Topic 3: Moral Hazard Flashcards
What is Moral Hazard
Where one party in a contract changes their behaviour after the contract, in a way which results in a higher cost or lower revenue to the other party through the contract
How does health care have an element of Moral Hazard?
Once you are insured, you have an incentive to consume more medical services then you would if you had to pay for them, some of which might be unnecessary given their high cost
How is moral hazard combated in the insurance industry?
It’s affects are migitated through cost-sharing strategies, with elements such as: - Copayments - Deductables - Coinsurance - Stop loss - Indemnities
What is a copayment?
A fixed amount that must be paid by the insuree for every service/good consumed
What are deductibles?
An amount that must be paid out of pocket before the insurance starts
What is coinsurance?
A fixed percentage that must be paid by the insuree for every dollar spent
What is Stop Loss?
A value which once reached in spending, no more must be paid by the insuree from coinsurance
Show on a graph the welfare loss in medical spending under three scenarios: no insurance, full insurance and insurance with copayments
What is an indemnity in insurance? Illustrate the welfare loss under an indemnity based insurance system
Show the welfare loss under a fixed copayment insurance system
What is ex-anti and ex-post in insurance?
Ex-anti: When the action of the agent occurs before the realisation of the uncertainty insured for Ex-post: When the action of the agent occurs after the realisation of the uncertainty insured for
Give an example of ex-anti Moral Hazard
An insuree decreases the amount of protection against some insured event they would normally undergo. Ie, leaves car unlocked, doesn’t bother with burglar alarm
