The Moral Hazard Myth

Posted on August 26, 2005 by Dave Pollard

Malcolm Gladwell’s latest article in the New Yorker explains why it is that:

The leading cause of personal bankruptcy in the US is unpaid medical bills
The death rate for Americans without health insurance is 25% higher than for those that have it
Americans spend 2.5 times what the rest of the Western world pays per capita for health care
The US has one of the lowest doctor/patient ratios in the West
Americans visit doctors and get admitted to hospital less often than people in most countries in the West
Americans are among the least satisfied with their health care system
US life expectancy is significantly lower than the average of Western nations, while childhood immunization rates are lower and infant mortality is higher
Americans spend over three times as much per capita on healthcare paperwork and administration as Canadians
Despite the high cost, the US is almost alone in the West in not having universal health care, and 45 million Americans have no health insurance at all

There is overwhelming evidence that people with no, or inadequate, health coverage are sicker, that this illness translates into poor physical appearance (bad teeth especially) and low self-esteem, and therefore these people have great difficulty getting decent-paying jobs and hence don’t qualify for health insurance. The perfect vicious cycle.

The reason for this, says Gladwell, is the perpetuation of a neocon myth in the US that isn’t accepted anywhere else in the Western world. That myth is called “Moral Hazard” and it says that having insurance changes the behaviour of the insured. If you have generous health insurance, Moral Hazard says you’re going to go to the doctor and the hospital more often, sometimes unnecessarily, just because it’s free. The evidence is all to the contrary, but the myth prevails in the US nevertheless. What’s more, there is evidence that in the few areas where people actually do avail themselves of health care services that aren’t absolutely, critically needed (like dental checkups), the preventative value of these services exceeds their cost, so such ‘abuses’ actually save the health care system money.

In some areas of insurance, Moral Hazard actually has some validity. For example, the S&L failures in the 1980s were caused to some degree by reckless lending due to generous FDIC government guarantees. The assurance of bailouts if loans failed actually encouraged some S&L’s to lend irresponsibly. But this simply doesn’t apply in the health industry. Most people don’t frivolously use medical services just because they’re available free. And users of Medicare, the only aspect of the US health care system based on the social insurance model (which equalizes financial risk between the healthy and the sick) — the model used in every other Western nation — are consistently vastly happier with their plan than Americans with private health insurance.

Bush’s new Health Savings Accounts, nevertheless, presupposes Moral Hazard is the principal reason the US health system is in crisis, and its effect will be simply to reduce the use of the health system by the country’s sickest people. Instead of the social insurance model it uses the discredited actuarial model (like car insurance, where cost is related to the perceived risk of making claims). So many Americans with expensive medical conditions cannot get insurance at all. Stanford economist Victor Fuchs says “this reduces the social redistributive element of insurance” and that Health Savings Accounts are hence the antithesis of universal health care.

Rather than technical arguments, Gladwell says, Americans should be asking themselves these questions:

Do you think redistribution of risk (so that the healthy subsidize the sick) is a good idea?
Is it fair that those genetically predisposed to illness and tooth ailments, or whose poverty complicates diseases like asthma and diabetes, or who are unlucky enough to be in serious accidents, should bear a greater proportion of health care costs than those who aren’t?

That’s not to say that there aren’t people who abuse the system. But to punish 45 million Americans (at least) because of a mythological belief that people are naturally inclined to abuse anything they can get for free is not only cruel and inhumane, it’s ideologically obsessive, wrong-headed and irrational. But then that’s the very definition of the Bush administration and their cronies. Tragic, and disgraceful.

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7 Responses to The Moral Hazard Myth

otterhound says:

August 26, 2005 at 15:08

Apparently one has two crappy alternatives: (a) good care for some and no care for others (the US); or (b) mediocre care for all — if you don’t die in the queue — (Canada). Neither alternative is too attractive.
Anon says:

August 26, 2005 at 21:59

For an alternative view of Gladwell’s article, one might read Arnold King’s “How Economists Really View Health Insurance” at http://www.techcentralstation.com/082605E.html. King believes that Gladwell has thoroughly confused moral hazard and the law of demand, with defective conclusions by Gladwell as the consequence.
Kate says:

