Health Maintenance Organization (HMO) is best described as which of the following?

• A. Fee-for-service with separate accounting
• B. Prepaid system sharing financial risk with fixed payment (capitation)
• C. Government-funded universal coverage
• D. Patient-owned clinics with variable payment

Answer: (B)

HMO is a prepaid managed care arrangement that uses capitation, a fixed amount paid per enrolled member, to finance care. Providers receive a set payment each period regardless of how many services a member uses, which shifts some financial risk to the providers and creates incentives to emphasize preventive care, coordination, and cost containment. The model is typically network-based with a primary care physician acting as a gatekeeper who must authorize referrals for specialty services, helping control utilization and costs.

This contrasts with fee-for-service, where providers are paid for each service and utilization can rise with incentives to perform more procedures. It also differs from government-funded universal coverage, which describes a different financing mechanism, often with public funding across the population. Finally, patient-owned clinics with variable payment don’t embody the prepaid, risk-sharing structure or the network/gatekeeper features that define an HMO.