The key effect of health insurance is to lower the out-of-pocket price of health services. Consumers purchase goods and services up to the point where the marginal benefit of the item is just equal to the value of the resources given up. In the absence of insurance a consumer may pay sixty dollars for a physician visit.
With insurance the consumer is responsible for paying only a small portion of the bill, perhaps only a ten-dollar copay. Thus, health insurance gives consumers an incentive to use health services that have only a very small benefit even if the full cost of the service (the sum of what the consumer and the insurer must pay) is much greater. This overuse of medical care in response to an artificially low price is an example of “moral hazard”
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