Health Sciences 3840B Lecture Notes - Lecture 8: Opportunity Cost, Co-Insurance, Moral Hazard
30 May 2018
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An individual will consume health care until their marginal benefit is 0
See diagram in notes
If social benefit is greater than social cost, the amount of consumption should increase
You will consume until benefit equals the cost
Marginal cost is 0 because insurance company is paying for it
So they consume up until the benefit is 0
Equilibrium quantity is also what is socially optimal (Q*) under the assumptions made in the diagram
QF is greater than what is socially optimal, so the quantity that is consumed is inefficiently high –if people don’t have to pay for health care they’ll consume too
much of it
Amount of welfare that is lost is lower triangle in diagram
Going to consume until the benefit is what you have to pay
How much do you have to pay for it to be socially optimal?
Price to consumer is nothing as long as the costs are below a certain c
What they pay is going to be the cost minus what the insurance company pays (c-c)
If one individual in your family has a big health expense, the cap for everyone is reached quicker. If each person has an individual cap, it’s only $500 and
insurance is covering the rest, and everybody else still has their individual caps. Lower risk to have a separate cap for each individual rather than overall cap.
Theta is proportion that you have to pay –if you split with the insurance company theta is 0.5
If theta was 1/3, than an individual has to pay 33% of the costs
When you have to pay less for things you have more income, and when you have more income you demand more
In this framework nothing accounts for having more income when you pay 0 dollars. Demand curve shifts to the right
Individuals consuming health care aren’t necessarily well informed
Willingness and ability to pay may not be the best measure of social benefit, because people with higher income will have higher benefit
Based on assumption that price is greater than marginal cost, the horizontal line in diagram lowers for MC
What is socially optimal is higher than equilibrium quantity
Smaller triangle for welfare loss (welfare loss is overestimated)
Less welfare loss
Standard analysis of moral hazard has overestimated welfare loss again
Demand curve shifts to the right
Standard analysis doesn’t take this into account
Price elasticity –how does the quantity demanded change when the price changes
If your income goes up, you’ll consume more of diff things and also save some, not a 1:1 ratio for income and demand
Change in what you pay for the change in cost that is going to solve the equation
Optimal coinsurance is 0.5 x c = every time you consume one unit of health care you pay half of it. Answer won’t be this simple though
Benefits to having access to insurance for individuals who are risk averse (and most people are, so most people benefit from having access to insurance)
You don’t get utility directly out of health care, you get it out of health status, which is determined by your health care
What determines your demand curve: marginal benefit
If individuals don’t know how health care affects health status
Cost sharing doesn’t affect how much information you have, if you have sub-par info then you can’t make a better decision even if you cost share
Could still consume things that you don’t need because you still think you need it
1. True/False/Uncertain (and explain). (a) True. A physician can influence the amount of health care consumed. ie. can curb excess consumption of health care
after an insured loss has occurred. (b) False. Anyone who is insured and therefore not facing the full cost of health care services can over consume. (c) True.
Positive externalities of production would mean that the true marginal cost is lower. Then, the optimal quantity is higher. Hence analysis over-estimated losses
because true optimal quantity is closer to the quantity consumed under full insurance. (d) False. While there may be welfare losses from moral hazard that does
not mean there are not equal or larger benefits from insurance. It depends on assumptions about the market and the nature of the insurance policy (ie. if it is
not full insurance, moral hazard is )
2. Your friend is concerned about moral hazard. He thinks that if there are more services covered then there will be over-consumption. This will cost a lot
(through premiums coming via student fees etc.), and he thinks that this additional cost is not a good use of money since there are probably other things
students would like to put their money to (collectively via student fees or individually if those fees were less), and that the marginal benefit of those other uses
of money (the opportunity cost of increasing coverage) is higher than the marginal benefit of more consumption of health care services. You can tell him
whatever you want, but the critiques of the standard analysis of moral hazard from this Lecture might be helpful. No matter what you think, you can use
concrete economics concepts to discuss this type of issue.
Lec 8 Moral Hazard
May 6, 2018
3:51 PM
Health Economics Page 1
Document Summary
An individual will consume health care until their marginal benefit is 0. If social benefit is greater than social cost, the amount of consumption should increase. You will consume until benefit equals the cost. Marginal cost is 0 because insurance company is paying for it. So they consume up until the benefit is 0. Equilibrium quantity is also what is socially optimal (q*) under the assumptions made in the diagram. Qf is greater than what is socially optimal, so the quantity that is consumed is inefficiently high if people don"t have to pay for health care they"ll consume too much of it. Amount of welfare that is lost is lower triangle in diagram. Going to consume until the benefit is what you have to pay. Price to consumer is nothing as long as the costs are below a certain c. What they pay is going to be the cost minus what the insurance company pays (c-c)
