Question

1. 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

In the given situation, patients have low out of pocket expenditure while health care providers also bear no risk, they get payments through the variable payments method where they do not have to bear the risk of cost overruns, as is the case in the fixed payment method.

As a result, patients end up demanding more health care services than is optimal and health care providers have no problem providing this service. in fact this supply of excess medical services is in their interest as it increases their earning. This situation of low out of pocket expenditure of consumers interacting with the variable payments method to health care providers by insurance carriers leads to a moral hazard where there is assymetric information and inefficient allocation of resources. The scarce resources are no longer allocated in an efficient manner among the populace due to this situation of moral hazard.

The problem of adverse selection arises due to the obvious advantage that health care providers have over the patients in terms of knowledge about medical care. Hence the sellers, the health care providers can charge variable prices and other rates and the buyers will not be able to compare and get a fair price due to this lack of information and uncertainty about the price, quality and quantity of medical care.