What is the key economic problem unique to health insurance?

What is the key economic problem unique to health insurance?

• A. Adverse selection
• B. Information asymmetry
• C. Moral hazard
• D. Free rider problem

Answer: (C)

When people hold health insurance, the out-of-pocket cost of care falls, changing incentives. This leads to moral hazard: the insured may use more medical services or opt for more costly care than they would if they bore the full cost themselves. In health care, you see this as more frequent visits, more tests, or choosing pricier treatments because the price they pay directly isn’t the full price of the service. The important point is the behavioral change that happens after obtaining coverage, not just who is in the risk pool. That’s what sets moral hazard apart from other issues like adverse selection, which is about pre-enrollment who buys insurance based on risk, or general information gaps. Free rider problems relate to sharing benefits of a public good, not the insured’s personal utilization behavior. Cost-sharing tools like copays, deductibles, and coinsurance help keep patients financially engaged and can reduce moral hazard by ensuring they still bear some cost, guiding utilization toward value.

When people hold health insurance, the out-of-pocket cost of care falls, changing incentives. This leads to moral hazard: the insured may use more medical services or opt for more costly care than they would if they bore the full cost themselves. In health care, you see this as more frequent visits, more tests, or choosing pricier treatments because the price they pay directly isn’t the full price of the service. The important point is the behavioral change that happens after obtaining coverage, not just who is in the risk pool. That’s what sets moral hazard apart from other issues like adverse selection, which is about pre-enrollment who buys insurance based on risk, or general information gaps. Free rider problems relate to sharing benefits of a public good, not the insured’s personal utilization behavior. Cost-sharing tools like copays, deductibles, and coinsurance help keep patients financially engaged and can reduce moral hazard by ensuring they still bear some cost, guiding utilization toward value.