Adverse selection and moral hazard in health insurance
The work of Cutler and Zeckhauser (2000) explored the fundamental issues surrounding health insurance regarding the impact of adverse selection and moral hazard in health insurance. Tumay (2009) defined adverse selection as a consequence of asymmetric information among market participants and is a phenomenon in which a hidden characteristic problem and individuals on the informed side of the market (insurers in this case) self-select in a manner which is harmful to the ones on the uninformed side of the market structure. This scenario gives rise to a moral hazard in the health insurance industry. Cutler and Zeckhauser (2000) identified two primary lessons linked with the provision of health insurance. The first one regards the fundamental tradeoff between spreading of risk and suitable incentives. The first problem is, therefore, a fundamental question or issue of moral hazard. The second lesson emanates from the concept of adverse selection which results from information asymmetry between providers and consumers who are bombarded by the immense amount of information from a broad choice of health plans. In this paper, the two fundamental lessons are explored in greater detail in order to uncover their genesis and possible remedies.
Moral hazard health insurance
The moral hazard in insurance arises from several factors. According to Einav & Finkelsten (2017), earlier scholars concentrated on the impact of health insurance coverage on the healthy behaviors of individuals with coverage. He noted that one of the moral hazards rises from the poor health behaviors due to an experience of less incentive to avoid health risks associated with less exercise, smoking, and unhealthy eating behaviors. The other moral hazard on the side of the providers arises from most individuals consuming fewer healthcare at a time when they are required to pay more for it out of their pockets. The fundamental tradeoff between spreading of risk and suitable incentives paints a grim picture of insurers worldwide. To mitigate or eradicate this moral hazard, they use various strategies such as co-payments and deductibles.
How the insurance industry mitigates the moral hazard associated with high premiums
Both co-payments and deductible are important in the insurance industry. In the United States of America, insurers refer to this form of payment is that made by the insured individual each time that they do access healthcare services. An amount requires payment before the insurance company can pay for any claims is what professionals in the field refer to as copayments. The major application this payment is ensuring that insured share in the payment of health care in a bid eradicates moral hazard (Samuelson, 2001). It is fraction of the total amount but plays a major role in ensuring that there is no unnecessary seeking of medication. On the other hand, deductibles though paid before settling of claims is for the sole purpose of ensuring that individuals do not seek for insurance assistance on medical conditions that they can settle by themselves (Dione, 2002). This is possible through a common restriction of its coverage to instances that will lead to the incurring of huge medical costs. Due to this fact, insurance premiums are relatively cheaper in the instances of higher deductibles.
As noted earlier, adverse selection within the healthcare industry is a product of information asymmetry. The consumers who have limited amount of information about the products they are offered blindly make a selection among confusing lists of products n while the providers are well aware of the possible disadvantages or risks associated with purchasing such products (Ahmed etal, 2017). There is a need for the major players and regulatory bodies to come up with suitable frameworks for mitigating the impact of adverse selection within the healthcare industry.
The health care system has been growing at a rapid rate, thus necessitating intervention from scholars and other policymakers who try to determine the best approaches that can be used to reduce spending on healthcare. Due to increase in demand for medical covers, insurance companies have been established to try and spread risks associated with unpredictable events True pulling premiums for multiple insured individuals to decrease the risk associated with insurance and increase social well-being. Hence, this move reduces the costs associated with healthcare, and this causes individuals to consume medical care services as compared to those who do not have medical coverage. This presents the problem of Moral Hazard. On the other hand, adverse selection constitutes the strategic behavior adopted by individuals as they decide on whether to consume health care insurance or not. Therefore, people who are considered sicker or the ones that pose a greater risk in insurance tend to buy health insurance, well those who are a healthy defect from it.
