Final answer:
Under a discount on charge arrangement, the provider receives less than what it would normally charge for a particular service. This is often contrasted with a fee-for-service system, which reimburses providers based on the individual services provided. Adverse selection can affect these dynamics in the insurance market.
Step-by-step explanation:
Under a discount on charge arrangement, the provider receives less than what it would normally charge for a particular service. This is a common method where providers give a discounted rate to insurers or health maintenance organizations (HMOs) in exchange for a steady stream of patients or inclusion in the insurer's network. For instance, in a fee-for-service system, the healthcare provider is reimbursed for each service provided to a patient. In contrast, HMOs typically operate on a capitation basis, where they receive a set amount per enrolled person assigned to them per period, regardless of whether that person seeks care.
Adverse selection is a phenomenon in the insurance industry where there is a mismatch in information between the insurance buyers and the insurance company. High-risk parties are more likely to engage with the insurance offerings as it benefits them more, while low-risk parties may opt out due to cost considerations—leading to a potential imbalance in the insurance pool.