Health Insurance: Adverse Selection vs. Moral Hazard

By: Mevish Jaffer

How important is health insurance to you? Perhaps the answer to this question depends on your overall health condition. However, at some point you have to consider whether you want to base the decision of purchasing a health insurance plan solely on the current status of your health. The reality of it is that health insurance is a significant factor that affects your life and yet not everyone tends to feel this way. This is where the adverse selection verses moral hazard of health insurance controversy comes into play.

Adverse Selection of Health Insurance Plans

You may be wondering what exactly adverse selection is all about. Well, in terms of health insurance, adverse selection explains the inclination for you to only purchase health insurance if you know you will ultimately benefit from it. The way adverse selection works is that if you’re in poor health, you have more of a tendency to buy a health insurance plan because you’re aware of all the medical bills you will have to handle. On the flip side of adverse selection, you may feel you are in fairly good health and therefore don’t find the purchase of a health insurance plan essential. It makes sense to you because visiting the doctor once a year and paying a one-time fee is much more cost effective than making monthly health insurance payments.

If you think there is a connection between adverse selection and why health insurance companies check out your medical history during the screening process, you’re absolutely correct! Prior to purchasing a health insurance plan, you are generally asked to fill out a lengthy medical history form, in which you answer specific health-related questions such as:

  • Do you smoke?
  • How much do you weigh?
  • What kind of diseases/health conditions run in your family? (High blood pressure, diabetes etc.)
  • Have you ever been treated for a terminal illness?

By gathering this type of information, health insurance companies are able to determine whether or not you will be a large financial liability to them. Unfortunately, based on that, you are often either denied coverage or charged with higher premiums/rates in order to balance the amount the health insurance company will be responsible to cover. On a brighter note, there are actually some insurance companies out there that will reward you for not smoking and being in good health by offering special discounts on your health insurance policy.

The Moral Hazard of Health Insurance

The moral hazard, as it relates to health insurance is a certain way of thinking about your medical costs concerning a health-related emergency when you know you are insured. In other words if you have an adequate health insurance plan, you’re more inclined not to stress over payment in the case of a medical emergency, as you know your out-of-pocket expenses will be alleviated by your health insurance company. When it comes to the moral hazard of health insurance, you may also be less likely to keep up with annual physicals and other forms of preventative health care.

In the end, you have to think about the adverse selection and moral hazard of health insurance carefully. Even though you may be in good health now, you never know what the future holds for you and while you should remain positive, you also need to be prepared for unforeseen medical situations. If you already have a health insurance plan, you shouldn’t take it for granted. While it may be tempting to neglect your routine check-ups and chalk it all up to the fact that if something should happen, you’re covered: it’s not a good idea. Your first priority should be your well-being and as long as you remember that, you won’t get caught up in the controversy of adverse selection verses moral hazard!

By: jolem
Date: 11/3/2011 6:25:00 AM
how can moral hazard be combated in health care

By: mohit kumar
Date: 3/21/2010 10:20:09 PM
iam not geting what was you saying.

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