What is moral hazard in the context of health insurance?

Moral hazard in the context of health insurance refers to the behavior changes that occur when individuals are insulated from risk due to insurance coverage. When individuals have health insurance, the financial burden of seeking medical care is significantly reduced. This can lead to an increase in the consumption of health services because individuals may feel less inclined to consider the costs associated with their healthcare decisions.

For instance, a person may opt for more frequent doctor visits, tests, or treatments than they would if they were paying fully out of pocket. The security provided by insurance prompts them to engage in behaviors that they might otherwise avoid due to cost, reflecting the concept of moral hazard. This phenomenon is a crucial factor for insurers to consider, as it can lead to higher overall healthcare costs and affect premium pricing and policy design.

In this context, the other options describe aspects of health insurance but do not accurately capture the essence of moral hazard as it relates to behavior changes tied to the financial protections offered by insurance.