Health Care Economics and

Policies
Faculty of Nursing
Cairo University
Master Program 2nd semester
2024-2025
Health Insurance Adverse Selection
Moral
Under supervision
Prof.Dr: Abeer Seada
prepared by
Aya Helal Ali Salama
Hadir Ahmed Hussein
Samah Elsayed
Rawda Ashraf
Intended learing outcomes
• At the end of this presentation ,the
candidate will be able to
• Define health insurance
• Mention purpose of health care
• Define moral hazare dand adverse selection
• State health adverse selection and moral
hazards
• Discuss Cause of moral hazard
• Compare between moral hazard and
adverse selection
Discuss Strategies to mitigate the effects of
moral hazard and adverse selection
Summarize Health insurance in Egypt
Discuss the main cause of adverse selection
Explain comprehensive Health Insurance Law
 Outlines
1-Introduction.
2-Definition of health insurance.
3- Purpose of health insurance
4-Moral hazard and adverse selection.
5-Compare between moral hazard and adverse selection
6-Key differences between moral hazard and adverse selection
7-Health insurance in Egypt
8- Main cause of adverse selection
9- Comprehensive Health Insurance Law
10-Reference.
Introduction
Adverse selection and moral hazards are pivotal
issues in health insurance, influencing market
dynamics and policy effectiveness. Adverse
selection arises when there's asymmetric
information between insurers and insured, leading to
a pool with higher risk individuals.
Moral hazard occurs post-contract, where insured
individuals' behavior may change, increasing usage
of healthcare services. Together, these phenomena
challenge the sustainability and efficiency of health
insurance systems, necessitating innovative
solutions
 Definition of Health insurance
•  Health insurance :is a type of insurance coverage that
pays for medicaland surgical expenses incurred by the
insured.
•  Health insurance can reimburse the insured for expenses
incurred from illness or injury, or pay the care provider
directly.
It is often included in employer benefit packages as a means of
enticingquality employees, with premiums partially covered by
the employer butoften also deducted from employee pay
checks.
 Purposes of health insurance.
• The core purpose of health insurance is to:
• Provide financial protection against high medical costs,
• Ensuring that people have access to health
• Care when they need it without the burden of
unaffordable expenses.

 Moral hazard and adverse selection
Moral hazard occurs when the behavior of one party to a
contract changes in a way that is disadvantageous. to another
after the contract has been signed.

In the context of health insurance, it refers to the phenomenon

where individuals who are insured may be more likely to
engage in riskier behaviors or consume healthcare services
more liberally than they would if they were paying for these
services out-of-pocket.

This occurs because the financial risk of their healthcare

expenses is transferred to the insurer, diminishing the
individual's incentive to avoid risk and to use healthcare
services judiciously
For example:
A person with comprehensive health insurance
coverage might choose to visit a doctor for minor
illnesses more frequently or opt for more
expensive treatment options, knowing that the
insurance will cover the majority of the costs.
This can lead to overutilization of healthcare
resources, increased costs for insurance
companies, and, ultimately, higher premiums for
all policyholders
Cause of moral hazard

Increased Costs for Insurers and Higher Premiums: When .1

individuals engage in riskier behavior because they are insured,
insurers face higher claims and costs. To cover these costs, they
often raise premiums, affecting all policyholders and making
.insurance more expensive

Market Inefficiencies: Moral hazard can lead to inefficient .2

resource allocation. For example, excessive healthcare use due to
full insurance coverage may result in unnecessary treatments,
driving up healthcare costs without improving outcomes. This
.reduces overall efficiency and can strain resources
Greater Financial Instability: In financial markets, moral hazard can .3
encourage excessive risk-taking, especially if institutions expect
government bailouts. This can lead to financial bubbles and crises, as
seen in the 2008 financial crisis, where risky lending practices and lack of
.accountability led to widespread economic disruption

Reduced Personal Responsibility and Accountability: When people or .4

organizations do not face the consequences of their risky actions, they
may be less motivated to act responsibly. This can create a culture where
individuals are more likely to neglect their own well-being, finances, or
.other obligations, relying on insurance or bailouts instead

Increased Strain on Public Resources: Government-backed safety .5

nets or bailouts can lead to public costs. When companies, especially
financial institutions, expect bailouts in case of failure, taxpayer money
may be used to cover their losses, diverting public resources from other
.needs
Negative Impact on Risk Pool and Insurance .6
Accessibility: When riskier behavior leads to more claims,
insurers may tighten their policies, increase premiums, or
restrict access to certain types of insurance, potentially
making insurance unaffordable or inaccessible for some
.groups

