Sunday, December 17, 2006

A Critique on Moral Hazard Theory as the Basis for Healthcare Coverage in America -William Cheung

Healthcare in the United States is highly regarded as the most sophisticated and technologically advanced anywhere in the world, yet the system for financing and delivering care is incredibly complex and convoluted. Almost one in six people in the United States lack health insurance; that equates to over forty five million Americans. Eighty percent, or roughly thirty six million of those who are uninsured, are from working families. “The uninsured are members of every race and ethnic group, every age group and every income level” (Health Coverage In America, 2004). The key point is that the overwhelming majority of the uninsured are from families currently in the labor force, dispelling the common misconception that those without health coverage in America are poor and unemployed.

When compared to other countries, the United States spends much more on healthcare, yet leaves millions uninsured. “The United States spends 15 percent of its Gross Domestic Product (GDP) on health care, which equates to 2.2 trillion dollars, while offering little or marginal care to over forty five million people, while the German system, by far the most expensive of all the countries in the European Union (EU), provides universal coverage for all its citizens for less than 11 percent of its GDP, according to the Organization for Economic Cooperation and Development (OECD). The median for EU nations is 8 percent” (Hujer, 2004). Every other industrialized country in the world provides universal health coverage, yet spends significantly less than the United States. The annual growth in American health spending continually exceeds both the annual growth within our own GDP and per capita health spending in other OECD country by huge margins.

In the United States, the assumption is that better quality and better health results from greater spending on healthcare, but the fact is that the United States does not have anywhere near the best health in the world. “The poor performance of the United States was recently confirmed by the World Health Organization, and the figures regarding the poor position of the United States in health worldwide are robust and not dependent on the particular measures used” (Starfield, 2000). Regardless of the criteria used to measure quality or performance, satisfaction remained lower among people living in the United States. Americans are not happy with the current healthcare system, yet change has been hard to come by.

The fact is, politics have always gotten in the way of healthcare reform. “A powerful impediment to the expansion of health insurance is the idea of moral hazard. Moral Hazard is the term economists use to describe the fact that insurance can change the behavior for the person being insured. Insurance can have the paradoxical effect of producing risky and wasteful behavior” (Gladwell, 2005). As the famous economist Mark Pauly put it, “the individual will alter his or her desired expenditures for medical care because of the fact of insurance. Medical insurance, by lowering the marginal cost of care to the individual, may increase usage”. Moral hazard theory describes the phenomenon in which having insurance causes the insured to engage in riskier behaviors, presumably because his or her personal liability for bad outcomes is now greatly limited. “Health economists in other industrialized nations do not share this obsession. Nor do most Americans. But moral hazard has profoundly shaped the way health care policies have been formulated and the way policymakers have come to think about insurance” (Gladwell, 2005).

Moral hazard underlies cost cutting efforts such as high deductibles, large co-payments, and the utilization reviews that saturate the American healthcare system. These methods were put in place to try and limit moral hazard, on the grounds that if you force personal health liability back onto the individual, he or she will make more economically sensible choices with respect to healthcare. The inefficiency that arises from excessive paperwork is due to the mistrust moral hazard creates. High administrative costs are put in place to ensure that the care and procedures provided are absolutely necessary. Moral hazard is said to occur whenever individuals are not responsible for paying all the costs associated with their medical treatment. But there are profound problems and fundamental flaws with this belief.

Putting economic and administrative roadblocks in front of those trying to get healthcare does not necessarily reduce healthcare costs. Cost cutting efforts that focus on decreasing utilization of health services might sound desirable to the government and to insurers, but this is a very short term view that can end up costing a lot more in the long run. In fact, if people had more access to healthcare, it is more likely that problems will be taken care of earlier, before they progress into chronic conditions. “Increasing people’s out of pocket expenses will make them less likely to seek routine preventive care that might stave off bigger problems down the road” (Freudenheim, 2006). In the long run, if people do not receive adequate preventive care, their health troubles will manifest into bigger problems. Ultimately, this will foster the development of a large population with chronic disease and disability.

One of the reasons why healthcare costs in the United States are so substantial is because there is a tremendous burden of chronic conditions. It is not the case that we are spending most of the money to treat the acute conditions that the government and insurers are trying to reduce; instead, we are paying the most to treat the chronic diseases and disabilities that could have easily been avoided if preventive care had been attained earlier. “The sickest one percent of patients, the chronically ill and those in the intensive care unit, account for over a quarter of all healthcare costs” (Landro, 2003). In trying to reduce the usage of healthcare, moral hazard theory has actually increased the demand and the necessity for more services and care.

From a public health perspective, moral hazard theory serves as a strong deterrent to preventive care. This has severe implications when it comes to healthcare because “better preventive care can dramatically reduce hospitalization” (Landro, 2003). Moral hazard advocates the philosophy that care should not be covered unless it is absolutely necessary. This effectively eliminates preventive care since the effects of good preventive care cannot be seen or measured, causing insurers to disregard it as required and essential. This focus on treatment rather than on prevention might cut costs, but this short term view has blinded them from seeing the big picture. In the long run, the lack of prevention will lead to a huge burden of healthcare costs due to chronic illnesses and disabilities, and therein lies a fundamental flaw in moral hazard theory.