August 27, 2005 at 00:58

The point is if the care is good but no one can afford it, or are afraid to go to the doctor because of the expense, then it doesn’t matter. The end result is that Americans have the same life expectancy as Mexicans though our country is considered the first world and theirs the second.We are at a point of crisis. Something’s got to give. I have had private insurance and now I have public as part of the military’s TriCare program. It’s horrendous too. They value services so low that unless you go to the VA you have to pay 50% of the bill. Take my recent annual gyn exam. $250, which was not unreasonable, of which TriCare paid $120, leaving me with $130 of the bill. Does this encourage me to go to the doctor if I sense something is wrong, but perhaps not life-threatening? Of course not! And there are hundreds of thousands on this same plan; actually millions since medicare is not so different.And then the uninsured! I have a friend who was shot five times in New Orleans and lived, but has been saddled with over $500,000 worth of debt because of it. Now he and his wife and their baby are uninsured because they can’t afford to be insured seeing that they have so much debt. It’s a crazy, vicious cycle. A good friend of my mom’s just went to the emergency room the other day worried he’d caught dysentery in Baja. He doesn’t have insurance either. Three days after his visit he still didn’t have the results of his test, but he had the bill: over $2,000. People without insurance are more likely to go to the emergency room because they don’t have regular doctors. And many doctors won’t see patients without insurance, so the uninsured are left with no coice.Dental care. Man. Medicare covers dental care in the most rudamentary way. If the tooth is damaged, it’s pulled, not repaired, which can lead to all sorts of other problems. I’ve never had dental insurance, so I’ve always paid out of pocket. I go to the dentist every year anyway, and over the years I’ve spent thousands and thousands of dollars. If I weren’t educated and middle class, I’d never have been able to afford all the dental work I’ve had and I’d be suffering from a host of medical issues as a result. Dental health is integral to overall body health. Not that you’d know that from the way our country treats it.This health care crisis will bring our country down. It is the biggest drag on our economy right now. Just yesterday Krugman wrote about the disconnect between the “healthy” economy our government keeps talking about and how most of us actually feel about the economy. Most of us are strapped in large part because of health care, and no amount of jobs will make up for it, especially service industry jobs like those we’re creating now. It’s got to be addressed. I have to say I don’t hear the “moral hazard” argument from our leaders about health care. Instead I hear about “choice” and “quality.” We have the illusion of choice in this country and the false belief that everything we do and have is superior to what other countries do and have. We think our care is superior simply because we’re in the US. Is the care really worse in France, where women can have six IVF cycles included in their public insurance, or in Mexico where ultrasounds of the ovaries and uterus are part of a woman’s annual exam (at least in the cities)? Our system is for profit, which sets it apart from every other medical system I’ve heard of. Every aspect of our health care system is based on profit-making, from the insurance companies to the drug manufacturers to the doctors to the hospitals. There are many non-profit hospitals, of course, but still their doctors are paid more than doctors in Europe, and their administrators are paid significantly more. And then the insurance industry! What a scam. Everyone hates them, patients, doctors, administrators. I think they should be held to the same economic standard as non-profits in this country because they are for the public good. They should not be able to grow their profits so significantly at the expense of our health.I don’t know what the answer is, but I’d like to see our government try a two-tiered system or something similar and see how it goes. Why not? It can’t hurt to try. Frankly it can’t be more bureaucratic than our failed system is already. You spend more time talking to administrators than to doctors by a long shot. All of the paper pushers…it’s insane and it’s outrageously expensive. We’ve become rule-obsessed and our system stuffed with worthless, pork barrel layers. What a disaster.
Evelyn Mitchell says:

August 27, 2005 at 15:15

There’s a lot of economic incentive for the system to remain as it is. With administrative costs 3x the Canadian level, that’s a lot of cash for insurance companies to influence rulemaking.And the influence happens in both blatent (the attack ads run during the early Clinton years), and subtle (the ‘common sense’ that HMOs provide bad care) ways.It’s a wierd sort of blindspot about public policy which I don’t understand.
Dave Pollard says:

August 29, 2005 at 17:48

Otterhound: Sorry to see that the absurd myth of ‘mediocre and dangerous health care in Canada’ just won’t die. The Canadian system is far from perfect but its problems are not related to universality or quality or efficiency, but to the fucking lawyers who force doctors to do the 90% of the work that could be delegated to para- and non-professionals and won’t let patients self-diagnose and self-treat, and to the moronic administrators and accountants who don’t understand the concept of ‘sunk cost’ and hence invest too much in bricks and mortar and too little in people and technology.Anon: That’s the most bizarre, nonsensical critique I have ever read. Hard to believe its author actually has an economics degree.Kate: Absolutely. I wish the economist who Anon refers to could read your comments. Evelyn: Agreed. False pride and addiction to ideology.
Julien Couvreur says:

August 31, 2005 at 19:38

I couldn’t find any explanation for why “Americans spend 2.5 times what the rest of the Western world pays per capita for health care”.Any pointers?
Blue Cross of California says:

November 27, 2005 at 23:53

Wow great blog and very interesting story on the moral hazard myth.