Final answer:
The main distinction between fee-for-service and HMOs is the reimbursement model, where fee-for-service pays per service provided, while HMOs pay a set fee per patient. Adverse selection is a common issue related to these models.
Step-by-step explanation:
The key difference between a fee-for-service healthcare system and a system based on health maintenance organizations (HMOs) lies in the reimbursement model for medical care providers. In a fee-for-service system, providers are paid based on the cost of services they deliver to each patient. By contrast, HMOs reimburse providers based on the number of patients they care for, regardless of the individual amount of care each patient receives. This results in a capitated payment system where the incentive is to manage the overall care of patients rather than billing for each service separately. One issue that can arise in these systems is adverse selection, where there is an imbalance in the risk profile of insurance customers that can lead to financial losses for insurance companies.