Final answer:
In health financing systems, providers are reimbursed for service costs. Adverse selection can impact insurance markets due to information asymmetry. Policy development requires balancing treatment costs, patient quality of life, and privacy concerns.
Step-by-step explanation:
In a fee-for-service health financing system, medical care providers receive reimbursement according to the cost of services they provide. This system contrasts with health maintenance organizations (HMOs), where providers are reimbursed based on the number of patients they manage, incentivizing efficiency and cost allocation among patients who need varying levels of care.
Adverse selection is a challenge that can arise in insurance markets. It occurs when there's an asymmetric information situation where insurance buyers have more knowledge about their health risks than the insurance providers. Consequently, those with lower risks may find insurance too expensive and opt out, while those with higher risks are more likely to enroll, seeing it as beneficial. This imbalance can lead to increased costs for insurance companies and a less balanced distribution of risk.