Moral+hazard+-+asymmetric+information


 * Moral Hazard**

Moral hazard in medical care is defined as the situation in which individuals alter their behavior after they have purchased medical insurance because they are no longer liable for the full cost of their actions. An example of this would be, health insurance may persuade consumers to take fewer precautions to prevent illness or to shop very little for the best medical prices. Also, insured consumers may purchase more medical care than they otherwise would have without insurance coverage. This would increase the coinsurance rate for the consumer.


 * The Effects**

In terms of the market for medical services, moral hazard results from five types of actions. First, at any point in time when an insured event takes place, the quantity demanded of medical services may exceed the amount the consumer would buy if he or she had to pay the full cost. Quantity demanded might be greater because the insured consumer faces a price that is below the marginal cost of the medical service. Second, the moral hazard problem might show up over time as consumers have less incentive to guard against an insured event. Reductions in things like exercise may raise the probability of illness. Third, moral hazard may arise from new technology in medical care. Fourth, behavioral change as insurance lowers the consumers’ incentive to monitor the behavior of health care providers. Less monitoring gives the health care provider the ability to prescribe unnecessary tests or surgery. Finally, moral hazard effect occurs when insurance lowers the consumer’s incentive to look around and find the lowest price for medical services.


 * Another View**

Another definition of moral hazard is the risk that a party to a transaction has not entered into the contract in good faith, has provided misleading information about its assets, liabilities or credit capacity, or has an incentive to take unusual risks in a desperate attempt to earn a profit before the contract settles.

Moral hazard can be present any time two parties come into agreement with one another. Each party in a contract may have the opportunity to gain from acting contrary to the principles laid out by the agreement. For example, when a salesperson is paid a flat salary with no commissions for his or her sales, there is a danger that the salesperson may not try very hard to sell the business owner's goods because the wage stays the same regardless of how much or how little the owner benefits from the salesperson's work.

The problem of moral hazard creates problems both for private insurance and the government. Private insurance tries to keep the insured value of any misfortune less than the value to the insured person. It tries to keep buildings and autos insured for less than their true worth. In addition, it is usually against the law to create the misfortune that you are insured against. Finally, if the problem of moral hazard is too great, there will be no insurance coverage for the misfortune.

1. Moral Hazard is the situation in which individuals alter their behavior after they have purchased medical insurance because ? A) the government will not pay for it. B) they are liable for their actions now. C) they have to pay the full amount of the insurance. D) they are no longer liable for the cost of their actions
 * Questions:**

2. T/F. Moral hazard problem might show up over time as consumers have more incentive to guard against illness. 3. Moral hazard effect occurs when insurance lowers the consumer's incentive to__. A) Not purchase insurance B) Shop around for the lowest price for medical care C) Not seek new doctors D) Ask the government for help

4. Who tries to keep the insured value of any misfortune less than the value to the insured person? A) Local doctors B) The government C) Private insurance companies D) Society


 * Answers:**

1. D 2. False 3. B 4. C


 * References:**

Neun, Stephen P., and Rexford E. Santerre. Health Economics: Theories, Insights, and Industry Studies. 4th Ed. Mason: Thomson South-Western, 2007.

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