Health Care, Insurance

Alan C. Monheit

Health care insurance is a contractual arrangement through which individuals spread the financial risk of unexpected and costly medical events. By enabling the voluntary pooling of health-related financial risks, health insurance enhances social welfare. However, incentives inherent in a health insurance contract can result in the inefficient use of health services, leading to reductions in social welfare. Additionally, disparities in information about health status between persons seeking insurance and entities providing coverage can affect the efficient and equitable pricing and provision of health insurance and result in welfare losses. Consequently, the conflict between the welfare gains from risk pooling and the welfare losses from the inefficient use of medical care (known as moral hazard) and asymmetric information (the problem of adverse risk selection) remains an ongoing tension in the design of health plans and in efforts to expand coverage. According to standard theory, risk-averse individuals prefer a monetary loss with ...

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