Question

The following are types of information problems that arise in the health care sector. Provide a unique example of each and explain its implications (why it is a problem). 1) Moral hazard 2) Adverse selection

Answer 1

1) Moral hazard is the case when one of the party among two have less incentive to protect themselves in case of need. Consider the case of medical insurance people have. People pay annual subscription for the premium amount of the health insurance and feels that they are risk free from any of the disease and from the fear of death. They takes care of their health lesser than before, they eat whatever they wants no matter it is healthy or not for the body, they do not do any physical activity because they know that in case of medical emergency, insurance company will bear the cost of the hospital bills and any other expense which gives them less incentive to take care of their health and creates moral hazard in the society.

2) Adverse selection is when sellers have information that buyers do not have, or vice versa, about some aspect of product quality. This happens very often in the health care system that doctors have knowledge about the process and you have no idea. Assume a case when you go the hospital for hernia operation and doctors offer you 3 different packages one is $2500 other is $6000 and third being $10000 and they claim that they use superior quality of products in operation as the prices rises but many people claims that the products used have no major differences in them but it is the customer who is ready to give amount to get that claimed high services whereas patients have no idea about the quality of it which creates the adverse selection problem in health care system.