Question

1. Insurance companies often have both a fixed premium regardless of health care expenditures and a variable co-pay that the consumer must pay for every visit to the doctor. Identify and explain the motive for this payment structure in insurance plans.

Answer 1

Answer - This policy of the insurance company is to reduce the problem of the moral hazard which persists in the insurance contracts. If the person will have to pay the fee to insurance company on eveny visit to doctor , he will avoid doing that and keep himself healthy. Hence the insurance company will have lesser chances of the losses from the claims which would have arised if the person concealed the information from the company about his illness. This would have created the moral hazard as the insured would be careless knowing the fact that he will be paid the amount of insurance if he is sick. This also reduces the problem of the adverse selection.