Question

Define Free Rider Problem and Moral Hazard as they pertain to health insurance coverage. Give examples of each.

Answer 1

The free rider problem is one of the most common problem in health insurance. Free rider problem arises when the benefits intended for one party, get relished by another. So, the other party is enjoying the benefits at the cost paid by the intended party. The free rider problem arises mainly due to lack of transparency in the health insurance plans offered by companies. A common example of free rider problem is the free health checkups being offered to the less privileged for the cost of health insurance premium paid by the insurance buyers.

Moral hazard problem arises in healthcare when one party behaves in a certain way as it knows that the other party will be required to face the consequences of the behavior. Example of moral hazard is the additional healthcare which gets purchased when a person buys an insurance coverage for himself or herself.