Moral hazards are based on the premise that people will change their behavior when the consequences of their adverse actions will be borne by others (Pettinger, 2017). It is predicated on the selfish nature of people. This motivates them to undertake behaviors of which they know there will be minimal repercussions to them personally. Mots people’s behavior is usually based on a balance of reward and punishment. These two dimensions are closely analyzed before any action is undertaken. The aspect of punishment encourages people to minimize bad behavior. With the removal of punishment, this encourages adventure and skirting of the rules.

Moral hazard in the healthcare industry is ubiquitously linked to medical insurance. It becomes especially pronounced in the adoption of medical insurance schemes and during the making of claims. Healthcare is a costly expenditure whose costliness has been partly mitigated over the years by the expansion of medical insurance. Medical insurance schemes involve pooling of funds from various policyholders to fund the treatment of those that may fall sick and earn the insurance companies profits at the same time. However, this has come under heavy scrutiny especially in the United States. The healthcare system is one of the costliest, globally. Over 18 percent of the economic output is ploughed back into the healthcare industry as medical costs (Korobkin, 2014).

In the country, most insurance schemes use the term ‘medically necessary care.’ Although some of the schemes exclude some conditions, it does not specify the cost of the various interventions for the conditions covered by the various policies. This leaves a loophole for exploitation. Thus, policyholders will request for any medication or intervention covered by the policy without regard to costs. This may be done without consideration of the risks and adverse effects of the treatment, basing their decisions entirely on the promise of benefit (Ercolano, 2017). This exploitation is especially prevalent in government-run medical schemes or subsidized policies. As a result, there is an increased cost of health per person. Minor conditions are managed expensively compromising the care of persons with complicated conditions who may require costly, specialized treatment. Even in chronic conditions, policyholders might choose costly curative care instead of cheaper preventive care. In this case, moral hazard is displayed by the tendency of policyholders to choose costly methods of intervention in situations where they might have cheaper alternatives. This hazard can also be viewed from the doctor’s dimension. Doctors have a tendency to overprescribe especially when they know the costs are borne by third parties (Pettinger, 2017).

The effect of moral hazards in the healthcare industry is the rise in healthcare costs. As it becomes more expensive, it becomes unprofitable for insurance companies and smaller packages are developed to ensure their profitability. This results in a reduced quality of healthcare available to people in the country. The rise in drug and treatment costs will greatly affect uninsured individuals who mainly thrive on out of pocket expenditures. For instance, in government-run schemes, more funds are spent on minor conditions, crowding out individuals with rare diseases whose only option of treatment is very costly. This compromises the level of care of the industry. The costs of insurance policies are bound to rise, pricing out low-income earners who are forced to depend on out of pocket expenditures and skeleton policies. Overall, the quality of healthcare in a country is reduced.

Moral hazards can be prevented through co-pay schemes (Pettinger, 2017). This incentivizes users to choose the affordable interventions as they also contribute a significant proportion of the payment of the treatment. Services and drugs in hospitals should also have a standardized fee agreed upon by the insurance companies and health facilities to prevent the over-prescription by doctors. These methods encourage all stakeholders in the industry to ensure equity and full optimization of resources.