Final answer:
Third-party payment systems can lead to higher health care costs due to increased demand for services and moral hazard, where individuals consume more care than necessary. Cost-sharing measures like deductibles can mitigate this overutilization. The overall cost may still rise, affecting insurance premiums or taxes, and the fee-for-service model can incentivize unnecessary services.
Step-by-step explanation:
Third-party payment systems in healthcare, where insurance companies or the government pay for health services, can significantly affect health care costs. This payment method decreases the direct cost of healthcare for individuals, potentially leading to an increase in demand for services. Due to this, people with insurance coverage may consume more healthcare services, such as extra doctor visits or procedures, than if they were paying entirely out-of-pocket, as they may only face the cost of a deductible or copayment.
This system can contribute to a phenomenon known as moral hazard, where individuals have less incentive to avoid overutilization of medical services or to choose less expensive options. One study showed that when individuals face moderate out-of-pocket costs, there is about a one-third reduction in medical care consumption without a significant difference in health outcomes. This indicates that cost-sharing measures can discourage overconsumption without harming health.
However, overall costs for the insurer, and therefore society, may increase. Patients may indirectly bear these increases through higher insurance premiums or taxes. The fee-for-service model, where providers are paid for each service they provide, can further encourage the provision of unnecessary services, adding to the overall cost burden. Finding alternative payment systems and addressing the incentives within the medical system are complex but necessary steps to managing healthcare costs effectively.