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The moral hazard problem

Moral hazard refers to the case when people engage in riskier behavior with insurance than they would if they did not have insurance. For example, if you have health insurance that covers the cost of visiting the doctor, you may be less likely to take precautions against catching an illness that might require a doctor’s visit. If you have car insurance, you will worry less about driving or parking your car in ways that make it more likely to get dented. In another example, a business without insurance might install absolute top-level security and fire sprinkler systems to guard against theft and fire. If it is insured, that same business might only install a minimum level of security and fire sprinkler systems.

Moral hazard cannot be eliminated, but insurance companies have some ways of reducing its effect. Investigations to prevent insurance fraud are one way of reducing the extreme cases of moral hazard. Insurance companies can also monitor certain kinds of behavior; to return to the example from above, they might offer a business a lower rate on property insurance if the business installs a top-level security and fire sprinkler system and has those systems inspected once a year.

Another method to reduce moral hazard is to require the injured party to pay a share of the costs. For example, insurance policies often have deductibles , which is an amount that the insurance policyholder must pay out of their own pocket before the insurance coverage starts paying. For example, auto insurance might pay for all losses greater than $500. Health insurance policies often have a copayment    , in which the policyholder must pay a small amount; for example, a person might have to pay $20 for each doctor visit, and the insurance company would cover the rest. Another method of cost-sharing is coinsurance    , which means that the insurance company covers a certain percentage of the cost. For example, insurance might pay for 80% of the costs of repairing a home after a fire, but the homeowner would pay the other 20%.

All of these forms of cost-sharing discourage moral hazard, because people know that they will have to pay something out of their own pocket when they make an insurance claim. The effect can be powerful. One prominent study found that when people face moderate deductibles and copayments for their health insurance, they consume about one-third less in medical care than people who have complete insurance and do not pay anything out of pocket, presumably because deductibles and copayments reduce the level of moral hazard. However, those who consumed less health care did not seem to have any difference in health status.

A final way of reducing moral hazard, which is especially applicable to health care, is to focus on the incentives of providers of health care, rather than consumers. Traditionally, most health care in the United States has been provided on a fee-for-service    basis, which means that medical care providers are paid for the services they provide and are paid more if they provide additional services. However, in the last decade or so, the structure of healthcare provision has shifted to an emphasis on health maintenance organizations (HMOs). A health maintenance organization (HMO)    provides healthcare that receives a fixed amount per person enrolled in the plan—regardless of how many services are provided. In this case, a patient with insurance has an incentive to demand more care, but the healthcare provider, which is receiving only a fixed payment, has an incentive to reduce the moral hazard problem by limiting the quantity of care provided—as long as it will not lead to worse health problems and higher costs later. Today, many doctors are paid with some combination of managed care and fee-for-service; that is, a flat amount per patient, but with additional payments for the treatment of certain health conditions.

Questions & Answers

In some cases, barriers to entry may lead to monopoly.
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Tamali
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Angel
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The law of demand states that quantity purchased varies inversely with the price. In other words, the higher the price the lower the demanded quantity.
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Suleiman Reply
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Suleiman
if demand and costfuncion of cournot duopolist is, y=20-0.p, y= y1+y2, c1=30+2y1,c2=50+10y2, then find profit function of each firms and their reaction function and also the profit of each firms
Gemeda Reply
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Gemeda
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Gemeda
It is a model of imperfect competition in which two firms with identical cost functions compete with homogeneous products in a static settling
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Douglas Reply
this is the degree of responsiveness of demand to a little or slight Change in the price of the commodity, price of other commodity and income
Stanley
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Economics is a social science that studies human behaviour as a relationship between ends and scarce means which HV alternative uses
Jude
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the degree of responsiveness of s slight change in price of a good at a given time
Jude
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Tamali
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A budget is a plan you make on how you spend your money 💰🤑 either for the month or a year
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Theophilus
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mohamed Reply
Types of demand curve
mohamed
demand curve is a showing the aggregate of demand whether falling from right to the left in the table above
BULAMA
demand curve is the graphical representation of various quantities of a commodity bought at various prices
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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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