Moral Hazard Effects in Health Insurance. An Empirical Perspective

Seminar Paper, 2016

20 Pages, Grade: 1,3



List of figures

List of tables

List of abbreviations

List of symbols

1. Introduction

2. Health insurance

3. Moral hazard
3.1 Moral hazard general
3.2 Moral hazard in health insurance

4. Empirical perspective
4.1 The RAND Health Insurance Experiment
4.2 Price elasticity for health services in the German market
4.3 Health care providers and the external moral hazard

5. Solutions of moral hazard effects
5.1 By the insured persons
5.2 Medical Savings Accounts

6. Conclusion

List of literature

List of figures

Figure 1: Specifications of moral hazard

Figure 2: Demand of medical services as a funktion of price elasticity

List of tables

Table 1: Sample means for annual ust of medical services per capita

Table 2: Elasticity of demand

List of abbreviations

Abbildung in dieser Leseprobe nicht enthalten

1. Introduction

In the discussion about cost increase in the German market health care it is often mentioned the existence of a moral hazard problem. A bigger part of the costs of illness are ascribed to the insured persons´ behavior or lifestyle. The insured persons are led to an increased demand of medical services, as without an insurance (Hoh/Honekamp, 2010). But also by doctors or pharmacists may be evidenced an „unethical“ behavior on the part of supply-induced demand. Is it really an unethical or rather a rational behavior? Which experiences have been made with a higher self-participation of the insured persons? In which context stay health care services and price elasticity? And how can you reduce the problem of moral hazard? These are just a few questions which should be examinated in this paper.

In the following the structure of the paper will be displayed. The first chapter begins with health insurance in general and explains the benefits and the risks of being insured. The second chapter gives a generally valid definition of moral hazard as well as in terms of health insurance in particular. The third chapter shows the empirical perspective from the point of view of insured persons and doctors. Thereby, it will enlarge on the RAND experiment and the price elasticity in the German market. The fourth chapter gives a few solutions for moral hazard effects, whereby solutions for insured persons and for alternative financing are here in the focus. The last chapter will give a conclusion to the discussed topic.

2. Health insurance

The intention of a health system should be financial security in case of illness and as well an efficient health service support accessible for anyone. In Germany, a distinction between statutory (SHI) and private health insurance is made, where the SHI can be understood as a community of solidarity (cf. SGB V § 1 (1) sentence 1). Based on the principle of solidarity, policyholders pay a contribution depending on their income. In case of sickness, they receive for this contribution benefits that are independent of the amount of their contributions paid (Hoh/Honekamp, 2010, pp. 5-6).

Generally, insurance can help to improve the welfare of a society. Often exceed the individuals solvency an unforseen illness. The uncertainty of the financial feasibility can be reduced by taking out an insurance policy. It is attractive for insurance companies, because based on the law of large numbers, the average number of cases of disease in large groups is relatively accurately predictable. Therefore, insurance companies have an incentive to undertake the risk of loss of insurants against the payment of a premium. This mechanism of health care may be descriped as risk pooling, which provides a balance between diseased and healthy individuals. In general, it contributes to a welfare gain. However, a problem of risk pooling is the asymmetrical distribution of information between insurance provider and the insured person, which can lead to welfare losses. On the one hand by adverse selection and on the other hand by an unethical behavior; the moral hazard (Schreyögg, 2002, pp. 3-6; Hurley, 2000, pp. 80-81). Therefore, the problem of moral hazard in general and for health insurance in particular will be explained in more detail to illustrate the problems of a welfare loss.

3. Moral hazard

3.1 Moral hazard general

The term moral hazard has its origin in the American fire insurance because it is associated with careless behavior of the insured individuum or malicious arson (Bertelsmann Stiftung, 2006, p. 8).

Here is one example: An individuum takes out an insurance policy and wants to be protected against financial damages. Due to the insurance, the individuum may act more negligent than he has to carry possible costs by himself.

In the German literature of insurance the term is often incorrectly translated as „subjektive risk“ or „moral risk“. Moral hazard is less a moral problem, but rather a behavioral change induced by the insurance by the service recipient and the provider (Hoh/Honekamp, 2010, pp. 11-12).

3.2 Moral hazard in health insurance

In the German health system the term moral hazard is often mentioned in the discussions about the cost increases and thereby in the context of the demand of medical care of the patients. With regard to health insurance, the term moral hazard stands for an individuum, who changes its behavior because of being covered by an insurance. The insured person asks for more medical care than he would do without insurance (Pauly, 1968, p. 535).

In health insurance, moral hazard was spread through the papers of Mark Pauly (1968) and Kenneth Arrow (1963). They used the expression to refer to the subjective risk attitude. Arrow (1963) focused in his article „Uncertainty and the Welfare Economics of Medical Care“ on the incomplete market of health insurance and the significance of the uncertainty as unquantifiable risk. The demand for medical care is not equivalent to the necessity of food and clothing. The necessity occurs irregularly and depends on the probability to be ill. The expenses of food depend on the income of an individuum can avoid its hunger. For health, this cannot be expected. On the one hand, health is a question of money with regard to quantity and quality of medical care, but on the other hand the risk of illness cannot be eliminated by money (Arrow, 1963, pp. 948-949; Osmers/Vauth, 2004, p. 8).

In „The Economics of Moral Health“ Pauly argues that extensive insurance always leads to consumption of resources, as long as the insured person can influence the extent, occurance and probability in case of a damage event. Because the demand of medical care does not affect the level of contribution, the insured person will be tempted to demand more medical care than he needs. Most of the patients are not able to estimate the costs of treatment. From the point of view by Pauly this behavior is less immoral but rather economically rational. Due to the individual utility maximation of each individual develops additional benefit, but no additional costs. This increases the costs of healt insurance companies, by what the financial contributions are on the rise again. According to Pauly, the only way to counteract the problem is to use an appropriate incentive mechanism on behalf of the insured person (e.g. by deductible) (Pauly, 1968, pp. 531-535).

You can see, that the welfare implications of health insurance are not explicit. On the one hand, health insurances ensure the balance between diseased and healthy people of a society and therefore they contribute to a welfare gain. On the other hand the rational behavior of the induviduals leads to a welfare loss.

The problem of moral hazard can be classify into different specifications. On the one hand in legal or illegal behavior, whereas illegal behavior is understood as insurance fraud and therefore this specification will not be discussed in this paper.

Abbildung in dieser Leseprobe nicht enthalten

Figure 1: Specifications of moral hazard (Hoh/Honekamp, 2010, p. 13)

The legal behavior includes internal as well as external moral hazard. Internal moral hazard is understood as relationship between insurance and insured person, which in turn can be divided in ex-ante and ex-post moral hazard. Ex-ante moral hazard describes a behavior of the insured person, which increases the probability of a damage before the damage occurs (e.g.


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Moral Hazard Effects in Health Insurance. An Empirical Perspective
University of Kassel
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moral, hazard, effects, health, insurance, empirical, perspective
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Anke Höhmann (Author), 2016, Moral Hazard Effects in Health Insurance. An Empirical Perspective, Munich, GRIN Verlag,


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