Question

How can deductibles, copayments, and coinsurance reduce moral hazard?

Short answer

Deductibles, copayments, and coinsurance reduce moral hazard by increasing the cost-sharing burden on the insured person, making them more cautious about their healthcare utilization. Deductibles require insured individuals to cover initial costs before insurance coverage begins, copayments involve fixed amounts paid for specific healthcare services, and coinsurance requires insured individuals to pay a percentage of medical costs even after meeting the deductible. These mechanisms encourage more responsible healthcare decision-making and minimize the risks and over-utilization of healthcare services.

Step-by-step solution

Deductibles

A deductible is the amount of money the insured person has to pay for covered healthcare services before the insurance plan starts to cover the costs. By having a deductible, the insured person will be more cautious in utilizing medical services, as they will have to bear the initial costs themselves. This self-regulation can be seen as a solution to at least partially reduce the moral hazard problem. In other words, implementing a deductible increases the cost-sharing burden and makes the insured person more aware of the expenses, leading to more responsible healthcare decisions.

Copayments

A copayment is a fixed amount the insured person has to pay for specific healthcare services. For example, a \(30 copayment for a doctor's visit or a \)15 copayment for prescription medication. Copayments help reduce moral hazard by making individuals think twice before using healthcare services because they have to contribute a portion of the cost. It discourages over-utilization of healthcare services that may not be necessary or essential by directly affecting the insured person's pocket.

Coinsurance

Coinsurance is the percentage of the cost of medical services that the insured person bears after meeting the deductible. For example, if a health plan has a 20% coinsurance rate and the cost of a medical service is \(100, the insured person will pay \)20, while the insurance company pays the remaining $80. Coinsurance is yet another way to share the cost of healthcare services between the insured and the insurer, making patients more accountable for their healthcare choices. By having coinsurance, patients will be more cautious when deciding which medical treatments to utilize, again reducing moral hazard in the process. In summary, each of these cost-sharing mechanisms (deductibles, copayments, and coinsurance) helps to reduce the moral hazard associated with insurance by increasing the financial responsibility placed on the insured person. As a result, they encourage more careful and responsible healthcare decision-making, minimizing the risks and over-utilization of healthcare services.