Final answer:
To reduce the monthly premium and compensate for it, one should choose Option 1, which increases the co-pay amounts. This relates to cost-sharing mechanisms in health insurance such as deductibles, copayments, and coinsurance, that help in reducing moral hazard by sharing costs with the insured.
Step-by-step explanation:
To answer the student's question: Option 1 will reduce the monthly premium but increase the co-pay amounts to compensate for the lower premium. Health insurance plans have mechanisms like deductibles, copayments, and coinsurance to share costs with policyholders, thereby reducing moral hazard. Deductibles must be paid out-of-pocket before the insurance company contributes to the bill, while copayments are flat fees paid by policyholders for specific services. Coinsurance is a percentage of costs that the insured must cover.
These cost-sharing provisions ensure that the insured party bears some responsibility for the expenses incurred, which discourages excessive use of medical services. For example, if a policyholder has a lower monthly premium, they may have a higher copayment or deductible, which means they pay more each time they access medical services.
By carefully balancing these elements, insurance providers can offer plans that fit various budgetary and coverage needs while also reducing the temptation for policyholders to overuse their insurance coverage.