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Health Insurance, Moral Hazard, and Managed Care


  • Ching-to Albert Ma


  • Michael Riordan



If an illness is not contractible, then even partially insured consumers demand treatment for it when the benefit is less than the cost, a condition known as moral hazard. Traditional health insurance, which controls moral hazard with copayments (demand management), can result in either a deficient or an excessive provision of treatment relative to ideal insurance. In particular, treatment for a low-probability illness is deficient if illness per se has little effect on the consumer's marginal utility of income and if the consumer's price elasticity of expected demand for treatment is large relative to the risk-spreading distortion when these are evaluated at a copayment that brings forth the ideal provision of treatment. Managed care, which controls moral hazard with physician incentives, can either increase or decrease treatment delivery relative to traditional insurance, depending on whether demand management results in deficient or excessive treatment. Copyright (c) 2002 Massachusetts Institute of Technology.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Ching-to Albert Ma & Michael Riordan, 1997. "Health Insurance, Moral Hazard, and Managed Care," Papers 0080, Boston University - Industry Studies Programme.
  • Handle: RePEc:fth:bostin:0080

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    References listed on IDEAS

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    Cited by:

    1. Rehn, Eric, 2007. "Public Hospitals - Incentives and Organization," Working Papers 2007:13, Lund University, Department of Economics, revised 01 Apr 2008.
    2. Bardey, David & Cremer, Helmuth & Lozachmeur, Jean-Marie, 2011. "Doctors' remuneration schemes and hospital competition in two-sided markets with common network externalities," TSE Working Papers 11-250, Toulouse School of Economics (TSE), revised Jul 2011.
    3. Martin Gaynor & Deborah Haas-Wilson & William B. Vogt, 2000. "Are Invisible Hands Good Hands? Moral Hazard, Competition, and the Second-Best in Health Care Markets," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 992-1005, October.
    4. Bronwyn Howell, 2008. "Capitation and Financial Risk Allocation in New Zealand’s Primary Health Care Sector: The Perverse Consequences of Neglecting Financial Risk Allocation," Agenda - A Journal of Policy Analysis and Reform, Australian National University, College of Business and Economics, School of Economics, vol. 15(1), pages 29-48.
    5. Patricia M. Danzon & Jonathan D. Ketcham, 2004. "Reference Pricing of Pharmaceuticals for Medicare: Evidence from Germany, the Netherlands, and New Zealand," NBER Chapters,in: Frontiers in Health Policy Research, Volume 7, pages 1-54 National Bureau of Economic Research, Inc.
    6. Ma, Ching-to Albert, 2004. "Public rationing and private cost incentives," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 333-352, January.
    7. James M. Malcomson, 2004. "Health Service Gatekeepers," RAND Journal of Economics, The RAND Corporation, vol. 35(2), pages 401-421, Summer.
    8. Bardey David & Bourgeon Jean-Marc, 2011. "Health Care Network Formation and Policyholders' Welfare," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(2), pages 1-20, January.
    9. Kowalski, Amanda E., 2015. "Estimating the tradeoff between risk protection and moral hazard with a nonlinear budget set model of health insurance," International Journal of Industrial Organization, Elsevier, vol. 43(C), pages 122-135.
    10. Godager, Geir & Wiesen, Daniel, 2013. "Profit or patients’ health benefit? Exploring the heterogeneity in physician altruism," Journal of Health Economics, Elsevier, vol. 32(6), pages 1105-1116.
    11. Howell, Bronwyn, 2007. "Financial Risk in Primary Health Care Contracting: Implications for Sector Structure, Ownership and Outcomes," Working Paper Series 3964, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    12. Randall P. Ellis & Ching‐to Albert Ma, 2011. "Health insurance, cost expectations, and adverse job turnover," Health Economics, John Wiley & Sons, Ltd., vol. 20(1), pages 27-44, January.
    13. Liu, Ting & Ma, Ching-to Albert, 2013. "Health insurance, treatment plan, and delegation to altruistic physician," Journal of Economic Behavior & Organization, Elsevier, vol. 85(C), pages 79-96.
    14. Jihong Ding & Minglai Zhu, 2009. "A theoretical investigation of the reformed public health insurance in urban China," Frontiers of Economics in China, Springer;Higher Education Press, vol. 4(1), pages 1-29, March.
    15. David Bardey & Jean-Charles Rochet, 2010. "Competition Among Health Plans: A Two-Sided Market Approach," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 19(2), pages 435-451, June.
    16. Michael Hoel, 2005. "Concerns for Equity and the Optimal Co-Payments for Publicly Provided Health Care," CESifo Working Paper Series 1620, CESifo Group Munich.
    17. Howell, Bronwyn, 2007. "Contractual Pitfalls in Capitated Primary Health Care: Sharing Random Demand Risk in New Zealand's Strategy," Working Paper Series 3965, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    18. Hennig-Schmidt, Heike & Selten, Reinhard & Wiesen, Daniel, 2011. "How payment systems affect physicians' provision behaviour--An experimental investigation," Journal of Health Economics, Elsevier, vol. 30(4), pages 637-646, July.
    19. Boone, J., 2014. "Fee-for-service, Capitation and Health Provider Choice with Private Contracts," Discussion Paper 2014-066, Tilburg University, Center for Economic Research.
    20. Randall P. Ellis & Ching-to Albert Ma, 2005. "Health Insurance, Expectations, and Job Turnover," Boston University - Department of Economics - Working Papers Series WP2005-036, Boston University - Department of Economics.
    21. Dyson, Maree & Allen, Felicity & Duckett, Stephen, 2000. "Profiling childhood disability: the reliability of the educational needs questionnaire," Evaluation and Program Planning, Elsevier, vol. 23(2), pages 177-185, May.
    22. Asheim, Geir B. & Emblem, Anne Wenche & Nilssen, Tore, 2010. "Health insurance: Medical treatment vs disability payment," Research in Economics, Elsevier, vol. 64(3), pages 137-145, September.

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