Final answer:
The key difference between fee-for-service healthcare and HMOs is the payment structure, where fee-for-service reimburses providers for each service, while HMOs pay a fixed fee per patient, promoting cost-efficiency. Adverse selection is a concern in insurance markets and is more pronounced in fee-for-service systems.
Step-by-step explanation:
The Key Difference Between Fee-for-Service and HMOs
The primary difference between a fee-for-service healthcare system and a health maintenance organization (HMO) based system lies in the payment structure to medical care providers. In a fee-for-service system, providers are compensated for each service they perform, potentially leading to higher overall costs and more extensive healthcare utilization. Conversely, HMOs provide a fixed fee per patient, encouraging providers to focus on preventive care and cost-efficiency, as they must manage the allocated resources to serve all the care the patients need without exceeding the pre-agreed payment.
Adverse selection is a significant issue that affects insurance markets, particularly in a fee-for-service system where individuals with higher health risks are more likely to select comprehensive insurance coverage, knowing their increased need for healthcare services, whereas those with lower risks might opt-out, considering it expensive given their perceived lower need for medical care.