Abstract: The lower cost of health care services made possible by health insurance may lead to moral hazard. Moral hazard creates inefficiency in the health insurance market and loss in welfare. This paper investigates moral hazard and welfare effects of health insurance in Nigeria. A health care utilization model was estimated for moral hazard in the demand for health care using a generalized method of moments. Marshallian, Hicksian and Nyman’s estimates were used to determine the welfare effects of health insurance. Moral hazard in health insurance was evident in the value of price elasticity of demand for medical care consumption in health insurance, social and private health insurance with coefficients of 0.16, 0.14 and 0.0001 respectively. There were welfare gains (efficient moral hazard) from the Marshallian (85.8%), Hicksian (87.5%) and Nyman’s (87.3%) estimates against welfare loss (inefficient moral hazard) of -14.2%, 12.5% and -12.7%. Health insurance increased overall welfare in spite of the moral hazard. Therefore, government should, through appropriate policies, encourage the expansion of health insurance in Nigeria.

JEL classification: I130
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