Unit 3 Flashcards
People are risk averse
buying insurance to protect from uncertainty (with too much moral hazard as a consequence) and don’t like uncertainty = will demand insurance (to remove the uncertainty)
Insurance removes uncertainty
Insurance pays for your healthcare
Moral Hazard
Transaction between 2 parties and 1 of the parties takes a hidden action (they can do something that the other party can not observe
Examples of moral hazards
what are these examples of?
hiring a babysitter and asking them not to give your kids sweets (parent cant observe whether or not they do)
price of healthcare is free so people consume more (law of demand); your actions are partially hidden from the insurance agency
vet over suggesting tests for sick dog
Opportunity cost due to moral hazard is money we don’t spend on something else
Prices signal/transmit information (e.g. avocados); when price is up, the source is more scare so you buy less of it
When you don’t see the cost, then the price Is the same because insurance is paying for the price of care
• Prices are not adjusting to reflect scarcity
• How do we deal with this issue?
cost sharing
Pushes some of the cost on to the patient (examples: deductibles & co-pays); This exist because of moral hazard
challenge of cost sharing
If you make cost share to high – it undoes the point of insurance, if you make it to low – you have moral hazard
RAND Health Insurance
o Moral Hazard Exists! People are sensitive to price of healthcare.
o No difference in health outcomes based on cost sharing
o Higher risk people did forego care
Moral hazard
occurs when one side takes a hidden action that the other side cannot observe
What was the RAND Health Insurance Experiment?
experiment to find causal effect of cost-sharing on health consumption.
They selected a large sample of low-income families without insurance from around the country (6 different cities) and randomly assigned them to different insurance plans with different degrees of cost-sharing. (e.g. a free plan vs. high deductible plan)
tracked people for 5 years
STUDY FINDINGS: that the price of healthcare matters because it effects how much health care people consume
On average there was no difference in health status amongst people in free plan vs the one people paid for = wasteful consumption
• On average, people in the free plan were just as healthy as people in the deductible plan. Therefore, the extra 25% in expenses was inefficient. (the 25% shows that moral hazard exists)
What led to the creation of cost sharing that we see today
The RAND Health Insurance Experiment was so influential that it was the driving force behind ____
Shigeoka examined the health insurance system in Japan to determine what happens to healthcare expenses for individuals once they approach age 70.
o Cost sharing changes consumption of care, with no change seen in mortality at age 70
prices matter when it comes to healthcare consumption (RAND holds true today)
• At age 70, people transition from being privately insured to publicly insured (Japan’s equivalent of Medicare). Public insurance is much more generous than private insurance in that it has lower cost sharing
Shigeoka found that there was a jump in consumption of healthcare at age 70. Because people face lower prices for medical care at this age, this led him to conclude that there was evidence of moral hazard.
the less you pay –> the more you consume
co-pays
o Copay doesn’t lower actual emergency visits, but does lower visit that are not considered severe “emergencies”
- Once a higher co-pay was instituted for an ED visit, there was a reduction in the percent of visits that were classified as “often not an emergency”.
- This study was one of the first studies to show that copayments for ED visits do a decent job of getting people to cut back on inefficient healthcare.
Non pecuniary costs
o Time – the longer you wait the less likely you will do certain procedures (another form of moral hazard)
o Discomfort/pain & new technology
how does waiting times affect people’s consumption of healthcare?
The longer you have to wait for a procedure, the more likely you are to skip that procedure.
