slides12 - Definition Why is it bad? How does insurance try...

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Unformatted text preview: Definition Why is it bad? How does insurance try to reduce it? Which policies increase it? Insurance Moral Hazard Angela Fertig Spring 2010 Angela Fertig Insurance Moral Hazard Definition Why is it bad? How does insurance try to reduce it? Which policies increase it? Moral Hazard Definition: moral hazard is the increased usage of services when the patients marginal costs are low due to insurance Graph: I downward sloping demand for dr services I fixed price I insurance reduces the price to 0 (assume no copays, etc.) I demand Q MH instead of Q * Angela Fertig Insurance Moral Hazard Definition Why is it bad? How does insurance try to reduce it? Which policies increase it? Why is moral hazard bad? 1. Insurance companies can lose money I Assume premium payment is P(sick)*Coverage (assuming no loading fee) I Insurer assumes Coverage= PQ * I Actual coverage= PQ MH I So, insurers E = TR- TC = 0 . 05 * PQ *- . 05 * PQ MH insurer loses money Angela Fertig Insurance Moral Hazard Definition Why is it bad? How does insurance try to reduce it? Which policies increase it? Why is moral hazard bad? 2. Premiums can be higher or more uninsured I Insurer assumes Coverage= PQ MH I Premium = 0 . 05 * PQ MH I If no insurance, ECost= 0 . 05 * PQ * willing to pay a little more for insurance to avoid risk, but maybe not 0...
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This note was uploaded on 01/18/2012 for the course HPAM 8600 taught by Professor Ferig during the Spring '11 term at University of Georgia Athens.

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slides12 - Definition Why is it bad? How does insurance try...

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