11.) Health Insurance Flashcards
What are the characteristics of agents with regards to health insurance?
Utility is increasing with income but at a declining rate. Agents are uncertain about their health outcomes and they are risk averse.
What is information asymmetry?
A situation in which agents in a potential economic transaction do not have the same information about the quality of the good being transacted.
What is adverse selection?
The oversupply of low-quality goods, products, or contracts that result when there is asymmetric information. For instance, if a supplier of a product has better information about product quality than a buyer, then the highest quality products will not be offered.
What is moral hazard?
The tendency for insurance against loss to reduce incentives to prevent or minimise the cost of loss.
When does moral hazard in insurance occur?
If the cost of a risky or wasteful action to an individual is reduced, asymmetric information prevents an insurer from adequately pricing the action, that individual responds to the price distortion by changing his behaviour, taking more risks or demanding more covered goods and services.
How do insurers reduce moral hazard?
By having cost sharing plans: coinsurance and copayment, deductibles/excess, monitoring and gatekeeping
What is coinsurance and copayment?
Coinsurance: insurance provision in which enrolees pay a percentage of each medical bill
Copayment: insurance provision in which enrolees pay a fixed amount
What are deductibles/excess?
Set minimal levels of expenses below which the insurer does not help reimburse medical expenses.
What is monitoring and gatekeeping?
Confronting information asymmetry head on. Some insurance companies try to observe and guide the preventative measures their customers take, while others supervise the medical care given. Gatekeeping is like using GPs to judge the required treatment rather than patients themselves.
