final answer:
A health maintenance organization (HMO) is where providers are paid a fixed monthly fee for each enrolled person regardless of the services provided, helping manage healthcare costs and reducing adverse selection and moral hazard.
Step-by-step explanation:
The contractual arrangement described in the question refers to a health maintenance organization (HMO). In an HMO, medical care providers are reimbursed with a fixed monthly fee paid in advance for each person enrolled, regardless of the number of services provided. This model contrasts with the fee-for-service system where providers are reimbursed based on the individual services they perform. HMOs aim to manage costs and maintain patient care quality, while mitigating issues like adverse selection and moral hazard. Adverse selection occurs when there is an asymmetry of information between the insurance company and the insured, potentially leading higher-risk individuals to seek more coverage. To address moral hazard in healthcare, providers may receive a combination of managed care and fee-for-service payments to balance incentives for care provision.