Moral Hazard In Healthcare

In this presentation, the focus will be in the field of economics. The central problem of economics involves the study of scarcity (limited choices and unlimited wants). It shows how individuals, societies, governments, businesses, households allocate their scarce resources when faced with the problem of scarcity. It is about the choices that we make and the effects of our choices on each other. Economics is highly applicable to every aspect of our lives, from the decisions we make as individuals to the structures created by governments and firms. Economics is important as it can be used to address a variety of questions and problems in the society, including the desirability of a particular financial investment opportunity, the benefits and

Market failure arises when there is a spillover cost/ benefit onto a third party that is not directly involved in the production or consumption of the particular goods or services. The concept I would like to talk about today is about moral hazard in the healthcare system arising from asymmetric information leads to the problem of market failure.

Asymmetric information theory is originally proposed by Akerlof (1970) and further developed by Spence (1973) and Stiglitz (1975) among others. The theory states that information asymmetry creates an imbalance in power between agents in transactions; this leads to a possibility that some agents may take advantage of the situation and results in market distortion. The common forms of behavior of the agents with information advantage are adverse selection and moral hazard.

The term "moral hazard" originated from the insurance literature. In modern economics, economists understand it as a description of loss-increasing behavior that arises under insurance. In many contemporary textbooks, it is defined as a situation where there is a tendency for an individual to take undue risks because the costs are not borne by the party taking the

In heath care, a patient whose medical cost is fully covered by his insurer/employer/government may demand any and every pharmaceuticals and other treatments that promise any benefit at all, without regard to cost, which leads to the problem of moral hazard. Thus, the question is on how much should the government finance healthcare such that it does not lead to the problem of moral hazard whereby individual over-consume healthcare and increases the burden of the government financing due to such overconsumption. The research paper, titled “Shifting the burden of health care finance: a case study of public–private partnership in Singapore” by Meng Kin Lim on Singapore discusses the approach adopted by the Singapore government, which is that of co-payment between both the individual and government through the use of the 3Ms (medishield, Medisave and Medifund). In this paper, it shows that how via the use of the 3M framework that Singapore government is able to help to subsidise the needy who are unable to pay for healthcare via the use of means-testing, but at the same time prevent individuals from over-consuming healthcare via the use of the co-payment system. The co-payment process makes the individuals think if the treatment is really necessary for them. This helps to ensure that there is no over-consumption of healthcare due to moral hazard thus increasing