APA RESEARCH PAPER

Microeconomic Effect of Healthcare Insurance

Microeconomic Effect of Healthcare Insurance

Using wealth on healthcare is only one of several means that the economy has an effect on the health of people. Economic prosperity facilitates persons to stay away from dangerous works, to take an enhanced food intake, and to clean up the environment, as well as to buy more healthcare products and services.

Adverse selection arises because insurers don't have complete knowledge of the health risks of those they insure. A different type of information asymmetry arises because having insurance may distort one's behavior in ways that are not precisely known by the insurer. Considering a simple case in which everyone faces the identical risk of being sick each year. There is thus a well-functioning market for health insurance with each person paying an actuarially fair premium (ignoring loading fees). People engage in risk smoothing in order to maximize expected utility. (Vaughan, 2007)

But the benefit of risk smoothing can come at a cost to efficiency. Because the cost of disease will be completely paid back, the insured may be more expected to take part in hazardous activities, for example not exercising much, eating a lot of junk food, and smoking. The incentive to increase risky behavior because the adverse outcomes of that behavior are covered by insurance is known as moral hazard. For example, a person with an insurance policy that compensates him for anything stolen from his home might be less likely to lock his doors. This problem arises because of asymmetric information: The insurance provider charges for coverage based on an assumed level of risky behavior by the insured, but cannot know how much the insured will increase risky behavior once she is covered. The continuation of moral hazard initiates a basic strain on the insurance policies plan: The more that an insurance plan smoothes risk by covering health care costs, the more it causes wasteful gorge of healthcare through an increase in risky behavior. (Brunner, 2012)

Another efficiency issue related to insurance markets arises because the policy pays some or all of the incremental cost of health care. This increases the incentive for the insured to purchase more health care services (such as visits to the doctor). To explore the consequences of this observation, we first need to elaborate on the basic structure of health insurance plans. Insurance plans require people to pay a premium (usually monthly) in order to receive the guarantee of compensation should a certain adverse event occur. Most insurance policies also require individuals to pay for some of their health expenses out of their own pockets. The policy's deductible is the amount of health care costs the individual must pay each year before the insurance company starts paying compensation. For example, a $1,000 earnings which are deductible that the insured should give the first $1,000 in health expenses each year before receiving any money from the insurance company. (Heimer, 2002)

In addition to the deductible, however, the insured person generally pays some portion of her medical ...