Econ 101 Post Series: Moral Hazard and Adverse Selection

[scott]

Part II in the Scott Economics 101 Post Series.

I'm not going to add very much (or any) of my opinion on how it applies to certain matters, because the idiotic replies from boutons and Wild Cobra (who I am beginning to suspect are actually the same troll) make my eyes bleed.

With that said, these are some important topics especially in relation to the debate over healthcare or any kind of insurance program (social or private).

Moral Hazard: (http://en.wikipedia.org/wiki/Moral_hazard)


In economic theory, moral hazard is a situation in which a party insulated from risk behaves differently from how it would behave if it were fully exposed to the risk.

Moral hazard arises because an individual or institution does not take the full consequences and responsibilities of its actions, and therefore has a tendency to act less carefully than it otherwise would, leaving another party to hold some responsibility for the consequences of those actions. For example, a person with insurance against automobile theft may be less cautious about locking his or her car, because the negative consequences of vehicle theft are (partially) the responsibility of the insurance company.

Economists explain moral hazard as a special case of information asymmetry, a situation in which one party in a transaction has more information than another. In particular, moral hazard may occur if a party that is insulated from risk has more information about its actions and intentions than the party paying for the negative consequences of the risk. More broadly, moral hazard occurs when the party with more information about its actions or intentions has a tendency or incentive to behave inappropriately from the perspective of the party with less information.

Moral hazard also arises in a principal-agent problem, where one party, called an agent, acts on behalf of another party, called the principal. The agent usually has more information about his or her actions or intentions than the principal does, because the principal usually cannot completely monitor the agent. The agent may have an incentive to act inappropriately (from the viewpoint of the principal) if the interests of the agent and the principal are not aligned.

Adverse Selection (http://en.wikipedia.org/wiki/Adverse_selection)


Adverse selection, anti-selection, or negative selection is a term used in economics, insurance, statistics, and risk management. It refers to a market process in which "bad" results occur when buyers and sellers have asymmetric information (i.e. access to different information): the "bad" products or services are more likely to be selected. A bank that sets one price for all its checking account customers runs the risk of being adversely selected against by its low-balance, high-activity (and hence least profitable) customers. Two ways to model adverse selection are with signaling games and screening games.

An understanding of these theories may alter your decision-making paradigm on certain issues, or it may strengthen them (and that statement can be said no matter what side of a position you are currently on). I've read a few posts that clearly lack a fundamental understanding of these concepts - which isn't a knock on those people lacking said understanding, because most people are unfamiliar with them - and I have entirely selfish motives of increasing the level of debate in this forum.

Why am I so interested in increasing the level of debate? Because it's currently so fucking stupid that I usually just avoid it altogether.

Have a nice day.

[RandomGuy]

Adverse selection rears its ugly head in a host of things that I get to see at my job.

Insurers, especially health insurers deal with it constantly.

People in good health tend to eschew health insurance, and one has to be very careful in pricing risk assumed, and allowing for this. It drives the actuaries nuts when it happens.

[Wild Cobra]

I understand why you don't want to say much. I can pick apart some of the finer points of what you said so easily. However, for the most part, I agree with you.

Now how about applying that to situations like how people abuse the health care system when they aren't responsible for helping control costs. How mothers will throw away their babies fathers at a whim because they don't have to be responsible, and can get state assistance.

I can go on and on about how your words apply to conservative thinking.

[ElNono]

Where's Part I? I must've missed it.

[Wild Cobra]

Where's Part I? I must've missed it.
I was wondering the same thing, but considering I ignore him a lot, figured it was me.

[ElNono]

You're making his point for him.

[scott]

Where's Part I? I must've missed it.

http://spurstalk.com/forums/showthread.php?t=184312

[scott]

I understand why you don't want to say much. I can pick apart some of the finer points of what you said so easily.

Go ahead, we're all listening.

[ElNono]

http://spurstalk.com/forums/showthread.php?t=184312

Thanks. Didn't know it was part I! :toast

[boutons_deux]

Studies in other advanced countries that have (NON-free) national health insurance show that it does not cause an over-consumption of health care services just because the co-pay is absent or not dissuasive.

