reduce the moral hazard problem by limiting the quantity of care provided—as long as it will not lead to worse

health problems and higher costs later. Today, many doctors are paid with some combination of managed care

and fee-for-service; that is, a flat amount per patient, but with additional payments for the treatment of certain

health conditions.

Imperfect information is the cause of the moral hazard problem. If an insurance company had perfect
information on risk, it could simply raise its premiums every time an insured party engages in riskier

behavior. However, an insurance company cannot monitor all the risks that people take all the time and so,

even with various checks and cost sharing, moral hazard will remain a problem.

LINK IT UP

Visit this website (http://openstax.org/l/healtheconomics) to read about the relationship between health care

and behavioral economics.

The Adverse Selection Problem
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