LH

Health Economics & Policy Notes

Course Overview

  • Health Economics & Policy - Spring 2025 with Prof. Ganesh

Course Structure

  1. Demand Side
    • Health Insurance
    • Adverse Selection
    • Moral Hazard and Behavioral Economics
  2. Supply Side
    • Clinician Pay
    • Payment Reform and Quality
  3. Policy
    • Healthcare Policy Models
    • Epidemiology and Economics
    • Externalities
  4. Foundation
    • Introduction to Macro- and Microeconomics (no prior knowledge necessary)

Understanding Moral Hazard

Definition and Introduction

  • Moral Hazard is a situation where individuals alter their behavior due to the insurance they hold. The presence of insurance can lead to riskier behaviors because they are shielded from the full consequences of those risks.

Example Case Study

  • Characters: Jay (has insurance), Peter (lost insurance), Tim (has insurance but is risk-averse)
  • Scenario: Three coworkers win a hang-gliding lesson, leading to various outcomes based on their risk aversion and insurance status.
    • Jay: Participates in hang-gliding thinking his insurance will cover any injuries.
    • Peter: Is excited but does not participate due to lack of insurance.
    • Tim: Avoids hang-gliding entirely because he is very risk-averse.

Outcomes of Behavior

  • After leaping, Jay and Peter experience an accident.
  • Consequences: Both end up requiring extensive medical treatment, which highlights how insurance coverage influences choices that lead to adverse health outcomes.

Key Points on Moral Hazard

  1. Ex-ante Moral Hazard: Behaviors before an insured event occurs that increase likelihood of that event (e.g., not taking preventive measures).
  2. Ex-post Moral Hazard: Actions taken after an event that increases recovery costs (e.g., opting for expensive treatments rather than cheaper alternatives).

Conditions for Moral Hazard

  • Price Distortion: Insurance often causes individuals to underestimate the actual risk.
  • Price Sensitivity: Insured individuals become less sensitive to treatment costs.
  • Information Asymmetry: Insurers are unable to fully understand or monitor the behaviors of insured individuals.

Social Loss

  • Defined as costs incurred due to unnecessary treatments arising from moral hazard.
  • This loss is shared among all insured in a pool, as costs increase premiums.

Behavioral Economics in Healthcare

Problems

  • People often struggle to make rational health-related decisions.
  • Difficulty in choosing health plans due to complex variables (premiums, copays, deductibles).

Solutions

  1. Nudges: Strategies to guide people towards healthier behaviors (e.g., automatic enrollment in health plans).
  2. Commitment Mechanisms: Strategies to help individuals stick to healthy routines (e.g., contracts that penalize non-participation in healthy activities).

Discussion Points

  • Ethical considerations: Are there services that should not require cost-sharing?
  • Morbidity of High Deductible Plans? - Are they providing adequate coverage?
  • Potential issues with monitoring and gatekeeping practices in health insurance.

Evidence of Moral Hazard

  • Findings from the RAND Health Insurance Experiment highlight that enrollees with richer insurance plans engage in riskier health behaviors, leading to higher healthcare usage.

Conclusion

  • Understanding moral hazard and addressing its implications is crucial for developing effective health policy and insurance solutions while minimizing social losses.