Most mentally healthy people have jobs and dislike taking time off to go wait to see a doctor

adverse selection (aka, capitalist's wet dream of assymetric warfare) is a great advantage to UCA, with their armies of accountants and lawyers spewing multi-page, fine-print, opaque contracts full of gotchas, tricks, caveats, fuck-you's, selling to Human-Americans with no equivalent 3rd party support.

[Wild Cobra]

Go ahead, we're all listening.
I'l, pick one from the quoted material.

For example, a person with insurance against automobile theft may be less cautious about locking his or her car, because the negative consequences of vehicle theft are (partially) the responsibility of the insurance company.
This doesn't apply, because the insured did not contractually hold up his end of the deal. The theif would effectively be given the keys.

Like I said though, I agree with the material in general.

If you live in an apartment where utilities are part of the rent, you tend to heat better in the winter and cool more in the summer, because it is a shared cost and you don't see the direct cost. Same with things like health insurance. When the consumers don't see the direct costs, they tend not to care about trying to control the costs.

[Wild Cobra]

What about the people who rent, and then vote on bond measures that raise property taxes, thinking it doesn't affect them? I find it ironic how many of them don't realize they indirectly pay property taxes in the rent. After all, they do live on a property...

Then they complain when the rent increases by $25.

[scott]

This doesn't apply, because the insured did not contractually hold up his end of the deal. The thief would effectively be given the keys.

First of all, I didn't say that. I quoted it. In fact, I really didn't say ANYTHING in my original post other than you and boutons are fucktards. So, I'm still waiting for:


I understand why you don't want to say much. I can pick apart some of the finer points of what you said so easily.

However, in this case, you happen to be wrong that it "doesn't apply." There may be some instances in which the property would NOT be insured if someone left their doors unlocked (but not all cases, and even in those cases, the ability to enforce is negligible).

Whether or not the property would be insured in that case is besides the point, it fits the definition of moral hazard to the letter, because the presence of insurance led the insured to behave differently, regardless of whether his behavior was justified by sound logic.

So, still waiting for you to pick it apart (even though you agree with it, and I didn't "say" it...)


I can go on and on about how your words apply to conservative thinking.

Incredible. I wonder why I didn't think it could be applied to conservative thinking...


An understanding of these theories may alter your decision-making paradigm on certain issues, or it may strengthen them (and that statement can be said no matter what side of a position you are currently on).

At least you brought it strong with a perfect example here:


If you live in an apartment where utilities are part of the rent, you tend to heat better in the winter and cool more in the summer, because it is a shared cost and you don't see the direct cost. Same with things like health insurance. When the consumers don't see the direct costs, they tend not to care about trying to control the costs.

The utilities example is spot on, and a good demonstration that moral hazard applies beyond insurance. To make matters worse, who are going to be the people who are going to seek out "utilities included" packages? The people most likely to abuse them. (Adverse Selection)

[scott]

Adverse selection rears its ugly head in a host of things that I get to see at my job.

Insurers, especially health insurers deal with it constantly.

People in good health tend to eschew health insurance, and one has to be very careful in pricing risk assumed, and allowing for this. It drives the actuaries nuts when it happens.

I would imagine you'd see it most in more highly specialized insurance types (as opposed to broad insurance coverage like "health" or "life"). Think of the insurance packages you buy at Best Buy when you purchase any kind of electronics - the ones that safeguard you even if it is your fault. The moral hazard is obvious in that kind of a case.

[scott]

What about the people who rent, and then vote on bond measures that raise property taxes, thinking it doesn't affect them? I find it ironic how many of them don't realize they indirectly pay property taxes in the rent. After all, they do live on a property...

Then they complain when the rent increases by $25.

Everyone complains about stupid shit. Texas homeowners complained when we had a $27 billion budget shortfall that resulted in massive education cuts, in great part to pay for the massive property tax reduction they cried for a few years prior. There is no problem with complaining about the shortfall, and there is no problem with wanting lower property taxes. The problem is complaining when you got one and then you are upset because the consequences are the other (much like the renter who now faces higher rent).

