Final answer:
Healthcare providers may increase costs by enhancing services to attract more patients in a fee-for-service system, while HMOs manage resources across patients. Adverse selection can lead to increased costs when high-risk patients predominantly purchase insurance. Insurance companies can negotiate lower rates due to their large number of clients, providing savings for both the insured and the companies.
Step-by-step explanation:
Providers in a fee-for-service health system may increase services to attract patients, which can result in higher costs. Such providers are reimbursed based on the cost of services they provide. In contrast, Health Maintenance Organizations (HMOs) receive reimbursement based on patient headcount, leading providers to manage the allocation of resources among patients differently. High demand services often entail using expensive technologies or hiring specialized staff, which leads to increased service costs.
Adverse selection affects insurance markets when there is an asymmetry of information between buyers and the insurance company. Buyers with high risks are more likely to get insurance, considering it beneficial, while low-risk buyers may deem insurance too costly. This scenario poses the risk that premiums will not cover the costs of the high-risk insured, potentially driving up prices to adjust for these risks.
Lastly, when insurance companies negotiate with healthcare providers due to their large client base, they often secure lower rates, which benefits the insured and saves money for the insurance companies when paying out claims.