Question

Identify and define the concepts of "moral hazard" and "adverse selection." How do these impact health care markets?

In class, we discussed problems associated with the supply of physicians in Alabama, and how these problems affect the health care market in Alabama. Your textbook also reviews the physician supply in the USA. The demand for physicians has been much greater than the supply, especially primary care physicians in rural areas of Alabama. What are three of the problems we discussed with the supply of physicians and what are three solutions that would help to overcome the supply problem? (Discuss fully.)

Answer 1

Moral hazard is a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost. It arises when both the parties have incomplete information about each other.

Adverse selection refer to a situation where sellers have information that buyers do not have, or vice versa, about some aspect of product quality. In the case of insurance, adverse selection is the tendency of those in dangerous jobs or high-risk lifestyles to get life insurance.

As its impact on the health care market, “Moral hazard” refers to the additional health care that is purchased when persons become insured. Under conventional theory, health economists regard these additional health care purchases as inefficient because they represent care that is worth less to consumers than it costs to produce.

Talking about the effect of adverse selection on healthcare markets,adverse selection can be discussed as strategic behavior by the more informed partner in a contract against the interest of the less informed partner(s). In the health insurance field, this manifests itself through healthy people choosing managed care and less healthy people choosing more generous plans.