Question

Archenland currently has a public health insurance system that reimburses citizens for 80% of all health care costs incurred. The government is considering a policy change that would provide medical care providers with a fixed reimbursement level for each diagnosed illness and citizens would longer have to bear any out-of-pocket expenses for health care. how would this policy change affect moral hazard?

1] Archenland currently has a public health insurance system that reimburses citizens for 80% of all health care costs incurred. The government is considering a policy change that would pro- vide medical care providers with a fixed reimbursement level for each diagnosed illness, and citizens would no longer have to bear any out-of-pocket expenses for health care. How would this policy change affect moral hazard?

Answer 1

Moral hazard occurs in asymmetric information when the individual takes more risk because he is protected from the damage. Eg: The person would tend to care less for the car when he has the car insurance . This would occur once the insurance is done.

In the given case, the country or the government is reimbursing 80% of the total health bills. This means that the citizen needs to pay the rest 20% out of his own pocket. This implies that there would be less cases of moral hazard because a part of bill needs to be paid from the pocket of the patients.

If the government decides to remove this 20% and the citizen are not entitled to bear any costs, then the problem of moral hazard would increase. The reason being that now the patients are not paying any expenses for the healthcare and they are also aware that the government would pay it. So this increases the careless behaviour of the citizens regarding their health. They might indulge in practices that are harmful for their health and which might increase their healthcare expenditure which is to be borne by the government.