Moral Hazard
The change in behavior insurance can cause once people are protected against loss.
Overview
Once covered, people may guard less against loss, from leaving doors unlocked to filing borderline claims, and insurers cannot watch everyone all the time. Economist Kenneth Arrow placed the idea at the center of health economics in 1963, since prepaid care lowers the marginal price of using more of it. Insurance design answers with cost sharing: deductibles, copays, coinsurance, experience rating, waiting periods, exclusions, and claim investigation. Analysts separate ex ante moral hazard, less prevention before loss, from ex post, overconsumption after. Insurers also fight outright fraud, a crime rather than sloppiness, through special investigation units. The policy goal is cost sharing that deters the frivolous without deterring the necessary.
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