LH

Health Economics & Policy

Overview of Key Concepts in Health Economics and Policy

Course Structure

  • Demand Side:

    • Health Insurance

    • Adverse Selection

    • Moral Hazard and Behavioral Economics

  • Supply Side:

    • Clinician Pay

    • Payment Reform and Quality

    • Technologies in Healthcare

  • Policy:

    • Healthcare Policy Models

    • Epidemiology and Economics

    • Externalities

  • Foundation (Weeks 1-3):

    • Introduction to Macro- and Microeconomics (no prior knowledge required)

Moral Hazard

Introduction to Moral Hazard

  • Moral Hazard refers to changes in behavior resulting from having insurance, specifically:

    • Individuals may take on greater risks because they know they have financial protection.

    • Individuals may consume more healthcare than necessary due to reduced out-of-pocket costs.

Example Framework

  • The Scenario of Jay, Peter, and Tim:

    • Jay has health insurance, averages risk aversion, and is neutral toward hang gliding.

    • Peter lost his health insurance, is not risk-averse, and is eager to try hang gliding.

    • Tim lost his health insurance, is very risk-averse, and declines to try hang gliding.

Behavioral Outcomes

  • Post-accident consequences:

    • Jay undergoes risky behavior (hang gliding) due to insurance coverage.

    • When both Jay and Peter get injured, Jay opts for an expensive treatment (Bone-Gro), while Peter can't afford it.

    • Tim, who did not participate, faces no costs.

Costs and Implications

  • Who bears the costs?

    • Insurance payments for treatments such as medivacs and recovery from injuries are distributed among all premium payers in the insurance pool.

    • The wind causing the accident or Jay's insurance coverage triggers the costs.

Definition and Background of Moral Hazard

  • Definition:

    • "Moral hazard occurs when health insurance leads individuals to take on greater health risks or consume more healthcare services than they would without insurance."

  • Historical Context:

    • First noted in 1862; distinctions made between natural hazards (caused by disasters) and moral hazards (resulting from human decision-making due to risk mitigation from insurance).

Conditions for Moral Hazard

  1. Price Distortion:

    • Insured individuals are shielded from the true cost of healthcare, altering their risk perception.

  2. Price Sensitivity:

    • Individuals 'price sensitive' to treatment costs may behave differently when fully responsible for expenses.

  3. Information Asymmetry:

    • Insurance companies often lack accurate data on insured individuals' behaviors, preventing appropriate premium adjustments based on risk.

Types of Moral Hazard

  • Ex-ante Moral Hazard:

    • Changes in behavior before an event, e.g., disregarding preventive checks like vaccines.

  • Ex-post Moral Hazard:

    • Changes in behavior after an event occurs, leading to more costly recovery choices, like opting for expensive treatments over cheaper alternatives.

Social Loss and Insurance Implications

  • Social Loss:

    • Arises when insurance covers unnecessary procedures or treatments due to moral hazard, leading to inflated costs for all members of the insurance pool.

  • These costs are typically passed on, ultimately increasing premiums for all.

Evidence of Moral Hazard

  • RAND Study Findings:

    • Enrollees with generous insurance tend to exhibit more reckless health behaviors, leading to higher instances of emergency healthcare utilization.

Behavioral Economics Solutions

Problems

  • Health plan choice is complicated leading to choices not aligned with individual health needs.

  • Behavioral hazards like neglecting to follow medical advice are common.

Solutions to Encourage Healthier Decisions

  1. Nudges:

    • Strategies that encourage people towards healthier options by adjusting default options (e.g. automatic enrollment in health initiatives).

  2. Commitment Mechanisms:

    • Contracts or tools that require individuals to commit to healthier behaviors (e.g. penalties for not attending fitness programs).

Conclusion

  • The interaction between moral hazards and health insurance creates complex dynamics affecting both individual behavior and broader social costs. Understanding these nuances is crucial for improving healthcare policy and individual health outcomes.