Final answer:
PPOs were established to provide a balance between cost and flexibility in health care choices, featuring in-network benefits and negotiated reimbursement rates. They include mechanisms like deductibles and copayments to mitigate moral hazard and maintain reasonable premiums. The fundamental contrast between fee-for-service and HMOs is in the method of provider reimbursement, which has implications for resource allocation and risk management.
Step-by-step explanation:
Preferred Provider Organizations (PPOs) were created to offer a balance between the low cost of Health Maintenance Organizations (HMOs) and the flexibility of traditional fee-for-service plans. The distinctive features of PPOs include a network of preferred providers that patients can choose from without requiring a referral, the ability to seek care outside of the network at a higher cost, and lower copayments when using in-network services. PPOs typically use a reimbursement system that involves negotiated rates with providers and may include elements such as deductibles, copayments, and coinsurance.
An insurance system cannot guarantee that each person will receive benefits exactly equal to what they pay in premiums. Typically, an actuarially fair insurance policy averages out so that the benefits paid across all policyholders match the premiums collected. Moral hazard is when the presence of insurance leads people to take greater risks. This can result in more costly insurance premiums, as insurers adjust rates to mitigate the increased risk. Deductibles, copayments, and coinsurance can reduce moral hazard by ensuring that the insured has a financial stake in their own healthcare costs.
The key difference between a fee-for-service healthcare system and a health maintenance organization is that the former reimburses based on each service provided, while the latter provides a set fee for care over a certain period of time, putting the onus on providers to allocate care effectively. Additionally, adverse selection is a concern in markets, where an insurer is challenged with pricing premiums fairly in the face of asymmetric information about risk levels.