Implications of Moral Hazard for the Efficient Design of Health Plans
Moral hazards result from perfect information prevailing in the market such that the insurance does not have access to all the information pertaining the insured health status or behaviors. This makes it hard for the farms to predict the appropriate or expected average claims associated with a particular insurance policy. To ensure the formulation of a perfect insurance plan, the stakeholders ought to ensure that first, the average premiums paid by the insured are tailored to cater for unspecified risk level such that, persons that have a higher risk, or those who have a predominant disease pay higher premiums. On the other hand, Individuals who pose less risk are charged fewer amounts of premiums. Additionally, the behavioral factors ought to be considered such that and videos were frugal consumers are charged less. Moreover, individuals consider size indemnity by considering the cost and its benefits accruing additional medical care associated with each healthcare scenario. Second, the buyers prefer fair insurance where they can pay premiums that do not contain administrative costs. Thus, individuals are willing to pay higher premiums as long as they are assured of greater benefits or generous indemnity on their healthcare costs. Hence, the lack of administrative cost ensures that even the risk-averse individuals have or are willing to incur extra costs as a method of accepting the deductibles. Therefore, insurance companies are trying to pull insurance covers away from the coveted comprehensive levels, as a means of reducing the inefficiency.
Additionally, moral hazard renders cost sharing as inappropriate. The former conventional theory considered health insurance as a welfare gain, such that individuals had access to additional healthcare. The moral hazard that generates a gain in welfare ought to be encouraged, and one that generates loss is to be discouraged. The new theory I suggested that through sharing cost and policies problems that do not exist have been unnecessarily allocated a substantial amount of funds (Dione, 2002). Further, it suggests that insurance has become too blunt to be considered as an effective policy instrument and it should be outside to ensure that it focuses on and the division of positive moral hazard. This will ensure that videos with serious illnesses or those who might be associated with additional out-of-pocket financing, And the current types of insurance contract ought to be restricted to ensure that these kinds of care have been covered completely.
Notably, it is essential to subsidized insurance premiums paid by individuals since it is beneficial in the long run. According to the conventional theory, insurance consumers seemed to be made worse-off if they decided to voluntarily purchase a compressive insurance cover. Thus, that of subsidizing premiums paid for insurance tend to encourage more individuals to buy insurance, and possibly subscribe to insurance with efficient low-cost sharing provisions. For instance, the conventional theory proposed the subsidizing of employee health care insurance through permitting payment of premiums with pre-tax income. However, the contemporary critics Have suggested that the availability of health insurance make people better off, thereby the availability of subsidies motivate consumers to subscribe to insurance voluntarily. Hence, adopting the national health care plan has been taunted to improve the welfare of its members.
Finally, the high prices have been proven to be harmful. The conventional theory had suggested that high prices are beneficial since they reduce moral hazard. However, according to the modern theory, insurance companies charging high prices Do so since they have the market power regarding monopolies gained from the provisions given by the law. For instance, the law only allows physicians to prescribe drugs, thus making them the sole providers of such services and products. Therefore, through the modern theory economist and be able to revert the standard analysis which suggests that its courses and desirable production the use of health care insurance. In the extreme situations, the high prices held by monopolies have resulted in individuals shunning from the healthcare plan purchase.
Notably, adverse selection occurs when an individual does not have perfect information and his or her future risks of illness or any other factor that may cause alteration to the individual's future claim on an insurance policy. Additionally, in situations where the insured do not have access to perfect information about the client, the high-risk individuals tend to choose generous insurance covers, while the less risky individuals will go for them less generous coverage. Therefore, to uphold efficiency, the system ought to create an environment where insurers have access to the insured information and risks presented, where the client ought to identify the future claims. This makes it impossible for the markets to achieve an equilibrium.
In general, moral hazard and adverse selection have been identified as the direct and unavoidable consequences associated with insurance providers. This is because it is hard to achieve symmetric information between the insurers and the insured. However, measures such as regulation of the insurance market to ensure that the private organizations do not exploit insurance buyers. Such regulation includes guaranteed renewability which is set at on average cost feasible for all sorts of buyers. Additionally, Subsidizing high risks through the manipulation of listed premiums.
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