Final answer:
Avoidable costs are expenses that businesses or individuals can eliminate by not taking certain actions. In the insurance industry, cost-sharing measures like deductibles and copayments can create avoidable costs for insured individuals by reducing unnecessary healthcare consumption without affecting health status. Such financial management of avoidable costs can also lead to personal benefits, like the possibility to retire earlier.
Step-by-step explanation:
Costs that can be avoided are commonly referred to as avoidable costs, discretionary costs, or variable costs. These costs are often a focus in the context of business and insurance decisions. Avoidable costs are expenses that can be eliminated if a particular action is not taken. For example, if a business decides not to launch a new product line, the costs associated with its development and marketing become avoidable. As explained in reference to the insurance industry, there's a concept called moral hazard, where people with full insurance coverage are likely to use more healthcare services because they don't have to pay out-of-pocket. However, introducing cost-sharing measures such as deductibles and co-payments can lead individuals to consume about one-third less in medical care. This reduction in consumption, driven by the out-of-pocket costs, indirectly serves as a kind of avoidable cost for the insured individuals as well. Interestingly, even with this reduction, studies have found no significant difference in health status between those who consumed less health care due to cost-sharing and those who had more complete coverage.
Another perspective on avoidable costs comes into play when considering personal financial planning. By reducing unnecessary expenses, an individual may find additional savings that could lead to working less hard and potentially retiring earlier. Smart financial management and being cognizant of avoidable costs can significantly impact one's financial health and lifestyle choices.