Question

Explain why deductibles lower the demand for medical care. Why do consumers use up more healthcare services without deductible than with deductible?

Answer 1

The deductibles lower the demand for medical care because there are two main problems with demand for insurance: Morale hazard and Adverse selection. The problem of morale hazard is that Morale hazards arise out of carelessness or indifference of individuals to take preventive or precautionary steps to avoid going to the hospital. The other problem is adverse selection in which because of asymmetric information many high risk insurers will pretend to be low risk insurer in order to get lower premiums. Also, people who have already bought health insurance will not hesitate to go to the hospital for small ailments. Preventive care, which has a higher demand elasticity, will be most affected. As a result of moral hazard, people will show a lot of carelessness. For example, not following a healthy diet and eating more junk food. People with insurance would prefer going to for the most expensive treatment available and at the most expensive hospital. Therefore, having a deductible helps in overcoming the problem of morale hazard and adverse selection.

People use more healthcare services without deductible as they don't have to pay anything out of their pocket so they want to take maximum benefit out of the insurance scheme. Deductibles reduce the demand for healthcare services by increasing its price. Since, the insurer will have to pay something for a hospital visit, he will avoid going to the hospital for small problems. People without deductible need not worry about their out of pocket expenditure and so they would have frequent visits to the hospital.