Question

Write an essay in which you

1. Define and provide an original example of the concepts listed below.
2. Discuss their significance in determining the efficient functioning of a medical market.

Concepts

1. Moral Hazard
2. Adverse Selection
3. Asymmetric Information
4. Third-Party Payer
5. Cream Skimming

Answer 1

Medical market, like other markets has consumers (patients) , producers (doctors, nurses, etc) and third party (governement, insuerers, etc). The medical market exchanges goods like medicines, equipments etc and services of medical care, health insurance, medicalim etc in return for money like any other market. But there could be some factors that could affect the efficiency of this market in terms of quality, quantity, prices and reachability of goods and services. Following are some factors that play their role in affecting the efficiency of this market:

Moral Hazard - This refers to a situation in which one party has the opportunity of assuming and then carrying out a risky activity that could lead a negative outcome for other party but can be beneficial for the party carrying out that activity. For example: People become risky and careless about their health when they have taken health insurance to cover the costs, doctors may sell expensive medicines to people in order to earn more when cheaper substitutes are available.

Adverse Selection : This refers to a situation in which the buyer and the seller of the product do not have the same information available and this selected information sometimes creates efficiency in the market. For example: People while taking medical or health insurance may not give complete information about their health thus giving less than actual premiums and insurance being sold to riskier individuals whereas healthier people might defer the purchase. This leads to inefficiency in the health insurance market.

Assymetric Information: It is also known as information failure wherein one party has greater material knowledge than the other party. For example: When a doctor prescribes a medicine, patient has least knowledge about the medicine and its side effects and may not be aware of its long term effects. doctors may prescribe unnecessary tests in order to earn commission.

Third party payer: This is an entitiy, other than the patient or health care provider, that manages and reimburses the health care expenses. Insurance companies or government could act as these parties. Governement provides the basic health care facilities for poor people who can't afford and thus increase the reachability of health care to all the sections of society.

Cream skimming- This refers to a mechanism wherein patients are chosen on the basis of some characteristics other than their needs to improve their reputation or profits. For example: Sometimes, hospitals provide services to only those patients for whom they bear lower cost and hence higher profits. This leads to inefficiency in the health care market.