How Does a Moral Hazard Affect Health Insurance?

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Usually when you get health insurance, you have a choice between many different healthcare plans. These plans have differing levels of coverage for a certain price, with more expensive coverage offering more options. Most people usually select a health insurance plan that fits their needs and budget.
To make sure people don’t use medical insurance when they don’t need it, health insurance companies charge deductibles, copayments, and coinsurance when you visit your doctor. Insurance companies call this “eliminating a moral hazard.”
Here’s what you should know about how “moral hazards” affect health insurance and what insurance companies do to combat these situations.

How Health Insurance Works

Before you get health insurance, either through the Affordable Care Act (ACA), your company, a private insurance plan, or Medicare/Medicaid, you have to decide what kind of coverage you want. Most people try to balance the amount of coverage they get with the overall cost of a particular plan.
The actual price of an insurance plan is more than your monthly premium. It is also affected by such things as the deductible, copayments, and coinsurance you have to pay as a part of your medical care. Plans also provide varying levels of coverage with the insurance company, and as the policy holder, you share part of the burden of the care.
Common plans include 80/20 coverage, where the insurance company pays 80% of the costs and you pay 20%, after you pay your deductible. Insurance plans also have a maximum cost out of pocket, which is the maximum amount you will have to pay. If you want your insurance company to pay more of the bill, such as a 90/10 plan, then you have to pay more in the form of premiums.

When Is a Moral Hazard Created?

A moral hazard is created when these out-of-pocket costs are lowered. This usually results in an increase in the use of the health care provided. On the other hand, taking a more costly plan can also create a moral hazard because the insured is more likely to search for more expensive options for care since they end up paying less of a percentage of the overall costs.
A study from John Hopkins shows that about 14% of the people with a more expensive plan would have been fine with a less costly one. In essence, the plan holders did not need the higher level of care, as their condition could have just as easily been treated with preventive care.

How Insurance Companies Deal With Moral Hazards in Health Insurance Plans

As noted, insurance companies use deductibles, copayments, and coinsurance to try and reduce the effect of moral hazards on health insurance. Even people with health insurance through the ACA or Medicare have to bear some of the burden of their care through the above methods, though those with a low income can get help with paying for their plan from the government.
The bottom line: Insurance companies generally try to discourage the insured from using their healthcare plan unless they need to.
Ultimately, an increase in the amount of higher care means an increase in everyone’s costs when it comes to their health insurance. This is due mainly to the fact that when insurance companies have to take on more of a burden, they pass it on to their customers in the form of raised premium.

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