In the United States, the bulk of health care spending is paid by health insurance companies. Such a system is also called a third-party payer system where consumers of health care pay a nominal fee and the rest are paid by the health insurance provider
Why might such a system lead to an inefficient outcome?
A) Health insurance companies have an incentive to control cost and therefore tend to deny consumers many cutting edge medical treatments.
B) Consumers have an incentive to over-consume health care services because they pay prices well below the cost of providing these services.
C) Physicians concerned that insurance companies may not approve payments tend not to order expensive tests for their patients.
D) Consumers fearing that excessive use of health care services may lead to a rise in insurance premiums tend to under-consume health care services.
Answer: B
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