Moral Hazard In Health Care

Moral hazard is the tendency to overconsume medical care. The term is used by economists as describing the taking on more risk as the cost go up. When it comes to medical care the overall effect is the shifting of the demand curve for medical services and raising the equilibrium price. The purpose of buying health insurance is to financially protect the insured from a large financial expense if they become ill. Illness can come at any time and the medical expenditures are unpredictable for each person. Insurance companies look at risk factors within a large population group with similar characteristics. This allows them to calculate the probability of a health event occurring (Feldstein, 2012).
The health insurance premium protects the insured
…show more content…
During the 1970’s until the recent recession in 2008-2009 the medical expenses have risen faster than inflation. Third party payments and their moral hazard has increased demand and thereby driving up prices. Medical suppliers work with relatively low levels of third-party payment have seen significantly lower price of third-party payment have seen a price drop. The common insurable risk is the chance of a loss is small, the magnitude of loss financially will be devastating to the individual, and lastly when the risk is spread over a large group of people the premiums are more affordable. An example given was the chance of getting hit by a car because the risk is small. As well the medical cost for the medical services would be financially devastating as well the risk could be spread to a whole group resulting in affordable premiums. However, many services do not fit into this category and are consider predictable expenses or minor care (Buff & Terrell, …show more content…
The idea of medical insurance first began around 1260 with German Knappschaftverein. The idea was to have voluntary, charitable organizations which provided short and long term sickness insurance and pensions. The modern form of insurance was created in 1850 in the United States by Franklin Health Assurance Company of Massachusetts to cover injuries related to railroad and steamboat accidents. At that time many Americans did not own health insurances because most cost came right out of the patients pocket. This changed during World War II when politicians created a wage and price control to increase the number of insured. The U. S. Supreme Court in 1943 boosted demand for insurance by stated that employer-provided health insurance is tax exempt. This was only for employees that were in the 20 percent tax bracket; their employers would have offered $10,000 each and would receive 100 percent of their benefits. This was all changed when President Kennedy did tax cuts due to the high federal taxes which prevailed after World War II (Buff & Terrell,

Related Documents