Question

Which of the following would help prevent moral hazard in the health insurance market?

a. Insurance companies require co-pays for each healthcare visit.
b. The government pays all healthcare bills in a "single payer" system.
c. Insurance companies require an applicant for health insurance to take a physical.
d. Insurance companies charge higher health insurance premiums to skydivers.

Answer 1

Moral hazard in health insurance is mitigated through cost-sharing methods such as co-pays, deductibles, and coinsurance, where the policyholders pay part of the medical costs out of pocket, leading to reduced consumption of medical services.

Step-by-step explanation:

To prevent moral hazard in the health insurance market, one effective method is requiring insurance policyholders to have some skin in the game through various forms of cost-sharing mechanisms. These can discourage excessive use of medical services since the insured knows they will have to contribute to the costs. Insurance companies requiring co-pays for each healthcare visit is an example of such a measure, as it necessitates a policyholder to pay a predetermined fee for services, which diminishes the potential for moral hazard.

Another form of cost-sharing is the use of deductibles and coinsurance. Deductibles require policyholders to pay out of pocket before the insurance coverage starts paying (e.g., losses greater than $500 for auto insurance). Coinsurance is a shared payment model where the insurance covers a certain percentage of the cost, and the policyholder pays the remaining percentage (e.g., 80%/20% split on home repairs post-fire).

A prominent study supports that such measures, including moderate deductibles and copayments, result in about one-third less consumption of medical care without a noticeable difference in health status, illustrating effective reduction of moral hazard in health insurance when personal cost-sharing is involved.