requires the policyholder to pay a certain percentage of costs. Deductibles, copayments, and coinsurance

reduce moral hazard by requiring the insured party to bear some of the costs before collecting insurance

benefits.

In a fee-for-service health financing system, medical care providers receive reimbursement according to the

cost of services they provide. An alternative method of organizing health care is through health maintenance

organizations (HMOs), where medical care providers receive reimbursement according to the number of

patients they handle, and it is up to the providers to allocate resources between patients who receive more or

fewer health care services. Adverse selection arises in insurance markets when insurance buyers know more

about the risks they face than does the insurance company. As a result, the insurance company runs the risk

that low-risk parties will avoid its insurance because it is too costly for them, while high-risk parties will
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