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The Moral Hazard Myth

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Repeating a frequent argument, a commenter to this thread says:

The structure of a universal care system should somehow promote and reward healthy living.

How does one deter the freeloaders who take poor care of themselves and then overuse the system for years on end (as sort of mental health therapy)? “It will not happen” is a questionable response – it happens now.


Frankly, this gets us to one legitimate critique libertarians have of universal health care: it can be used to bootstrap lots more nanny statism. I can live with that given the net positives of having a better health care system, but it’s regrettable.

For this reason, however, it’s worth noting that the argument is lousy, a subset of the utterly bizarre belief that medical care works according to similar incentives as markets for consumer goods. As Malcolm Gladwell notes with respect to the claim that having health insurance (rather than paying for doctors out of pocket) represents a major moral hazard:

The moral-hazard argument makes sense, however, only if we consume health care in the same way that we consume other consumer goods, and to economists like Nyman this assumption is plainly absurd. We go to the doctor grudgingly, only because we’re sick. “Moral hazard is overblown,” the Princeton economist Uwe Reinhardt says. “You always hear that the demand for health care is unlimited. This is just not true. People who are very well insured, who are very rich, do you see them check into the hospital because it’s free? Do people really like to go to the doctor? Do they check into the hospital instead of playing golf?”

For that matter, when you have to pay for your own health care, does your consumption really become more efficient? In the late nineteen-seventies, the rand Corporation did an extensive study on the question, randomly assigning families to health plans with co-payment levels at zero per cent, twenty-five per cent, fifty per cent, or ninety-five per cent, up to six thousand dollars. As you might expect, the more that people were asked to chip in for their health care the less care they used. The problem was that they cut back equally on both frivolous care and useful care. Poor people in the high-deductible group with hypertension, for instance, didn’t do nearly as good a job of controlling their blood pressure as those in other groups, resulting in a ten-per-cent increase in the likelihood of death. As a recent Commonwealth Fund study concluded, cost sharing is “a blunt instrument.” Of course it is: how should the average consumer be expected to know beforehand what care is frivolous and what care is useful? I just went to the dermatologist to get moles checked for skin cancer. If I had had to pay a hundred per cent, or even fifty per cent, of the cost of the visit, I might not have gone. Would that have been a wise decision? I have no idea. But if one of those moles really is cancerous, that simple, inexpensive visit could save the health-care system tens of thousands of dollars (not to mention saving me a great deal of heartbreak). The focus on moral hazard suggests that the changes we make in our behavior when we have insurance are nearly always wasteful. Yet, when it comes to health care, many of the things we do only because we have insurance—like getting our moles checked, or getting our teeth cleaned regularly, or getting a mammogram or engaging in other routine preventive care—are anything but wasteful and inefficient. In fact, they are behaviors that could end up saving the health-care system a good deal of money.

As far as I can tell, here’s not much empirical evidence that the “moral hazard” has a major impact — it’s pretty hard to explain why the American system, which offers less insurance than other comparable ones, is so much more expensive, for example. The reason above is an important one: financial disincentives discourage you from preventative medicine, but not from treatment for more serious illnesses.

None of this surprises me, because the argument also strikes me as illogical on its face. The thing is, being healthy is its own powerful incentive. Maybe I’m unusual, but even though I have decent health insurance I don’t actually enjoy being sick, bedridden, in physical pain, spending time in doctor’s offices, etc. Do people really think it’s common — even subconsciously — for someone with a relatively healthy lifestyle to get health insurance and see that as an opportunity to go on that all Popeye’s, deep-fried HoHos, and Cutty Sark diet they’ve been hankering for? I don’t understand this reasoning at all. There may be room for some minor disincentives at the margin, but the idea that universal healthcare won’t work because the possibility of being bankrupted by medical bills is the major incentive people have to be healthy is bizarre.

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