Moral hazard and adverse selection in Australian private hospitals: 1989-1990

The Australian hospital system is characterized by the co-existence of private hospitals, where individuals pay for services and public hospitals, where services are free to all but delivered after a waiting time. The decision to purchase insurance for private hospital treatment depends on the trade-off between the price of treatment, waiting time, and the insurance premium. Clearly, the potential for adverse selection and moral hazard exists. When the endogeneity of the insurance decision is accounted for, the extent of moral hazard can substantially increase the expected length of a hospital stay by a factor of up to 3.