Higher Economic Inequality: Moral hazard in financial .7

markets, particularly among large corporations or banks,
can exacerbate inequality. When these entities are bailed
out after risky behavior, it often benefits executives or
shareholders while leaving smaller investors or taxpayers
.bearing the cost
Distorted Decision-Making: Knowing that risks will be .8
absorbed by others can distort decision-making at
individual and corporate levels. For example, insured
drivers may drive more recklessly, or a business might
engage in high-stakes projects without fully assessing
.risks, creating potential for financial or personal harm

Reduced Trust in Institutions: When people perceive .9

that certain groups or companies are taking undue risks
without consequences, it can erode trust in financial
institutions, government, and insurance providers. This
may lead to public backlash or calls for regulatory
.changes
 Adverse selection
• Adverse selection occurs when there is asymmetric information
between buyers and sellers, leading to a situation where
individuals who are more likely to use insurance coverage are
also more likely to purchase it.
•  This can lead to a disproportion in the insurance pool, with a
higher-thanaverage number of high-risk individuals, driving up
costs for insurers.
•  In response, insurers may increase premiums to cover these
higher costs,which can make insurance unaffordable for lower-
risk individuals, further exacerbating the problem.
Key differences of moral hazard and
adverse selection
:Adverse Selection
Before transaction occurs .1
Potential buyer of insurance most likely to .2
produce adverse outcomes are ones most likely to
seek insurance and be selected
:Moral Hazard
After transaction occurs .1
Hazard that buyer of insurance has incentives to .2
engage in undesirable activities making it more
likely that the bad outcome would occur
 Adverse selection In health insurance
•  Adverse selection can happen if healthier
individuals decide not to purchase insurance
(or to purchase less comprehensive coverage)
because they anticipate lower healthcare expenses,
while individuals with existing health conditions or
higher risk of illness are more motivated to purchase
comprehensive coverage.
•  This can lead to a less healthy insurance pool,
higher costs for insurers, and increased premiums,
potentially making health insurance unsustainable
or unaffordable for a significant portion of the
population.
 The main causes of adverse selection
• 1. Information Asymmetry: Adverse selection occurs when
one party, typically the buyer (such as an insurance
applicant), has more information about their risk level than
the seller (such as the insurer). This leads high-risk
individuals, who are more likely to benefit from coverage,
to seek insurance, while low-risk individuals may opt out.

• 2. Hidden Information on Health or Risk Factors: In

insurance, adverse selection often occurs because
individuals have private knowledge about their health or
risk factors that insurers cannot fully assess. For instance,
people who know they have a chronic health condition are
more likely to buy comprehensive health insurance, which
raises costs for insurers.
• 3. Self-Selection: When insurance plans or financial
products are offered broadly, individuals with higher risk
are more likely to self-select into those plans or products.
For example, riskier drivers are more likely to seek auto
insurance with extensive coverage, skewing the pool of
insured individuals toward higher risk.

• 4. Difficulty in Risk Assessment: Adverse selection can

also arise when it is challenging or costly for providers to
assess each customer’s true risk level. For example,
insurers may not have access to complete health
histories, making it hard to differentiate between high-risk
and low-risk clients.
Fixed Premiums: If insurance companies set the same .5
premium for everyone, regardless of individual risk, low-risk
individuals may feel they are overpaying for coverage and
might opt out. This leaves a pool of mostly high-risk
.individuals, increasing the insurer’s overall costs

Limited Screening or Underwriting: When insurers or .6

lenders do not adequately screen applicants or rely on
simplified underwriting (such as minimal health
assessments), it becomes easier for high-risk individuals to
.obtain insurance or loans, leading to adverse selection
Government-Mandated Insurance: In some cases, .7
government mandates or policies may encourage adverse
selection. For example, community rating in health
insurance (where insurers must charge the same premium
regardless of risk) can lead to higher-risk individuals
seeking more coverage, while healthier individuals may
.forgo insurance if they feel premiums are too high

Inability to Enforce or Design Incentive Structures: In .8

some industries, companies may lack the ability or
resources to create effective incentives that attract low-risk
individuals or deter high-risk ones, leaving them with a
.riskier client base
 Strategies to mitigate the effects of moral
hazard and adverse selection
1. Deductibles and Co-payment's
 These out-of-pocket expenses can help reduce moral
hazard by ensuring that insured individuals bear a
portion of the cost of their healthcare decisions.

