Final answer:
The primary distinction between fee-for-service and HMOs is the payment model; fee-for-service pays per service while HMOs provide a fixed fee per patient, encouraging cost-effective and necessary care to reduce moral hazard.
Step-by-step explanation:
Key Differences Between Fee-for-Service and Health Maintenance Organizations (HMOs)
The key difference between a fee-for-service healthcare system and a system based on health maintenance organizations (HMOs) lies in the payment and incentive structure for healthcare providers.
In a fee-for-service system, providers receive payment for each service they perform, which can lead to an incentive to provide more services.
Contrastingly, HMOs provide a fixed payment per patient to the healthcare provider, regardless of the number of services rendered, which incentivizes providers to focus on preventive measures and cost-effective treatment to manage overall healthcare expenditures.
This shift towards HMOs represents an effort to reduce the moral hazard problem by encouraging healthcare providers to deliver only necessary services to maintain patient health within the fixed payment structure.