insurance company covers a certain percentage of the cost. For example, insurance might pay for 80% of the

costs of repairing a home after a fire, but the homeowner would pay the other 20%.

All of these forms of cost sharing discourage moral hazard, because people know that they will have to pay

something out of their own pocket when they make an insurance claim. The effect can be powerful. One

prominent study found that when people face moderate deductibles and copayments for their health

insurance, they consume about one-third less in medical care than people who have complete insurance and

do not pay anything out of pocket, presumably because deductibles and copayments reduce the level of moral

hazard. However, those who consumed less health care did not seem to have any difference in health status.

A final way of reducing moral hazard, which is especially applicable to health care, is to focus on healthcare
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