Countering Consumer Moral Hazard
The problem of moral hazard, and possible solutions to it, is one of the most researched areas in the economics of health care, as witnessed by the content of the following three chapters. Let us briefly review the concept of moral hazard introduced in Chapter 3. Inefficiency in health care arises because insurance-based systems, in common with tax-financed systems, face the problem of potential excess demand: that is, a demand in excess of what it is felt the system ought to provide as a result of the benefits of this excess demand being exceeded by benefits forgone (or opportunity cost). The reasons for the existence and persistence of such excess demand are basically twofold: the problem arises from the absence (or the lowering) of a financial barrier to care on the side of demand; and, on the side of supply, financial arrangements enable (even encourage) providers to supply wasteful amounts. Supply-side effects are often exacerbated by a legal environment that encourages what has become known as ‘defensive’ medicine, a style of practice that minimises the probability of legal action for malpractice — but often only at considerable cost. The problem of changing attitudes of consumers and suppliers of care in response to such ‘perverse’ financial arrangements has become known in the literature as the problem of ‘moral hazard’, and it is moral hazard which leads to potential excess utilisation of health care.
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