Moral hazard

Generally it can be observed that price elasticity is low, a trend that is aggravated by the fact that in most health systems the consumer does not pay the totality of the price. Some authors state that the elasticity of substitution between medicines in different therapeutic groups can be almost nil. The existence of insurance is an incentive for greater consumption and facilitates the application of higher prices (moral hazard). 

What distinguishes the pharmaceutical market and justifies the need to fix maximum limits to public financing such as those involved in RP systems The pharmaceutical sector differs from other sectors in veiy important respects,14 15 including an imperfect agency relationship, imperfect informa -tion, moral hazard and joint, sunk and fixed costs. 

The consumer does not usually have to pay the whole of the price of the drag prescribed by the doctor. Even in the case of a perfect agency relationship between prescriber and patient, drag consumption may not be optimal because of the existence of moral hazard. This means that the insured patient has no incentive to induce the doctor to make the effort to seek information on lower-cost treatments. Even if the doctor had complete information, because of moral hazard the patient would tend not to demand the socially optimal quantity of prescribed drags. Consequently, the patient may receive an excess of prescriptions and/or the drags prescribed may be too expensive in relation to the social optimum.17... 

To sum up, the factors that enable the supply side to fix prices above the marginal cost are (a) the imperfect agency relationship between the doctor (the agent) and the insurer (the principal) the prescriber may prefer the brand product, about which he or she has acquired knowledge and experience during the patent period (risk aversion), (b) the patient, and sometimes also the doctor, may have imperfect information on the quality of cheaper alternatives, and (c) the lack of incentives to change prescription habits (moral hazard). 

Insurance Coverage of Pharmaceuticals, Use, Moral Hazard and Efficiency. Effects of Co-payment... 

The moral hazard associated with health insurance is twofold that which occurs ex ante, which consists in failing to prevent health problems because he or she knows that he or she is protected in the event of falling ill, and expost moral hazard, which is what occurs when rational consumers consume quantities that are greater than the optimum once they fall ill, because the marginal cost for the co-insured patient is lower than the marginal cost of production. 

This welfare loss implies inefficiency. Moral hazard gives rise to an inefficient reallocation of consumption, channelling it towards pharmaceuticals and away from other goods and services, both health care and others, which are not covered by insurance. Preventive services - sport, nutrition - become underused. 

In the 1970s and 1980s in the USA, the need for health cost containment and the alarming empirical estimates on the extent of moral hazard advised an increase in the co-payment rate for health services. Thus, Feldstein5 estimated that if the co-insurance rate were raised from 33 per cent to 67 per cent, the costs incurred due to welfare loss would fall much more than the benefits derived from reducing the risk. Subsequently, Feldman and Dowd,6 using data from the Rand experiment in the 1980s, reached similar conclusions. 

The phenomenon of moral hazard, and the consequent welfare loss, occurs when the demand of the insured party shows price elasticity, and the greater the elasticity the greater the moral hazard. Recall that the price elasticity of demand is defined as follows ... 

If we say, for example, that it stands at -0.2, we mean that if the price rises by 1 per cent, the quantity demanded will decrease by 0.2 per cent. In fact, the price elasticity of demand measures the potential for moral hazard.9 In Figure 7.1, the slope of the demand function for 100 per cent copayment is what ultimately determines the shaded area, which as we already know, corresponds to the welfare loss of total coverage pharmaceutical insurance. 

Nyman, J.A. (1999), The economics of moral hazard revisited , Journal of Health Economics, 18, 811-24. 

Pauly, M. (1968), The economics of moral hazard comment , American Economic Review, 58, 531-37. 

Zweifel, P. and W.G. Manning (2000), Moral hazard and consumer incentives in health care , in Handbook of Health Economics, vol 1A, Amsterdam North Holland pp. 409-59. 

Juengst, E.T., "Groups as Gatekeepers to Genomic Research Conceptually Confusing, Morally Hazardous, and Practically Useless," Kennedy Inst. Ethics ]., 8, 183-200 (1998b). 

Markets for pharmaceutical products worldwide are less than well balanced. Markets dominated by the monopsonistic (single-buyer) power of government can exercise undue power over the supply side of the market and depress prices to dynamically inefficient levels. At the other extreme, markets with an ill-informed and typically feeble demand side, weakened further by moral hazard inherent in health third-party payment, are unduly dominated by the supply side. What is needed instead are markets with more evenly balanced of power, in which both sides of the market are accurately informed about the prices, clinical effectiveness, and cost effectiveness of the rival products being offered for sale. Creating such markets is one of the major challenges confronting health care policy makers around the globe. 

These facts facilitate monitoring and suggest that any moral hazards are manageable. Large pharmaceutical companies routinely purchase preclini-cal and clinical testing services from contract researchers. 

A variant that addresses this problem are the proposals to target R D tax credits toward research on malaria, HIV/AIDS, and tuberculosis. But tax credits do not even have the reputation incentive (reputation is built up by success fully using previous grant money). If recipient research organizations are put at risk for some of their own funds (e.g., the part not funded through a tax credit or by mandatory subsidy matching), the moral hazard problem should be attenuated. ... 

For a more general discussion of health insurance markets, including the roles of moral hazard and adverse selection, see Cutler and Zeckhauser (2000). 

For further discussion, see, e.g., Gallini and Scotchmer (2002). In spite of the potential moral hazard problem (firms conducting R D receive tax subsidies even if the research is not successful, thereby potentially reducing the firm s effort), they are often recommended. See e.g., Offit (2005). 

Private insurance markets do not work well if there is adverse selection, moral hazard, or inadequate population-level information about the insured risks. 

Insurance companies have developed several strategies to cope with the information difficulties that lead to moral hazard and adverse selection. They use deductibles and copayments to reduce moral hazard. If cusfomers musf pay some of fhe damage cosfs themselves when accidents occur, they are less likely to engage in unanticipated risky behavior. Some firms also use experience rafing (i.e., raising rates if a claim is made) to reduce moral hazard. Experience rating penalizes cautious clients who still suffer accidents, but insurance firms cannot economically differentiate those careful policyholders from morally hazardous ones. 

Walker (2005) discusses the need to reflect upon the Code of Conduct for the International Red Cross and Red Crescent. He outlines that the Code was principally devised for natural disasters and is not as applicable in complex emergencies. In 2004, however, Hugo Slim, the resident scholar and ethicist at the International Federation of Red Cross Red Crescent, proposed five moral hazards aid-relief workers should be aware of. These are as follows (IFRC, 2004) ... 

Overservicing. Overservicing can occur because of the direct link between outputs and subsidies, combined with moral hazard and agency problems. 

Activation also serves to legitimise this relatively generous welfare system. The work test polices moral hazard and ensures that (almost) nobody cheats or lives off the system and in that way secures the system s broad support in the population, including of those who are not themselves likely to become unemployed and subject to activation. 

Activation of unemployment benefit recipients in the US is a concept well advanced in years. 10 Earliest discussions on the design of UI in the US focused on the issue of the insurability of unemployment (Blaustein 1993). Compensable joblessness was (and is) restricted to involuntary unavoidable unemployment (initial and continuing). The term moral hazard is insurance jargon for a situation where the insured can control the risk of exposure to the hazard insured against. UI rules were set to reduce the problem of moral hazard. UI programmes included features intended to prevent unemployment (Commons 1922). These features included definitions of involuntary unemployment, requirements for active job search, and benefit amounts and potential durations of benefits set below thresholds considered disincentives for actively seeking work. 

The problem of moral hazard is present when the insured can affect the chance of experiencing the unfavourable outcome insured against. 

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