“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 healthcare, many of the things we do, like engaging in routine preventive care, are anything but wasteful and inefficient” (Gladwell, 2005). Without adequate health insurance, many people would not receive the necessary preventive measures that can avert potentially serious and life threatening complications. Moral hazard outs both unneeded and needed care because we do not know what care is necessary. “How should the average patient be expected to know beforehand what care is frivolous and what care is useful? Medical knowledge is so complicated that the information possessed by the physician as to the consequences and possibilities of treatment is necessarily very much greater than that of the patient” (Millenson, 2001). People who have to pay more for their healthcare use less healthcare regardless of how urgent the need is for medical attention. By shifting the focus from those without insurance to the possibility that people with insurance use too much care, moral hazard theory emphasizes the wrong aspects of health coverage. Instead of focusing on the problem of having over forty five million Americans uninsured, we implement policies that try to reduce usage of medical services, even though not having coverage can be dangerous to your health, as the Institute of Medicine concluded; “health insurance is associated with better health outcomes for both adults and children and with their receipt of appropriate care across a range of preventive, chronic, and acute care services”. When millions of people lack insurance and the necessary funds to pay for healthcare, they rely on emergency rooms as their one source for medical services.

Having over forty five million uninsured people in the United States is causing significant financial burdens on hospital emergency rooms. The strain of caring for the uninsured is forcing many hospitals to close due to the major economic stress they cause. “Virtually all nonprofit community or public hospitals in America where the poor and the uninsured go to be healed are caught in a death spiral. The higher the number of indigent or low paying patients, the more money the hospital loses. So year after year, the hospitals operate in the red” (Schulte, 2003). The economic problems are largely due to the fact that there is a huge pool of free care which hospitals are required to give, simply because there is such a large segment of the population that is uninsured. “The emergency room is the only place an American has a right to medical care. As a result, it has become the portal for healthcare in this country, yet many of these patients could have been seen elsewhere, at far less expense” (Schulte, 2003). The lack of insurance leads millions of Americans with nowhere else to turn, resorting to emergency rooms as their form of primary care, even though treatment in the emergency room is far more expensive than regular outpatient care. “As it stands now, the burden of healthcare falls on hospital emergency rooms. Although they used to be the option of last resort, they have become the line of first defense for the uninsured” (Winokur, 2003). This undue stress on the emergency care system and the huge costs that result could be greatly reduced if more people had healthcare coverage, yet moral hazard theory has induced the government to disregard the problem. What is troubling about this view of healthcare is that policies will focus on reducing moral hazard, instead of trying to extend health coverage to those who lack it.

The political implications of moral hazard theory are vast and far-reaching. Both public and private programs have directed their course of action towards reducing excessive usage instead of concentrating on programs that try to expand coverage. “At the center of the Bush Administration’s plan to address the health insurance mess are Health Savings Accounts, and Health Savings Accounts are exactly what you would come up with if you were concerned, above all else, with minimizing moral hazard (Gladwell, 2005). President Bush believes that Americans currently have too much health insurance, so Health Savings Accounts were created to compel the population to act more prudently when it comes to healthcare. Instead of paying for health insurance to cover medical needs, Health Savings Accounts permit an individual to save a portion of their income, tax free, and use it as needed when medical expenses come about in the future.

To reduce health expenditure in America, the President, an advocate of moral hazard theory, argues that the direct costs that people pay for medicine should be raised, and in doing so they will have more incentive to be careful and spend sparingly. As President Bush explained recently, “Health Savings Accounts are aimed towards empowering the people to make decisions for themselves, owning their own healthcare plan, and at the same time bringing some demand control into the cost of healthcare”. Yet saving for healthcare does not work the same way as saving for consumer goods, and definitely is not the same as insurance. Insurance was created to help equalize financial risk between the healthy and the sick. This social aspect of insurance is based on the idea that transferring resources from those who have them to those who need it will provide people with the security of being safeguarded against severe financial burdens due to serious and chronic illness.

Yet Health Savings Accounts are not based on social insurance; it is instead based on the actuarial model. How much you pay with actuarial insurance is in large part a function of your individual situation and history. Those who are young and healthy will pay little to nothing for healthcare, while those unlucky enough to have serious illnesses will face unmanageably high healthcare costs. “If you are preoccupied with moral hazard, then you want people to pay for care with their own money, and, when you do that, the sick inevitably end up paying more than the healthy” (Gladwell, 2005). Putting more of the costs onto the consumer reduces the social redistributive element of insurance. “In the rest of the industrialized world, it is assumed that the more equally and widely the burdens of illness are shared, the better off the population as a whole is likely to be. The reason the United States has over forty five million people without coverage is that its healthcare policy is in the hands of the few people who disagree, and who regard health insurance not as the solution but as the problem” (Gladwell, 2005). This line of thinking does not solve the healthcare problems of the United States as President Bush argues; it really only exacerbates the problem by creating a vicious cycle wherein even more Americans will be uninsured, since those with serious and chronic illnesses are paying more and more, and those who cannot afford will forgo needed care and can only get sicker and sicker.