*Since you're not from Texas, when we say budget shortfall it isn't defecit spending like in DC. The Texas constitution requires the passage of a balanced budget, based on the Comptroller's estimate of revenue. So, when our revenue came in $27 billion short, it meant $27 billion of [edit] spending cuts had to be made.

Edit: mistakingly wrote tax instead of spending. Thanks RG.

[scott]

Studies in other advanced countries that have (NON-free) national health insurance show that it does not cause an over-consumption of health care services just because the co-pay is absent or not dissuasive.

Most mentally healthy people have jobs and dislike taking time off to go wait to see a doctor

adverse selection (aka, capitalist's wet dream of assymetric warfare) is a great advantage to UCA, with their armies of accountants and lawyers spewing multi-page, fine-print, opaque contracts full of gotchas, tricks, caveats, fuck-you's, selling to Human-Americans with no equivalent 3rd party support.

These were some really good points until your last paragraph where you went back to normal boustonspeak.

Some studies have shown that the key in a no per-visit cost system is to make the visit to the doctor be as unpleasant as possible. However, this tends to make some people unhappy when they realize just how unpleasant it is to go to the doctor. At the end of the day, costs matters and there must be some cost to deter people from uncessary doctor visits (outside of your hypocrondriacs who you will be unable to safeguard against). That cost can either be monetary (co-pays and deductables) or non-monetary (unpleasant conditions, taking time off from work, etc).

That deals with unncessary doctors visits (which are managable) but the other side is necessary doctors visits that get created via moral hazard (people starting taking more risks, live less healthy lifestyles, etc.). This has proven to be a bigger challenge to manage (and imagine it in your so-called UCA, where McDonalds and PhillipMorris now know everyone has health insurance... think they don't see an opportunity in that?).

I ignored your last paragraph, since it's void of any actual substance.

[boutons_deux]

"costs matters and there must be some cost to deter people from uncessary doctor visits"

Most national-health countries have some kind small co-pay, like $25 - $100, varying between a general practitioner and a specialist. Those countries simply don't suffer from over-consumption of medical care.

I repeat, because it's true:

adverse selection (aka, capitalist's wet dream of assymetric warfare against Human-Americans) is a great advantage to UCA, with their armies of accountants and lawyers spewing multi-page, fine-print, opaque contracts full of gotchas, tricks, caveats, fuck-you's, selling to Human-Americans with no equivalent 3rd party support.

This is exactly what happens in cell phone contracts, bank fees, (sub-prime/ARM) mortgages "predatorily" peddled to "liar loan" people, health insurance contracts, etc, etc. iow, plenty of fucking substance.

[scott]

Most national-health countries have some kind small co-pay, like $25 - $100, varying between a general practitioner and a specialist. Those countries simply don't suffer from over-consumption of medical care.

I think most people (myself included) would prefer a co-pay system to a "less than stellar service" system.

You aren't really understanding what adverse selection is, regardless of how true or not true your sentence is.

[ElNono]

How about providers overcharging insured patients vs non-insured (having difference price lists)? Would that be a case of the principal-agent problem?

That's certainly part of the costs problem.

[Wild Cobra]

How about providers overcharging insured patients vs non-insured (having difference price lists)? Would that be a case of the principal-agent problem?

That's certainly part of the costs problem.
Why?

When I was uninsured and payed cash, the doctor knew he would collect. There was no paying of staff to do all the tons of paperwork for insurance claims, that insure will turn down whenever they can.

Why are two price lists a problem. Some gas stations charge less for cash vs. credit when you buy fuel. Cash is a sure thing. people sometimes dispute credit payments.

Part of risk management.

[ElNono]

Why?

When I was uninsured and payed cash, the doctor knew he would collect. There was no paying of staff to do all the tons of paperwork for insurance claims, that insure will turn down whenever they can.

Why are two price lists a problem. Some gas stations charge less for cash vs. credit when you buy fuel. Cash is a sure thing. people sometimes dispute credit payments.

Part of risk management.

And you say you're a computer guy? :lmao

Most medical system that I know (including ours) files the claims electronically directly to the insurance.
The difference is that the insurance will only pay a fraction of what the doctor bills. That's where it gets tricky and the problems come up.

