Lecture 4A
Health insurance might increase the demand for health care.
Two main factors driving moral hazard in health insurance:
● Consumers are sensitive to healthcare prices
● Insurance contracts tend to be incomplete in the sense of specifying the consumer’s
efforts to avoid an insurance claim and to contain costs in the event of a claim
Why are health insurance contracts typically incomplete in the sense of specifying the
consumer’s effort to avoid an insurance claim and to contain costs in the event of a claim?
● Information asymmetry
● Transaction costs
● Regulation
Two types of moral hazard:
● Ex ante moral hazard → due to insurance, insured people will behave in a
riskier way and will need more health care.
● Ex-post moral hazard → about the price effect, due to insurance, the price
for health care becomes zero.
, Moral hazard may impose a welfare loss. It distorts the allocation of resources. Assuming
the allocation of resources is optimal when consumers are confronted with ‘real’ prices (e.g.
not distorted by insurance), moral hazard results in an inefficient allocation of resources.
Welfare loss due to moral hazard:
Moral hazard does not by definition impose a welfare loss. The welfare loss from moral
hazard might differ across types of care. The demand curves might differ across different
types of care.
Lecture 4B
Empirical research on moral hazard:
● Major challenge → to correct for selection bias
● Ideal design → randomized controlled experiment
● RAND → 45 %
○ Even the findings from the RAND-experiment might suffer some selection
bias
○ The elasticity of medical spending with respect to it’s out-of-pocket price
found in the RAND-experiment (-0.2) is not a universal constant.
○ Even under the assumption that the RAND-findings are completely valid,
extrapolation of these findings is tricky.
● Oregon → 35 %
Are people forward-looking? Do they consider their expected spending under the insurance
contract when making the decision to (not) use healthcare today?
Brot-Goldberg et al → Consumers respond to spot-prices rather than the true
expected end-of-year price.
Other findings by Brot-Goldberg et al.:
● Compared to full insurance, cost sharing:
○ Reduces the demand for health care
Health insurance might increase the demand for health care.
Two main factors driving moral hazard in health insurance:
● Consumers are sensitive to healthcare prices
● Insurance contracts tend to be incomplete in the sense of specifying the consumer’s
efforts to avoid an insurance claim and to contain costs in the event of a claim
Why are health insurance contracts typically incomplete in the sense of specifying the
consumer’s effort to avoid an insurance claim and to contain costs in the event of a claim?
● Information asymmetry
● Transaction costs
● Regulation
Two types of moral hazard:
● Ex ante moral hazard → due to insurance, insured people will behave in a
riskier way and will need more health care.
● Ex-post moral hazard → about the price effect, due to insurance, the price
for health care becomes zero.
, Moral hazard may impose a welfare loss. It distorts the allocation of resources. Assuming
the allocation of resources is optimal when consumers are confronted with ‘real’ prices (e.g.
not distorted by insurance), moral hazard results in an inefficient allocation of resources.
Welfare loss due to moral hazard:
Moral hazard does not by definition impose a welfare loss. The welfare loss from moral
hazard might differ across types of care. The demand curves might differ across different
types of care.
Lecture 4B
Empirical research on moral hazard:
● Major challenge → to correct for selection bias
● Ideal design → randomized controlled experiment
● RAND → 45 %
○ Even the findings from the RAND-experiment might suffer some selection
bias
○ The elasticity of medical spending with respect to it’s out-of-pocket price
found in the RAND-experiment (-0.2) is not a universal constant.
○ Even under the assumption that the RAND-findings are completely valid,
extrapolation of these findings is tricky.
● Oregon → 35 %
Are people forward-looking? Do they consider their expected spending under the insurance
contract when making the decision to (not) use healthcare today?
Brot-Goldberg et al → Consumers respond to spot-prices rather than the true
expected end-of-year price.
Other findings by Brot-Goldberg et al.:
● Compared to full insurance, cost sharing:
○ Reduces the demand for health care
