PH370--_Moral_Hazard--Pt1

Course Information

• NIA Health Economics & Policy

  • Semester: Spring 2025

  • Instructor: Prof. Ganesh

  • Institution: Cal State East Bay

  • Established: 1957

Course Structure Overview

Current Topics Covered:

• Demand Side

  • Health Insurance

  • Adverse Selection

  • Moral Hazard and Behavioral Economics

• Supply Side

  • Clinician Pay

  • Payment Reform and Quality

  • Technologies in Healthcare

• Healthcare Policy

  • Healthcare Policy Models

  • Epidemiology and Economics

  • Externalities

Foundation (Weeks 1-3)

• Introduction to Macro- and Microeconomics

• No prior knowledge required for participation.

Understanding Moral Hazard

Introduction to Moral Hazard

• Definition: The situation where having insurance leads people to change their behaviors in a riskier manner, or encourages excessive consumption of healthcare services.

Example Scenario: Hang-Gliding Raffle

• Three coworkers participate in a hang-gliding lesson raffle:

  • Jay: Has health insurance, average risk aversion, attempts hang-gliding.

  • Peter: Lost health insurance, high excitement for hang-gliding, attempts it.

  • Tim: Lost health insurance, risk averse, avoids hang-gliding.

Outcomes of the Hang-Gliding Incident

• Incident: Jay and Peter crash during hang-gliding; both sustain severe injuries.

• Consequences:

  • Jay and Peter require extensive recovery; traditional care is slow.

  • Bone-Gro treatment is available but costs $100,000.

Decisions Post-Incident

• Jay: Chooses Bone-Gro treatment due to insurance coverage, returns to work quickly.

• Peter: Unable to afford Bone-Gro, faces long recovery.

• Tim: Remains unaffected.

Cost Analysis in Moral Hazard

• Questions about who covers the costs of treatments that arise from insurance use.

• Social Loss: Occurs when insurance pays for unnecessary procedures leading to increased costs for all policyholders.

Definition and Background of Moral Hazard

Moral Hazard Explained

• Definition:

  • A situation where health insurance leads to:

    • Greater risks taken with health.

    • Increased healthcare consumption beyond normal levels.

  • Historical Note: The term was first noted in a 1862 handbook for insurance actuaries; distinguished between natural hazards and moral hazards stemming from human decisions.

Conditions Leading to Moral Hazard

Three Conditions:

1. Price Distortion: Insurance does not reflect true risk; insured individuals may not be fully aware of treatment costs.

2. Price Sensitivity: Insured individuals often act without regard to actual costs due to coverage.

3. Information Asymmetry: Insurers lack complete knowledge of behavioral changes, complicating risk assessment.

General Pattern of Behavior

• Sequence:

  1. Individual faces risk and buys insurance.

  2. Insurance lowers the price of taking risks, affecting behavior.

  3. Missed risk behaviors increase chances of adverse events, leading to social loss.

Types of Moral Hazard

Two Distinctions:

• Ex Ante Moral Hazard: Behavioral changes before an insured event occurs, e.g. neglecting health precautions.

• Ex Post Moral Hazard: Behavioral changes after an event occurs leading to increased treatment costs, e.g. preferring expensive treatment post-injury.

Social Loss Definition

• Social loss refers to unnecessary medical treatments covered by insurance, which ultimately increases costs shared by all insured individuals within a pool.

Elasticity of Demand Related to Moral Hazard

• The relationship between cost sensitivity and behavioral changes due to insurance coverage influences the level of social loss, reinforcing how price elasticity varies across circumstances of moral hazard.

Comparison: Adverse Selection and Moral Hazard

Key Differences:

• Adverse Selection: Poor health status of insured individuals leads to misinformed risk assessments by insurers.

• Moral Hazard: Behavioral changes post-insurance increase risks and costs for both individuals and insurers.

Addressing Moral Hazard in Insurance Markets

Solutions Include:

1. Cost Sharing:

   • Coinsurance: A fixed percentage of bills paid by enrollees.

   • Copayment: A fixed dollar amount for each care episode.

   • Deductibles: Minimum expenses before insurance covers the cost.

2. Monitoring and Gatekeeping:

   • Implementing incentive programs for healthy habits.

   • Requiring referrals for specialist visits to manage costs.