2. Preventive Care Incentives
 Offering coverage for preventive care at little or no
cost to encourage
healthier lifestyles and reduce long-term healthcare
costs.
• 3. Underwriting and Risk Adjustment
•  Assessing the risk of applicants and adjusting
premiums accordingly can help manage adverse
selection, though regulations like the Affordable Care
Act(ACA) limit the ability to adjust premiums based on
health status in many markets.

•  4. Mandatory Coverage: Requiring all individuals

to have health insurance (as attempted under the ACA
with the individual mandate) can help address adverse
selection by ensuring that healthier individuals cannot
opt out of purchasing insurance.

• 5. Risk Pools :Special programs or subsidies for
high-risk individuals can help spread the costs of
the sickest patients across a broader base,
mitigating the impact of adverse selection
Problems related to health insurance
systems
Complexity: Navigating insurance policies and understanding coverage .1
details can be confusing. Many individuals struggle with the complexity of
choosing the right plan, understanding what’s covered, and dealing with
.claims processes

High Premiums and Deductibles: Insurance premiums (the monthly cost .2

of coverage) and deductibles (the amount an individual must pay before
insurance kicks in) can be expensive, making it difficult for some people to
.afford coverage, particularly in low-income groups

Exclusion of Pre-existing Conditions: Some health insurance policies .3

may exclude coverage for pre-existing conditions or charge higher
premiums for individuals with them, creating a barrier for people who need
.care the most
Financial Sustainability: Some health insurance systems face financial .4
challenges, especially when a significant portion of the population is not
adequately covered, or when healthcare costs continue to rise faster than
.premiums or taxes can keep up with

Fraud and Abuse: Fraudulent claims and misuse of health insurance .5

resources can drive up costs, ultimately affecting premiums and the quality
.of services available to legitimate policyholders

Adverse Selection: This occurs when only those who expect to need .6
healthcare (like sick individuals) sign up for insurance, leaving healthier
individuals out. This imbalance raises the cost for those who do have
.insurance, as the insurer faces a higher percentage of high-cost claims

Underinsurance: Even with coverage, individuals may still face high out- .7
of-pocket expenses due to high co-pays, co-insurance, or deductibles that
.aren’t affordable for many, leaving them underinsured in practice
Suggestion to improve insurance
system on Egypt
• 1-Expand Coverage:
• Implement policies to extend health insurance
coverage to underserved populations, possibly
through subsidized programs or partnerships
with( NGOs ) non governmental organization to
reach low-income families.
• 2. Integrate Services:
• Promote integration of public and private health
insurance systems to create a more cohesive
network. This could involve standardizing
benefits and improving referral systems between
providers.
• 3. Enhance Quality Control:
• - Establish robust quality assurance mechanisms to
monitor healthcare providers’ performance. Regular
audits and patient feedback systems can help ensure
that standards are met.

• 4. Strengthen Regulations:
• Develop clearer regulatory frameworks for health
insurance providers, including standardized terms,
coverage requirements, and consumer protection
laws to enhance accountability.
 References
• Einav, L., Finkelstein, A., Ryan, S., Schrimpf, P., & Cullen, M. R. (2013).
Selection on Moral Hazard in Health Insurance. The American economic
review, 103(1), 178–219. https://doi.org/10.1257/aer.103.1.178
• Fasseeh, A., ElEzbawy, B., Adly, W., ElShahawy, R., George, M., Abaza, S.,
ElShalakani, A., & Kaló, Z. (2022). Healthcare financing in Egypt: a systematic
literature review. The Journal of the Egyptian Public Health Association, 97(1),
1. https://doi.org/10.1186/s42506-021-00089-8
• https://pdf.usaid.gov/pdf_docs/pnadg021.pdf
• https://eipr.org/sites/default/files/reports/pdf/Health_Expenditure_in_Egypt.pdf
• https://www.sciencedirect.com/science/article/abs/pii/
S0277953623005695#:~:text=Access%20issues%20identified%20include
%20unaffordable,staffing%20shortages%20in%20public%20hospitals
• Khalifa, A. Y., Jabbour, J. Y., Mataria, A., Bakr, M., Farid, M., &
Mathauer, I. (2022). Purchasing health services under the Egypt's new
Universal Health Insurance law: What are the implications for universal
health coverage?. The International journal of health planning and
management, 37(2), 619–631. https://doi.org/10.1002/hpm.3354
• Khalifa, A. Y., Jabbour, J. Y., Mataria, A., Bakr, M., Farid, M., &
Mathauer, I. (2022). Purchasing health services under the Egypt's new
Universal Health Insurance law: What are the implications for universal
health coverage?. The International journal of health planning and
management, 37(2), 619–631. https://doi.org/10.1002/hpm.3354