According to (Roemoeer, 1986), Health insurance pays for part or all bills of health care of a person. There are various types of health insurance which include individual plans, health plans for the government, health plans for groups and worker’s compensation.
Health insurance is also classified into managed care and traditional insurance where in the later, a hospital, doctor or the provider of health care is reimbursed for part or all fees that have been charged by an insurance company. Health insurance’s purpose is to assist people in covering their costs of health care.
These costs include hospital stays, tests, doctor visits, surgery, home care, procedures, among other services and treatments. Americans tend to treat health insurance policies differently from others especially automobile and liability policies due to the high level of market failure experienced in the health markets.
Failure of America’s Health Insurance Market
Market failure is the term used by economists to describe instances where insurance markets fail to provide adequate insurance services at reasonable prices. The reasons why these markets fail vary a lot with the main ones being adverse selection, risk and moral hazard.
Americans have experienced a rise in the costs of health insurance than in other types of insurance, especially automobile or liability insurance policies. Moral hazard can be described as people’s tendency to engage is behavior that is risky just because they have insurance cover and therefore assume that precautionary measures are no longer important.
In liability insurance, moral hazard is considered in the context of risks occurring to the third party generating a lot of uncertainty hence contributing to difficulties experienced by insurers concerning liability exposures. In liability insurance, moral hazard is divided into four types which includes, policy holder hazard, underwriting hazard, jurisprudential hazard and claimant hazard.
Automobile insurance is the insurance paid to cover an automobile and faces the problem of moral hazard where the insured tend to neglect and become irresponsible since they are sure of payment incase of any loss.(Rosko,1988)
However health insurance is the most affected by moral hazard as well as risk as it deals with health of human beings which cannot be completely ignored even with the rise of premiums. This makes people who opt to remain in the market try to cope with high premiums as the government attempts to solve this problem.
Health insurance tries to make life of human beings secure and safer but when the insured engage in riskier behavior, the process of providing insurance becomes problematic and complicated. An economist named Mark Pauly initiated an argument that moral hazard contributes a lot in medicine and was backed by John Nyman.
Nyman states that moral hazard’s fear only lies behind utilization reviews, deductibles and co-payments which are major characteristics of American system of health insurance. He also argues that, moral hazard’s fear explains the reason as to why health economists of U.S lack enthusiasm for expansion of coverage of health insurance. (Roemoeer, 1986)
The result of irresponsible behavior by the insured has a large number of risks that consequently raise costs of health insurance premiums. Adverse selection in insurance markets is portrayed in form of asymmetric information. There is a relationship between moral hazard and information asymmetry which is a situation where the insured has more information on their history of health as well as likely outcomes than companies that insure them against risk.
In this context ,moral hazard take place when the insured tends to behave inappropriately than what is expected by the insurer who has less information concerning him/her. Premium levels are based on the average number of people in a group where an average amount is calculated and paid by every member.
However, it happens that some group members need more care than their premiums while others need less than their payment. It then occurs that those expecting to pay less ignore insurance payment while those expecting to get more care remain in the market for a longer period. (Navarro, 2000)
This process where some leave as others remain lead to the rise of average costs as well as an increase in the price of premiums. Consequently, more people tend to drop out of the health insurance policy market leading to failure of the market. People also drop out from insurance markets when they tend to believe that their condition is permanent and cannot be changed by having an insurance cover against it.
This makes them lack the need to have protection through purchasing insurance policy. Another reason for market failure is that some people do not get themselves insured as they expect the government to provide them with basic living standards when they retire regardless of whether they have an insurance cover or not. Such people lack incentives to get health insurance covers which lead to market failure. (Jensen, 1999)
Ways in Which Moral Hazard and Risks due Information Asymmetry Can Be Solved
(Navarro, 2000), argues that, this problem can be solved by asking people to disclose all what they know about their health condition when purchasing the policies from companies insuring them. This would assist in knowing the number of people who need more insurance cover as well as those who need less thereby regulating the premiums to reduce drop outs.
Another strategy may be to mandate everyone to have health insurance coverage where one would not be allowed to drop out whether he/she have much dependence on the cover or not. This process of reducing costs of premiums raises concerns about the privacy of those being insured asking questions about the amount of information that should be disclosed to the companies providing insurance cover.
Another point of concern is the extent to which insurance companies should perform tests on those asking for cover before they are signed up.
The moral hazard problem could be addressed though it is not possible to have it completely eliminated through arrangements where the insured shares costs with the insurer in form of co-payments and deductibles among others. In these arrangements the insured are penalized when they need to be compensated by the insurance companies.
Though Americans purchase other types of insurance policies the impact of high premium costs of health insurance makes them view it more differently. This is because health insurance is taken to be of more importance than others as it covers ones health situation and when it’s faced by market failure, Americans as well as other human beings become troubled.
However, causes of market failure are being addressed by the American government to protect its citizens from the ever rising costs of health premiums. But as long as insurance companies take the responsibility of paying part of those costs, a certain moral hazard degree could still persist. (Rosko, 1988)
Roemoeer M. (1986): An Introduction to the US Health Care System: Springer pp22-26
Navarro V. (2000): Assessment of the World Health Report: Elsevier pp 12-15
Rosko M. (1988): The Economics of Health Care: GreenWood Press pp 33-37
Jensen G. (1999): Mandated Benefit Laws and Employer –Sponsored Health Insurance: Health insurance Association of America