Chapter 15: Q7. Jack has three types of medical expenditures: contact lenses, pr

Question

Chapter 15: Q7. Jack has three types of medical expenditures: contact lenses, prescription drugs for a condition he has, and accidents and acute illnesses (such as broken bones and pneumonia). He has been paying for all of his medical expenditures out of pocket and he is now considering purchasing health insurance. The different plans he is considering offer coverage for different types of expenditures. Describe the consumption smoothing benefits and moral hazard costs of coverage for contact lenses, prescription drugs, and accidents and acute illnesses.

Explanation / Answer

There are likely to be some consumption-smoothing benefits of health insurance coverage of expenses for contact lenses since contact lens use is completely predictable (and a small fraction of his income).

The moral hazard effects of coverage for contact lenses are likely to be modest as well: Jack might consume some more contact lenses than he would if they were not covered by insurance, but there are only so many contact lenses he needs; furthermore, the coverage would probably limit the number he could purchase in a year. Prescription drugs for preexisting conditions are similar in both respects, with even lower moral hazard costs. However, prescription drug coverage more generally might also apply to future needs. This sort of coverage would have consumption-smoothing benefits as well as moral hazard costs since coverage might make doctors more likely to prescribe drugs for conditions that do not really need them (for example, to replace over-the-counter substitutes).

Coverage for accidents and acute illnesses is likely to have the greatest consumption-smoothing benefits: Jack cannot easily consumption smooth in the event of a major injury without insurance. It is also likely to have low moral hazard costs since illnesses and acute injuries are relatively easy to verify.

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.