• Entry
  • Reader's guide
  • Entries A-Z
  • Subject index

For most goods and services, the full price is borne by consumers. However, for healthcare services, third-party payers (e.g., government programs or private insurers) typically make partial or full payments on the consumer's behalf. Therefore, the amount paid out-of-pocket (OOP) by consumers represents only a fraction of the full payment received by the providers of services.

The fundamental purpose of imposing cost-sharing requirements on consumers is to control moral hazard (use of services beyond the quantity at which marginal benefit equals marginal cost). Although a risk-averse consumer would prefer full coverage (no OOP obligations) in the first best situation, the first best is generally not attainable because fully insured individuals have an incentive to use care until marginal benefit is zero. These low-benefit services will increase ...

    • Loading...
    locked icon

    Sign in to access this content

    Get a 30 day FREE TRIAL

    • Watch videos from a variety of sources bringing classroom topics to life
    • Read modern, diverse business cases
    • Explore hundreds of books and reference titles