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date: 19 June 2018

Information, Risk Aversion, and Health Care Economics

This is an advance summary of a forthcoming article in the Oxford Research Encyclopedia of Economics and Finance. Please check back later for the full article.

The terms information and risk aversion play central roles in health care economics. While risk aversion is among the main reasons for the existence of health insurance, information asymmetries between the insured individual and insurance company potentially lead to moral hazard or adverse selection. This has implications for the optimal design of health insurance contracts, but whether there is indeed moral hazard or adverse selection are ultimately empirical questions. Recently, there was even a debate about whether the opposite of adverse selection prevails: advantageous selection. Private information on risk aversion might weigh out information asymmetries regarding risk type and lead to more insurance coverage of healthy individuals (instead of less insurance coverage in adverse selection).

Information and risk preferences are not only important in health insurance but more generally in health economics. For instance, they affect health behavior and, consequently, health outcomes. The degree of risk aversion, the ability to perceive risks, and the availability of information about risks partly explain why some individuals engage in unhealthy behavior while others refrain from smoking, drinking, or the like.

Information has several dimensions. Apart from information on their own health status, risk preferences, or health risks, consumer information on provider quality or health insurance supply is central in the economics of health care. Even though health care systems are necessarily highly regulated throughout the world, all systems at least allow for some market elements. These typically include the possibility of consumer choice, for instance, regarding health insurance coverage or choice of medical provider. An important question is whether consumer choice elements work in the health care sector—that is, whether consumers actually make rational or optimal decisions—and whether more information can improve decision quality or not.