Question

Assume that you are a policy analyst who is tasked with explaining the problems of adverse selection and moral hazard in your country’s healthcare system to a political leader. Using the following information thoroughly describe these two concepts and how the country might address these problems.

Information about your country’s healthcare system: Role of insurance	Compulsory
Private insurance	Supplementary to nationalized insurance
Cost sharing	Physician Drug (not hospital)
Private hospitals/physician services	Yes

Answer 1

Moral hazard and adverse selection are problems frequently faced by health insurance companies and the govt while making policy decisions regarding the cost and coverage of insurance policies. Moral hazard in health care refers to the behaviour of people who are insured for health care to spend more than what they require and more than the utility they receive. It is a problem because the cost of providing such facility is more than the benefit received by the user. Thus it leads to wastage.
Adverse selection is buying of full coverage insurance plans by those who are in high risk jobs, or those who know that they are at more risk of a particular disease or ailment. Whereas the healthy one chosing for very less amount of insurance. Such behaviour increases the cost of insurance.
In a country where private sector is supplementary with govt health insurance program, private sector is likely to charge more from high risk individuals or keep conditions for utilizing services for checking the misuse. So it would be difficult to provide insurance at same rate to every citizen thus a way to address the situation would be to increase cost of insurance for everyone even for the healthy individuals. Or provide different plans for different needs.
In order to check moral hazard Drug prices shall be regulated, generic drugs should be available in the market. So that excessive drugs are not provided for earning extra profit.
Guidelines can be issued to hospitals about the treatment to be provided for various health requirements and when to take admission, or the quality of rooms provided etc to check excess cost.