Question

6. Evaluate the following statements:

1. “Moral hazard behavior decreases when the price elasticity of demand increases.”

2. “Managed care creates incentives that improve the principal-agent relationship.”

3. “Adverse selection and favorable/preferred selection make health insurance more affordable.”

Answer 1

a)Moral hazard behaviour happens at that time when one party in transaction losts its faith in the other party since the party knew the consequence of behaviour of the opposite party.One partay become ready to take risk or suffers the consequence. It happens in the situation when there are 2 parties come into agreement.

Price elasticity of demand is the degree of change in demand with the change in price.An increase in price decrease the demand for goods and viceversa.There is an inverse relationship between price and demand.At increased price elasticity(a small change in price leads to a great variation in demand)moral hazard behaviour decreases.

Because moral hazards only occure when price change induce a change in behaviour.Behaviour does not change at an increased price elasticity.At lowest price people automatically demand a product without bothering about risk and viceversa.

a)Managed care is a health care delivery system which controll cost and quality in the healthcare field..In the principal agent relationship one entity is legally appoints another to act on its begalf. Managed care organisations(MCO) make some agreement with health care agencies and beneficiaries .They accept incentive from the beneficiaries.The incentive promote MCOs mentality to service in a better way.It promote principal agent relationship in a more better way.

a)adverse selection and favourable or preferred selction make health insurance more affordable.

Adverse selection is a behaviour in which more informed partner is in contract with less informed partner.In the insurance feild , firms reluctant to sell insurance to the buyers who make a claim.Usually buyers have more knowledge than sellers.In this way insurance become affordable for him.

In highly competetive health care field,a small portion of enrollee group accounts for a large amount of expendiure.Favourable or preferred selction occures when a plan has an enrollee pooll and its healthcare needs are less than anticipated when the premium was set.It is the opposite of adverse selection.That is enrolle pool requires more than the anticipated amount.The bargaining in between both the selection make insurannce affordable.