Moral Hazard Before we leave the subject of the impact of insurance on the demand for medical care

Moral Hazard Before we leave the subject of the impact of insurance on the demand for medical care, we need to introduce the concept of moral hazard. Moral hazard refers to the situation in which consumers alter their behavior when provided with health insurance. For example, health insurance may induce consumers to take fewer precautions to prevent illnesses or to shop very little for the best medical prices. In addition, insured consumers may purchase more medical care than they otherwise would have without insurance coverage. Let’s illustrate this point by referring to Figure 5-4. According to the graph, a consumer without insurance purchases five units of medical services at a price of $50 per unit. If that consumer acquires full medical coverage such that the insurer’s coinsurance rate, Co, equals zero, the quantity demanded of medical care increases to the point where the demand curve crosses the horizontal axis. At this point, the consumer buys medical care as though it was a free good because she faces a zero price. Thus, any extension of medical insurance coverage has the potential to increase the consumption of medical care because consumers no longer pay the full price. The availability and extensiveness of health insurance may have a profound effect on medical care expenditures.

2. Given the “Moral Hazard” problem mentioned in CH 5, in your opinion, whether many insured patients in the U.S. really “abuse” the healthcare system? What kind of market participants (insurance carriers, physicians, hospitals, pharmaceuticals, or patients) suffer the most? Please explain briefly in your own words.

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