Final answer:
The typical fee-for-service payment structure involves providers billing for each service rendered and getting paid retrospectively by the insurer; this contrasts with capitation and HMO systems. Fee-for-service can lead to unnecessary spending and must navigate issues like adverse selection and moral hazard. A hybrid approach with managed care is increasingly common to balance incentives.
Step-by-step explanation:
In the typical fee-for-service payment structure, a provider will bill for all services rendered to the third-party payer after the services have been provided, and then the third-party payer, retrospectively, will pay the provider. This method contrasts with capitation and other healthcare payment systems such as those adopted by health maintenance organizations (HMOs). Under the fee-for-service model, providers have the incentive to perform more services since reimbursement is tied directly to the quantity of services delivered. This can potentially lead to unnecessary medical spending due to the provision of services that may not be medically required. On the other hand, HMOs often involve a fixed reimbursement per patient, incentivizing providers to limit services to control costs, which has its own set of challenges and risks, including the potential for under-provision of care.
Furthermore, the fee-for-service model can contribute to the phenomena of adverse selection and moral hazard in the healthcare insurance market. Adverse selection occurs when there's asymmetrical information between insurance buyers and the company, causing high-risk individuals to be more likely to purchase insurance, potentially leading to increased costs for the insurer. The fee-for-service system may also encourage excessive use of healthcare services since providers are paid more for additional services.
As healthcare delivery evolves, many providers are now being compensated through a combination of managed care and fee-for-service—where they receive a flat amount per patient with additional payments for managing specific health conditions. This hybrid approach aims to balance the incentive to provide necessary care while discouraging unnecessary services.