Revisiting the Welfare Economics of Moral
Hazard By
Nadia J. Sweis (PhD)
King Talal Faculty of Business and Technology
Princess Sumaya University for Technology
(PSUT)
Europe at a Crossroads: The Challenge for Future
Sustainable Development
th
WASD 14 International Annual Conference
LONDON
Introduction
-Healthinsuranceisoneofthemajortopicsinthefieldof
healtheconomics.
- Addressingthedemandforhealthinsurancehasbeenthe
focusofmanyresearchersforseveralyears.
- Providinghealthinsuranceaffecttheindividualsbehavior.
- Healthinsuranceisassociatedwithmanyproblems.
Introduction (Continued)
- MoralHazardisoneofthesemajorproblemsinwhich
individualstrade-offbetweenincenAvesandriskbearing.
- ThetopicofMoralHazardoccupiedalargepartofthe
literature.
- Manytoolshavebeenusedtomanagethisproblem.
What is Moral Hazard
-InEconomics,moralhazardoccurswhenoneperson
takesmorerisksbecausesomeoneelsebearsthecostof
thoserisks.
- AmoralhazardmayoccurwheretheacAonsofone
partymaychangetothedetrimentofanotheraGer
afinancialtransacAonhastakenplace.
- Moralhazardoccursunderatypeof
informaAonasymmetrywheretherisk-takingpartytoa
transacAonknowsmoreaboutitsintenAonsthanthe
partypayingtheconsequencesoftheriskinformaAon.
What is Moral Hazard (Continued)
-Moralhazardalsoarisesinaprincipal–agentproblem,
whereoneparty,calledanagent,actsonbehalfofanother
party,calledtheprincipal.
-TheagentusuallyhasmoreinformaAonabouthisorher
acAonsorintenAonsthantheprincipaldoes,becausethe
principalusuallycannotcompletelymonitortheagent.
-TheagentmayhaveanincenAvetoactinappropriately
(fromtheviewpointoftheprincipal)iftheinterestsofthe
agentandtheprincipalarenotaligned.
What is Moral Hazard (Continued)
-Manytoolshavebeenusedtomanagethisproblemandthese
toolswereclassifiedintotwotypes:
a-thedemandsideb-thesupply-side.
- Thedemandmanagementofmoralhazardminimizestheproblem
ofmoralhazardparAally,anditsbelievedthatthesupply
managementhelpsinsolvingthisproblem(AlbertMA,2002).
- Anotherwayofdealingwiththeproblemofmoralhazardwasto
analyzethecomponentsofthecauseofthisproblem.
-MoralHazarddependsonthetypeofhealthinsuranceplans
providedtoindividuals.
Aim of this Paper
Toconfirmthatusingindemnityhealth
insurancedecreasestheproblemofMoral
HazardinwhichpeopleareoveruAlizing
healthcareservices
byusingtheMaGuiremodel
TheModel
AccordingtotheopAmalhealthinsurancemodel(McGuire,2011),the
expecteduAlityfuncAonconsumerstendtomaximizeisasfollows
s
s
h
h
EU = pU (x, y ) + (1 − p)U (y )
y
Where:
EU:IstheexpecteduAlityofincome
€
€p:IstheprobabilityofgeTngsick
x:ThequanAtyofhealthcarecoverage
y s, y h
:IncomewhensickandincomewhenhealthyrespecAvely
:UAlitywhensickanduAlitywhenhealthyrespecAvely
U s,U h
s
€
€
TheModel(Con3nued)
TheMcGuiremodelassumesthatthepriceofcareis
one,andtheindividualpaysacoinsurance(c),anda
premium(π)whenbuyinginsurance.Thetotalincome
oftheindividualis(I).
s
h
EU = pU (x,I − π − cx) + (1 − p)U (I − π )
Ifthecoinsuranceiscandtheindividualconsumesxwhensick,the
fairpremium,π=p(1-c)x.
€
TheModel(Con3nued)
s
h
EU = pU (x,I − p(1−c)x −cx)+(1− p)U (I − p(1−c)x)
€
TheModel(Con3nued)
OurmodelusesthesameexpecteduAlityfuncAonwiththe
indemnityhealthinsurance.
TheexpecteduAlityfuncAonwillbeasfollows:
TheModel(Con3nued)
ResultsandDiscussion
AccordingtoMcGuirefirstderivaAvewithrespecttoc,showsthatatanyc>0thefirstorder
condiAonisnegaAve,andthustheopAmalcwouldbeatthevalueofzero.
InourmodelthefirstordercondiAonwithrespecttoccanberewriYenasfollows:
Ascincreases,incometransfersfromthesicktothehealthystate.
SeTngc=0,theMRSbetweenhealthcareandthemarginaluAlityofincomewhensickequals
tooneaccordingtoMcGuiremodel:
ResultsandDiscussion(Con3nued)
U xs
s
h =1
pU y + (1 − p)U y
Inourmodel,asc=0rewriAngthefirstordercondiAonwithrespecttoxyieldthefollowing:
€
€
1+ p
U xs
=
p
pU ys + (1 − p)U yh
ResultsandDiscussion(Con3nued)
U xs
s
h =1
pU y + (1 − p)U y
Inourmodel,asc=0rewriAngthefirstordercondiAonwithrespecttoxyieldthefollowing:
€
1+ p
U xs
s
h =
p
pU y + (1 − p)U y
MeaningtheMRSbetweenhealthcareandtheexpectedvalueofthemarginaluAlityofincomeis
greaterthanone
€
ResultsandDiscussion(Con3nued)
- InordertoequalizetheMarginalUAlityofhealthcarewiththeexpected
MarginalUAlityofincomeweneedtouselesscare(x)comparedto
McGuiremodel.
- AbeYerwayforuAlizingmedicalservices,andlessmoralhazardwelfare
loss.ThisisconsistentwithNymanresultsthatemphasistheindirect
relaAonbetweentheincomeeffectandtheprobabilityofbeingsick.
- ItsalsoconsistentwithNymanresultsthateliminaAngtheincomeeffect
willleadtolesswelfarelosses.
ResultsandDiscussion(Con3nued)
- Thehighertheprobabilityofbeingsickthelesstheproblemofmoral
hazardsinceweneedtouselessxcomparedtothosewithlower
probabilityofbeingsick.
-Thosewithpre-exisAngcondiAonsmightnotoveruAlizemedicalservices
whenhavingindemnitytypeofinsurance.
Summary
Purpose:Theaimofthispaperistoconfirmthatusingindemnityhealth
insurancedecreasestheproblemofMoralHazardinwhichpeopleareover
uAlizinghealthcareservices.
Approach:ThispapermodifiedthemicroeconomicmodelofuAlitythat
explainstherelaAonbetweenriskandincenAvesofusinghealthcare
servicesdevelopedbyThomasMcGuire.
Findings:Themodelconcludesthatindividualswithhighprobabilityof
geTngsickdon’toveruAlizemedicalserviceswhenhavingindemnity
healthinsurance.
Summary(Con3nued)
Socialimplica3ons:Thispapersuggeststhatusingindemnityhealth
insurancereducesMoralHazardbytheplacingofresponsibiliAesonboth
theinsuredandtheinsurer.Theinsuredwillbemorecarefulwhenusing
healthcareservicesandmightuseprevenAvecare.
Value:ThispaperaddstotheliteratureanewmathemaAcalapproachthat
supportstheprovisionofindemnityhealthinsuranceandwhyitmightbe
preferabletouniversalhealthinsurance.
ThankYou