Module 4

Question 1

What are the 2 drivers of moral hazard in healthcare?

Answer 1

1. Consumers are sensitive to HC prices (-P, +D)
2. Insurance contracts tend to be incomplete (in the sense of specifying the consumers’ efforts to avoid insurance claim and to contain costs in the event of a claim)

Question 2

What are the 3 types of moral hazard in HC?

Answer 2

1. Ex post moral hazard
2. Ex ante moral hazard
3. Provider induced moral hazzard

Question 2

Why do insurance contracts tend to be incomplete?

Answer 2

1. Information asymmetry: insurers can’t observe the efforts that consumers make to avoid insurance claim or to contain costs in case of a claim
2. Transaction costs: even if insurers could see the efforts, it would be too costly to check if every consumers makes these efforts
3. Regulation: many health insurance markets are regulated (in terms of premiums, HC providers, benefits covered,etc) -> limits flexibility of contract design

Question 3

Describe the main characteristics of a situation of Ex post moral hazard.

Answer 3

• market price ≠ price payed by consumers
  – if insurance is 100% -> Qd is maximum (demand curve is vertical) for any market price -> if there is more coverage, patients pay less and quantity demanded is higher

Question 4

Describe the main characteristics of a situation of Ex ante moral hazard.

Answer 4

• when insured, people tend to act in a riskier way -> more health problems

Example: mosquitoes in Uganda - there are mosquito nets, but they are rarely used because it’s “easier” to just go to the hospital

Question 5

How can moral hazard impose welfare losses? Is it always the case?

Answer 5

Moral hazard can distort the allocation of resources - if we use these resources in HC, we can’t use them in other goods.

Not always the case - moral hazard and welfare loss depend on the type of care (price elasticities - patients are differently sensitive to different types of care)
Example: John Nyman case - the patient can’t afford a transplant without insurance, but if she had the money to pay for it, she would spend it on the transplant

Question 6

What are the differences of cost sharing compared to full insurance?

Answer 6

• decrease in demand for healthcare across a range of services and in both high and low value care
• doesn’t motivate people to switch to cheaper providers
• motivates people to substitute high-cost procedures with low-cost ones

Question 7

How does the decrease of welfare due to moral hazard present in both regulated and unregulated markets?

Answer 7

When moral hazard leads to a decrease in welfare, this means that the marginal cost of additional medical care is higher than its marginal benefit (MC>MB), which leads to higher premiums.

unregulated markets: higher premiums -> decrease in uptake of health insurance - foregone welfare gains if patients are risk-averse

regulated markets: higher costs -> allocative efficiency

Question 8

What are the forms of consumer cost sharing?

Answer 8

1. Deductibles - consumer pays spending up to a certain threshold before insurance kicks in
2. Coinsurance - consumer pays a % of spending themselves
3. Copayments - consumers pay a fixed amount per treatment themselves

Innovative forms:
- VBID (Value based insurance design): level of cost sharing varies with value of treatment
- Doughnut-whole at the margin: cost sharing is centered around annual expected costs