ABSTRACT
This chapter considers the theory and practice of health care insurance and shows the necessity of quantifying risk, as well as attitudes toward risk. It discusses the theory of risk, as well as the demand and supply of insurance when the events and the losses are random. Consider the demand for insurance without all of the detailed trappings that accompany modern insurance plans. Government insurance programs often transfer income from one segment of society to another. Given the importance of such social insurance programs. Consumers will buy insurance only when there is diminishing marginal utility of wealth or income—that is, when the consumer is risk-averse. Martin Feldstein was among the first to show that the demand for insurance and the moral hazard brought on by insurance may interact to increase health care prices even more than either one alone. Health insurance arrangements affect not only expenditures for serious illnesses and injuries, but also plan for more routine expenditures.
