Health Care Economics: Moral Hazard

Deductible

-set minimal levels of expenses below which the insurer does not help reimburse medical expenses -requiring people to pay deductible can limit or eliminate the moral hazard from insurance if high enough Ex: a person paying first $10000 of medical bill then insurance pays the rest

Coinsurance

-insurance provision in which enrollees pay a percentage of each medical bill & the insurer pays the rest

Ways of Limiting Moral Hazard

-coinsurance -co payment -deductibles -monitoring

Moral Hazard & Risk Reduction

-social loss associated w/moral hazard may allow insurance itself to provide positive welfare gains that may offset the harm from moral hazard

Moral Hazard

-when someone takes more risks because someone else bears the burden of those risks

Price Distortion

-a function of the completeness of the insurance, the fuller the insurance, the greater the distortion

Ex Post Moral Hazard

-behavior changes that occur AFTER an insured event happens & makes recovering from that event more expensive Ex: using expensive drugs instead of generic Ex: knee replacement surgery instead of pain killers

Ex Ante Moral Hazard

-behavior changes that occur BEFORE an insured event happens and make that event more likely Ex: leaving the stove on Ex: not getting a flu shot

Price Sensitivity

-depends mostly on the nature of the risk being insured, & how controllable it is

Co Payment

-enrollees pay only a fixed amount, insurer pays the rest

Advantages of Moral Hazard

-extra preventative care -income effect -insurance makes people richer by making expensive surgeries or treatments affordable when they may have been unaffordable without insurance

Moral Hazard w/Health Insurance

-some insured people take risks w/their health that similar uninsured people wouldn't take, & demand more expensive treatment from their doctors when they get sick -moral hazard raises society's level of health care expenditures

Moral Hazard Leading to Social Loss

-takes form of extra money, labor, time, & effort that others expend on caring for people w/health problems

Price Discrimination & Sensitivity

-when both are high, insured individuals bear little costs, which results in large social loss -when both are minimal, insured individuals bear most costs, which still results in moral hazard, but smaller social loss

Monitoring

-when insurance companies try to observe & guide the preventative measures their customers take, while others choose to supervise the medical care received