You can walk into a doctor's office today with a hurting toe, and the nurse will check your blood pressure and pulse (completely unnecessary) but if they don't do it, they can't charge the office visit. How retarded is that? You don't think that doesn't add to the cost and diminish the service?

[Wild Cobra]

And you say you're a computer guy? :lmao

Most medical system that I know (including ours) files the claims electronically directly to the insurance.
The difference is that the insurance will only pay a fraction of what the doctor bills. That's where it gets tricky and the problems come up.

You can walk into a doctor's office today with a hurting toe, and the nurse will check your blood pressure and pulse (completely unnecessary) but if they don't do it, they can't charge the office visit. How retarded is that? You don't think that doesn't add to the cost and diminish the service?
I have little experience with doctor visits. Took my daughter in several times for specific reasons, They knew up front what we wanted, and paid for the visit and lab tests at the visit. My youngest daughter has hypothyroidism, and requires periodic blood tests.

I don't care what system you have for claims. There are still things that make it more expensive than cash, including the extra time crossing all the "T's" and dotting all the "I's" for the insurers.

[ElNono]

I don't care what system you have for claims. There are still things that make it more expensive than cash, including the extra time crossing all the "T's" and dotting all the "I's" for the insurers.

Another instance of not knowing what you're talking about. No surprises there.

The doctor uses the same system to keep track of your records whether you're paying cash or not. Crossing the "T's" and dotting all the "I's" doesn't really enter the picture, since systems will already fill out the ICD9 codes based on the doctor's input.

There's some overhead and it has to do with claims post-filing. But not the kind of overhead that requires over-charging 30%-40% more per patient. The main reason for those charges is that the insurance will almost without fault pay that much less than what the doctor bills.

Next time you bring your kid to the doc, ask him. We work with practices every day.

[Wild Cobra]

Another instance of not knowing what you're talking about. No surprises there.

The doctor uses the same system to keep track of your records whether you're paying cash or not. Crossing the "T's" and dotting all the "I's" doesn't really enter the picture, since systems will already fill out the ICD9 codes based on the doctor's input.

There's some overhead and it has to do with claims post-filing. But not the kind of overhead that requires over-charging 30%-40% more per patient. The main reason for those charges is that the insurance will almost without fault pay that much less than what the doctor bills.

Next time you bring your kid to the doc, ask him. We work with practices every day.
Well, not according to my doctor. Maybe we aren't as advanced as those of you on the east coast. Maybe it's just some insurance companies that get out of a claim for any silly reason that they can.

[RandomGuy]

I would imagine you'd see it most in more highly specialized insurance types (as opposed to broad insurance coverage like "health" or "life"). Think of the insurance packages you buy at Best Buy when you purchase any kind of electronics - the ones that safeguard you even if it is your fault. The moral hazard is obvious in that kind of a case.

That is correct.

[RandomGuy]

These were some really good points until your last paragraph where you went back to normal boustonspeak.

Some studies have shown that the key in a no per-visit cost system is to make the visit to the doctor be as unpleasant as possible. However, this tends to make some people unhappy when they realize just how unpleasant it is to go to the doctor. At the end of the day, costs matters and there must be some cost to deter people from uncessary doctor visits (outside of your hypocrondriacs who you will be unable to safeguard against). That cost can either be monetary (co-pays and deductables) or non-monetary (unpleasant conditions, taking time off from work, etc).

That deals with unncessary doctors visits (which are managable) but the other side is necessary doctors visits that get created via moral hazard (people starting taking more risks, live less healthy lifestyles, etc.). This has proven to be a bigger challenge to manage (and imagine it in your so-called UCA, where McDonalds and PhillipMorris now know everyone has health insurance... think they don't see an opportunity in that?).

I ignored your last paragraph, since it's void of any actual substance.

The studies that are out there show the following:

Co-pays do reduce doctor visits (utilization) for most things, and the largest drop is from zero copay to some small amount like $25. You see some drop-off as the co-pays get larger, but not much. If you really have to go to the doctor, the demand is pretty inelastic.

