Adverse Selection and Moral Hazard

¶ … adverse selection and moral hazard in health insurance: (a) are informational problems; (b) require incomplete coverage; - induce inefficiency?

Economically speaking, the moral hazard regarding how health insurance is allocated is that people who have generous health insurance use more medical care and receive higher quality medical care than those who have less generous insurance or no insurance at all. They do this based upon access and cost, regardless of their need for such care (Pauly 2006). This creates waste and inefficiency because, for example, a well-insured thirty-something woman with no or little risk of breast cancer may get annual mammograms while an older woman may not go for screenings at all even though she has a high genetic propensity to develop the illness. The older woman may have to pay high co-pays or have no insurance coverage at all.

This creates adverse selection, or an imperfect or inefficient allocation of resources. The informational problem is that insurance coverage is given based upon who has the least risk of incurring costs, so those individuals who need insurance coverage the most usually have the least comprehensive and most expensive plans. Their overuse also drives up costs. Incomplete coverage is better when allocating scarce resources to create something of a disincentive for consumers who may get unnecessary tests and medications on the theory that 'if insurance pays,' why not get the tests, which again means the system induces inefficiency by favoring the healthy and well-covered (Pauly 2006).

Supplier-induced demand and small-area variations problems are, in practice, identical problems." True or false?