Discussion: Demand for health insurance

Discussion: Demand for health insurance

Discussion: Demand for health insurance

What is “moral hazard”? What is “adverse selection”? How does each affect the demand for health insurance? What approaches do insurance companies use to control for each?
What are the different cost-containment approaches used by managed care firms? How does
managed care solve the problems of moral hazard and demand inducement?


Scenario: A Valley in northeast King County regularly floods. Every year, usually in late fall or early spring, the River overflows its banks enough to close a few roads that run across the valley floor. Normally, the flooding isn’t severe, but roughly every 10 years there is usually one serious flood where most of the valley is several feet under water. Despite the relatively predictable nature of these floods, people still build houses there and those houses routinely get flooded. (Some of them near Fall City are built on “stilts,” but this doesn’t seem as good of a solution as just moving to higher ground.)

Exercise: This exercise has two parts.

(1) Using the concept of moral hazard, propose TWO explanation for why people haven’t moved out of the valley. Are there other explanations for why someone might not move out of the valley that are not related to moral hazard? How plausible are those explanations? If you were an elected public official, what might you do to prevent this moral hazard problem and how effective do you think you would be in implementing your policy. Think about the trade-offs you, as a politician, face.

(2) Provide two other examples of moral hazard and/or offsetting behavior. What other types of rules or regulations would you implement to prevent people from falling into the moral hazard trap? In other words, how would you prevent offsetting behavior in the situations you present? Or can moral hazard be prevented at all?

(*Note that There is a very subtle difference between moral hazard and offsetting behavior. Moral hazard does include offsetting behavior, but not all offsetting behavior involves a moral hazard. )

You must proofread your paper. But do not strictly rely on your computer’s spell-checker and grammar-checker; failure to do so indicates a lack of effort on your part and you can expect your grade to suffer accordingly. Papers with numerous misspelled words and grammatical mistakes will be penalized. Read over your paper – in silence and then aloud – before handing it in and make corrections as necessary. Often it is advantageous to have a friend proofread your paper for obvious errors. Handwritten corrections are preferable to uncorrected mistakes.

Use a standard 10 to 12 point (10 to 12 characters per inch) typeface. Smaller or compressed type and papers with small margins or single-spacing are hard to read. It is better to let your essay run over the recommended number of pages than to try to compress it into fewer pages.

Likewise, large type, large margins, large indentations, triple-spacing, increased leading (space between lines), increased kerning (space between letters), and any other such attempts at “padding” to increase the length of a paper are unacceptable, wasteful of trees, and will not fool your professor.

The paper must be neatly formatted, double-spaced with a one-inch margin on the top, bottom, and sides of each page. When submitting hard copy, be sure to use white paper and print out using dark ink. If it is hard to read your essay, it will also be hard to follow your argument

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