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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

give two forms of collusion
nondumiso Reply
1.Explicit Collusion: Also termed overt collusion, this occurs when two or more firms in the same industry formally agree to control the market .
Gafar
2.Implicit Collusion: Also termed tacit collusion, this occurs when two or more firms in the same industry informally agree to control the market, often through nothing more than interdependent actions. A prime example of implicit collusion is price leadership .
Gafar
explicit collusion: this occurs when two or more firms in the same industry legally agree to control the market
Panashe
implicit collusion this occurs when two or more firms in the same industry illegally agree to control the market
Panashe
what is responsible for investigating cases of collusion
nondumiso
reasons why a country maybe involved in international trade
Nde Reply
state five similarities and differences between money market and capital market
Victoria Reply
Give a Zimbabwean example of firms operating in an oligopoly market and illustrate using diagrams how a manager in such a market maximize profit
Pam Reply
what is an industry
EWAH Reply
An industry is the production of goods and related services within an economy
Prabhu
an industry is place where goods and services are produced for human consumption....
Usman
scarcity is the major course of economics problems. discuss
Abdulhameed Reply
please say about that it is interesting for us
Abayneh
what is economics
Michael Reply
economics is a social sciences that deals with the production distribution and consumption of goods and services produced.its study of behaviour between economic agents
rkesh
what is the formula for elasticity of demand
Ridwan
change in demand/change in variable variable may be price, income,
rkesh
seasonal unemployment
Enoch Reply
example agriculture
lungku
want and scarcity
Prince
why the average of revenue AR fun
Abba
What is monopoli
Gadrey Reply
What is monopoly
Gadrey
monopoly
Hanan
monipoly ..where one firm controls all the market
RAM
what is demand
Jafar Reply
demand is what one willing and enable to purchase at a given price over period of a time.
Micheal
what is marginal revenue
just
distinguish between commercialization and industrialization
Alhassan Reply
why division of labour increase economy level of production
Henry Reply
what is opportunity coast
Henry Reply
a benefit profit or value of something that must be given up to acquire achieve something else
ammara
thx
Henry
why do indifference curves never cross (5 marks)
angela Reply
bcoz its gives a same level of satisfaction...when indifference curve cross intersect each other......then their is condition arise less than n more than
sj
indifference curves cannote intersect each other .At the point of tendency the heighr curve two tendency the lower indifferent curve
ammara
what are the reasons why a country maybe involved in international trade
Nde
due to differences in technology,resource endowment,climate, culture and experiences and comparative advantage.
Pam
budget line slope is 0.5 and price of good x is k10 whats the price of good y
angela Reply
callet the like times
Kute
just how with the solution
angela
help **
angela

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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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