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 - The most serious problem faced in the insurance contract is the problem of the Moral hazard faced by the insurer. This problem arises because the insured person knowing the fact that he is being protected by the third party , is ready to take the extra risk which results in increased cost to the insurer. To avoid this problem , the insurance companies come up with Co payments on every visit to a doctor so that the cost of insurance for insured increased and he takes lesser risk , reduces his visit to doctor and thus reduces the moral hazard.