[RandomGuy]

Why?

When I was uninsured and payed cash, the doctor knew he would collect. There was no paying of staff to do all the tons of paperwork for insurance claims, that insure will turn down whenever they can.

Why are two price lists a problem. Some gas stations charge less for cash vs. credit when you buy fuel. Cash is a sure thing. people sometimes dispute credit payments.

Part of risk management.

One out of every four dollars spent on healthcare goes to overhead.

Every insurer has their own forms and policies on what they will or will not pay for.

Pay cash up front, and there is no back office filing the claim, tracking the claim, no insurer paying 6 people to look at it, then two more to cut/log the check, etc. etc.

I think we would be far better off giving everybody a debit card, taxing people a certain amount to "fill up" the account, then letting them use it at the doctors office to pay as you go, then having insurance for the bigger things.

Single payor, with the government as the insurance company in the model of a modern HMO. Since the risk is collective anyways, this would simply cut out the middle-man of all the hidden cost shifting that we don't see, but pay for nonetheless.

If you want to opt out, then fine, get and pay for private insurance.

[RandomGuy]

Everyone complains about stupid shit. Texas homeowners complained when we had a $27 billion budget shortfall that resulted in massive education cuts, in great part to pay for the massive property tax reduction they cried for a few years prior. There is no problem with complaining about the shortfall, and there is no problem with wanting lower property taxes. The problem is complaining when you got one and then you are upset because the consequences are the other (much like the renter who now faces higher rent).

*Since you're not from Texas, when we say budget shortfall it isn't defecit spending like in DC. The Texas constitution requires the passage of a balanced budget, based on the Comptroller's estimate of revenue. So, when our revenue came in $27 billion short, it meant $27 billion of spending cuts had to be made.

FIFY, although they did come up with a lot of stealth tax increases, some of which I personally have seen.

The thing that bugs me most is that it was predicted in 2006, so it wasn't some huge surprise.
http://www.window.state.tx.us/news/60515letter.html

I hate being cynical, but I get the feeling that this was simply a box to check in preparation for his run for the presidency. "Cut taxes: check".
Since the comproller told him about the coming shortfall, he presumedly knew it would lead to huge problems after he left, but did it anyway. :bang

So the lege had to scramble to find new taxes that could be called anything but, and massive cuts to education. :bang

Teachers are not that well-paid in the state, so when you start cutting that, you drop a lot of educators as well, and end up with unmanagable class sizes. :bang

I'll stop now. It rankles.

[George Gervin's Afro]

Part II in the Scott Economics 101 Post Series.

I'm not going to add very much (or any) of my opinion on how it applies to certain matters, because the idiotic replies from boutons and Wild Cobra (who I am beginning to suspect are actually the same troll) make my eyes bleed.

With that said, these are some important topics especially in relation to the debate over healthcare or any kind of insurance program (social or private).

Moral Hazard: (http://en.wikipedia.org/wiki/Moral_hazard)



Adverse Selection (http://en.wikipedia.org/wiki/Adverse_selection)



An understanding of these theories may alter your decision-making paradigm on certain issues, or it may strengthen them (and that statement can be said no matter what side of a position you are currently on). I've read a few posts that clearly lack a fundamental understanding of these concepts - which isn't a knock on those people lacking said understanding, because most people are unfamiliar with them - and I have entirely selfish motives of increasing the level of debate in this forum.

Why am I so interested in increasing the level of debate? Because it's currently so fucking stupid that I usually just avoid it altogether.

Have a nice day.

This thread has shaken my lumbering mind. I first learned of this theory during one of my Business Ethics classes many moons ago.. good stuff because it makes you think ,at least most of us anyway...

I wish many more of these threads were more intellectually honest than they are ...but certain characters seem to consistently lack this honesty..

[CosmicCowboy]

I wish many more of these threads were more intellectually honest than they are ...but certain characters seem to consistently lack this honesty..

Pot, meet Kettle

[George Gervin's Afro]

Pot, meet Kettle

Why am I not surprised that you don't understand what 'intellectual dishonesty' means...


'the advocacy of a position which the advocate knows or believes to be false or misleading'