Question

D1. List and explain three methods that managed care companies try to reduce their costs. For each method, do you think that this reduces moral hazard (that is, excessive usage), or that it reduces quality, or both?

D2. Why do you suppose that people do not enter into their own pooling arrangements, given that the insurance company can charge hefty loading costs?

Answer 1

D1. Methods of COST REDUCTION are as follows;

# FINANCIAL MANAGEMENT : With the increasing difficulty in procuring finance, Management should eliminate useless investment. For this, it must critically examine the amount of working capital and fixed capital needed and the Financial conveniences of reducing them.Wasteful use of capital is as bad as inadequate capital. Over and Under Capitalisation are both bad signals. Therefore, Capital should be procured at economical cost and it should be economically used for getting maximum return. Moreover, this Financial Management does not reduces Moral Hazard and Quality of the product.

# ADMINISTRATION : Proper and Systematic Administration is another method of Cost Reduction. In this, Office should be re- organised if there is a scope for improvement in the efficiency of persons engaged in the office.Efforts should be made to reduce the expenses on telephone, lighting and travelling but not at the cost of efficiency. This method of cost reduction also not reduces the Moral Hazard and Product Quality.

# PRODUCTION PLAN, PROGRAMME and METHODS: Production control ensures proper planning of work by installing an efficient procedure and programme of materials ordering and proper utilisation of material and resources so that there is no waste of time and money due to waste of components, men, materials etc. This cost reduction method does not reduces the moral hazard and quality of product.

D2. People do not suppose to enter into their own Pooling arrangements even when Insurance company charges Hefty Loading costs because People are not in a position to bear that much risk associated in it. They found it would be beneficial for them to pay costs to insurance companies and transfers the risk. Risk pooling is essential to the concept of Insurance. It refers to the spreading of financial risks even among a large number of contributors to the program. Thus, People prefers to not enter into their own pooling arrangements.