Suppose the presence of medical insurance reduces the incentive for the physician or patient to contain expenditures on testing, treatment, or fees. This is an illustration of:

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Moral hazard occurs when the behavior of one party to a contract changes in a way that is disadvantageous to another party after the contract has been concluded. In the context of medical insurance, it refers to the phenomenon where the presence of insurance coverage leads to an increase in consumption of healthcare services because the insured party is shielded from the full cost of those services. This can lead to increased expenditures on testing, treatment, or fees, as the direct financial impact on the patient is reduced.

Suppose the Presence of Medical Insurance Reduces the Incentive for the Physician