Researchers from Johns Hopkins University’s Carey Business School examined health insurance data for nearly 3,000 chronically ill consumers. The researchers found that most consumers choose insurance plans that cover surgeries and drugs to improve the patient’s health rather than less expensive preventive care plans that help keep illnesses from getting worse. Jian Ni, a co-author of the study, explains that some consumers choose a more costly plan, even if they don’t need it, because “the insurer will pay for the bulk of it.” Ni believes that these consumers create moral hazard problems that “[contribute] to health care expenses . . . that are higher than they probably should be.”

a. What is moral hazard?

b. Most consumers in this study chose expensive health insurance plans that covered surgeries and drugs rather than less costly preventive plans. Why does a coauthor of the study describe this behavior as an example of moral hazard?

c. Why would moral hazard cause health care expenses to be “higher than they probably should be”?