Adverse selection and moral hazard in the health insurance market

Adverse selection and moral hazard in the health insurance market In the circumstance of free competition, the resources can be allocated efficiently in the market for most commodities. However, such competition mechanism in health care market can lead to ethic issues and inefficiency. Through our research, market failure can be attributed to the following reasons. Externalities is present whenever some economic agent’s welfare (utility or profit) is ‘directly’ affected by the action of another agent in the economy (176,H,D). In certain health care, people can benefit from others’ consumption, which will result that the social marginal benefit of health care is higher than the individual. Subsequently, the problem of underproduction will arise. Adverse selection and moral hazard in the health insurance market Health care is significantly different from common commodities such as food and clothes, since we don’t know when we need and how much we need pay. With response to the uncertainties, the market tends to deve lop insurance, which makes people better off via reducing the uncertainties. Problems specifically adverse selection and moral hazard inevitably exit in the market. Adverse selection is caused by the asymmetric information between the insurance company and the consumers, inducing high insurance fees. Nonetheless, people in low risk will be driven out of the market. Another problem is the moral hazard. When people have insurance, they tend to be less careful about their health status increasing their demands of health care service. The patients with insurance will demand more health care resources than they actually need, which will cause a welfare loss. Assume that marginal cost is constant. The amount of health care that should be provided is Q1, where marginal cost equal to marginal benefit. However, because of the excess demand of patients, Q2 will be provided. And the shaded area represents welfare loss. The information asymmetry between patient and doctor: agent problem In heal th care market, the relationship between the doctor and patient is much different from the normal buyers and sellers. The patient is there to give the doctor all the information t doctor needs in order that the doctor can make a decision, and the patient should then implement that decision once the doctor has made it (CD, 45 Williams). As a result, patients’ consumption largely depends on the doctor. Therefore doctors have an incentive to make patient consume more in order to make more profit. Hence overproduction occurs. Monopoly With respect to two reasons, the certain hospitals in some areas can easily achieve local monopoly. Firstly, People in one community may have only one choice of the hospital or doctor for others far away from their living areas. Secondly it is the natural monopoly. Because of the contradictory between the high fixed cost and the confined demands, only one hospital can make profit. Part 2: Perception from the U.K. market For the health care, the reso urce cannot be allocated efficiently in the free market. Government interventions play an essential role in providing the health care. In order to cope with such flaws, the UK government established NHS providing the civil with the health care.