Varying price distortion and price sensitivity (a) (b) $ Priceeit price tivit Pu Pr tiny huge social social loss Less price i distortion loss oneter distortion Pr B P B C In Figure A,price distortion and price sensitivity are both quite high. Insured individuals bear little of the cost of their heart attack treatments, and as they are quite price-sensitive they respond with more frequent trips to the local burger joint.This results in a large social loss. Bhattacharya,Hyde and Tu-HealthEconomics
Bhattacharya, Hyde and Tu – Health Economics Varying price distortion and price sensitivity In Figure A, price distortion and price sensitivity are both quite high. Insured individuals bear little of the cost of their heart attack treatments, and as they are quite price-sensitive they respond with more frequent trips to the local burger joint. This results in a large social loss
Varying price distortion and price sensitivity (a) (b) pricety … Pu Pr huge A tinv social loss social Less price distortion Greater distortion P P In Figure B,price distortion and price sensitivity are minimal. Insured individuals bear most of the cost of their cheeseburgers, and their demand for burgers is not very sensitive to prices anyway.In this case,there is still moral hazard but it produces a much smaller social loss. Bhattacharya,Hyde and Tu-HealthEconomics
Bhattacharya, Hyde and Tu – Health Economics Varying price distortion and price sensitivity In Figure B, price distortion and price sensitivity are minimal. Insured individuals bear most of the cost of their cheeseburgers, and their demand for burgers is not very sensitive to prices anyway. In this case, there is still moral hazard but it produces a much smaller social loss
What determines the level of price distortion and price sensitivity? The extent of price distortion is a function of the completeness of the insurance. The fuller the insurance,the greater the price distortion The extent of price sensitivity depends mostly on the nature of the risk being insured,and how controllable it is Consider Huntington's disease vs heart attacks Bhattacharya,Hyde and Tu-HealthEconomics
Bhattacharya, Hyde and Tu – Health Economics What determines the level of price distortion and price sensitivity? The extent of price distortion is a function of the completeness of the insurance. The fuller the insurance, the greater the price distortion The extent of price sensitivity depends mostly on the nature of the risk being insured, and how controllable it is Consider Huntington’s disease vs heart attacks
Moral hazard asymmetric information There is price distortion in insurance markets because insurance companies cannot monitor everything patients do and price their actions accordingly. For example,it would be impractical for an insurance company to count how many cheeseburgers its customers eat Similarly,insurers cannot tell if a patient really needed to see his doctor ten times in the last month Bhattacharya,Hyde and Tu-HealthEconomics
Bhattacharya, Hyde and Tu – Health Economics Moral hazard & asymmetric information There is price distortion in insurance markets because insurance companies cannot monitor everything patients do and price their actions accordingly. For example, it would be impractical for an insurance company to count how many cheeseburgers its customers eat Similarly, insurers cannot tell if a patient really needed to see his doctor ten times in the last month