Private insurance companies have also used moral hazard theory to try and contain costs. Consumer Driven Plans, offered by United Health Group Inc., are based on the principle that “people will shop for the best care at the lowest price if they have to pay more of the cost themselves. The idea is a response to traditional plans in which employers pay most of the bill after modest deductibles and co-payments, leaving consumers with little incentive to curtail their medical spending” (Fuhrmans, 2005). But only if services were thought of as wasteful would such a policy come about. Once again, the moral hazard rationale has created a plan that focuses more on price than on quality and appropriateness of care. By putting the burden of paying the large and hefty fees doctors and hospitals charge back onto the people, many will go without the preventive and routine care that is necessary for health and well being.

Due to the fear of moral hazard, healthcare in the United States is complex, convoluted and fragmented. As it has been pointed out, “health economists in other industrialized nations do not share this obsession” (Gladwell, 2005). Americans spend a lot more, yet receive much less. The fact is, “in most countries, the preponderance of medical care is financed or delivered in the public sector; in the United States however, most people pay for and receive their care through private institutions. Those other countries all provide universal healthcare coverage through government run or government mandated programs” (Bodenheimer, 2005). Germany was the first country to enact universal health coverage legislation; over a century ago, in 1883, the German sickness funds were created to cover the healthcare costs of the entire population. “These funds are not allowed to exclude people due to illness, or to raise contribution rates according to age or medical condition. German health insurance, unlike in the United States, must continue to cover its members whether or not they change jobs or stop working for any reason” (Bodenheimer, 2005). Canada and the United Kingdom have also severed the link between employment and health insurance. “Wealthy or poor, employed or jobless, everyone receives the same health insurance, financed in the same way. No one would even imagine that leaving, changing, retiring from, or losing a job has anything to do with health insurance” (Bodenheimer, 2005). By breaking the connection between employment and healthcare coverage, these countries have integrated medical care directly into the cost of living; everyone contributes through taxes so everyone can benefit. “In Germany, Canada, and the United Kingdom, no distinction is made between the public financing mechanisms of social insurance and public assistance. Such universal insurance programs create a fair system for distributing health services” (Bodenheimer, 2005). In contrast to the United States, these countries and all other industrialized nations have found a way to deliver universal healthcare to their entire populations at far less cost. The United States spends hundreds of billions of dollars extra and more than twice the amount per capita for healthcare annually than any other country in the world, yet does not come close to providing universal coverage. Because the United States is the only country that focuses on moral hazard instead of relying on the social aspect of insurance as every other nation does, we leave millions without health coverage, abandoning Americans who do not have health insurance, forcing them to fend for themselves when it comes to paying for medical care.

Works Cited

Alliance For Health Reform; “Health Coverage In America: Understanding the Issues & Proposed Solutions”;; 2004

Bodenheimer, Thomas, and Grumbach, Kevin; “Understanding Health Policy: A Clinical Approach”; The McGraw-Hill Companies, Inc. San Francisco, 2005

Fein, Rashi; “Medical Care, Medical Costs: The Search for a Health Insurance Policy”; Harvard University Press. Cambridge, 1986

Freudenheim, Milt; “Prognosis Is Mixed For Health Savings”; The New York Times: January 26, 2006

Fuhrmans, Vanessa; “A Big Insurer Bets On Hot Trend: Shopping Around For Health Care”; The Wall Street Journal: October 24, 2005

Gladwell, Malcolm; “The Moral Hazard Myth”; The New Yorker: August 29, 2005

Hujer, Marc; “Only in America”; Washington Post: May 11, 2004

Landro, Laura; “Six Prescriptions To Ease Rationing In U.S. Healthcare”; The Wall Street Journal: December 22, 2003

Millenson, Michael; “Moral Hazard vs. Real Hazard: Quality of Care Post-Arrow”; Journal of Health Politics, Policy, and Law: Vol. 26, no.5; October 2001

Reinhardt, Uwe, Hussey, Peter, and Anderson, Gerard; “U.S. Health Care Spending in an International Context”; Health Affairs: Vol. 23, no. 3; May/June 2004

Schenk, Robert; “Cyber Economics: An Analysis of Unintended Consequences”;; 2002

Schulte, Brigid; “Saving Lives, Losing Millions at Pr. George’s Hospital”; Washington Post: December 22, 2003

Starfield, Barbara; “Is U.S. Health Really the Best in the World?”; Journal of the American Medical Association: Vol. 284, no. 4; July 26, 2000

Winokur, Julie; “Live Sicker, Die Younger”;; May 16,2003


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