“Reference pricing” is an insurance concept used in parts of Europe where an individual with an illness receives a certain dollar amount to treat that illness and can use that dollar amount in any way. For example, if an appendectomy costs $8,000 on average the individual in “need” of an appendectomy would receive $8,000. They could use that to go to a less expensive hospital, pay $6,000 and keep $2,000, or go to a more expensive hospital costing $10,000 and use the $8,000 towards the $10,000 bill. Or they could just keep the $8,000 and deal with a painful appendix.

a) Do you think this would improve market efficiency?

b) How would this impact moral hazard in this market?

c) Can you think of two other market issues this might create?