Moral Hazard and Health Care- Is There An Answer?

Moral hazard is a term used in economics in relation to an individual who is willing to take risks because he or she will not have to bear the cost of his or her action. It is the reason purchasing health insurance was mandated under the Affordable Care Act, but it comes into play in other areas of health care as well.

It is clear that in the past and currently, many healthy young men and women who could afford health insurance have been gaming the system by making decisions not to buy it. They believed the odds were in their favor of avoiding serious illnesses or injuries and that the money required for insurance could be better utilized elsewhere. If they did suffer a significant illness or injury, care would always be available for them at an emergency room or hospital. And if the cost of their care was beyond their means, society would pay the price- health insurance costs for everyone else would be raised to pay for their care. Whether or not one agrees or disagrees with the individual mandate of the ACA, one would have to say that decisions not to buy insurance were unfair to their fellow citizens.

We also see a disregard of risk in various other behaviors by individuals in regard to their health where the costs are borne by society at large. Smoking is a major causative factor in many illnesses, including lung cancer, cardiovascular disease, peripheral vascular disease, strokes and COPD. The cost of caring for individuals who smoke and develop these conditions is astronomical. Yet in Medicare and many group insurance plans, smokers pay the same premiums as non-smokers. It’s the same with other risky conduct such as riding motorcycles, choosing to be sedentary and obese, and abusing alcohol or drugs. In addition, there are patients with chronic illnesses who are cognitively intact but non-compliant with their medical regimens which often results in more costly care down the line. And should society provide liver transplants to alcoholics and drug abusers whose conduct destroyed their livers in the first place?

How should society deal with people who are irresponsible in terms of their health and raise the cost of care for everyone else? Some might argue that smokers are paying high taxes for their cigarettes and that their money which goes into the general coffers balances out the cost of their care. But this does not pay directly for their health care and does nothing to reduce overall health care spending.

Should we charge individuals higher insurance premiums if they engage in behavior that damages their health, to defray the eventual costs and possibly mitigate some of their behavior? Unfortunately, these are often people with emotional problems or who live on the border of poverty and might drop their insurance if the price of coverage rose.

There are no easy answers. Lack of responsibility shifts the costs of health care to other people’s shoulders, but moral hazard requires that individuals should be accountable for their actions and that society should not be forced to pay for people’s disregard for good health practices.

Resurrecting Democracy

A VietNam vet and a Columbia history major who became a medical doctor, Bob Levine has watched the evolution of American politics over the past 40 years with increasing alarm. He knows he’s not alone. Partisan grid-lock, massive cash contributions and even more massive expenditures on lobbyists have undermined real democracy, and there is more than just a whiff of corruption emanating from Washington. If the nation is to overcome lockstep partisanship, restore growth to the economy and bring its debt under control, Levine argues that it will require a strong centrist third party to bring about the necessary reforms. Levine’s previous book, Shock Therapy For the American Health Care System took a realist approach to health care from a physician’s informed point of view; Resurrecting Democracy takes a similar pragmatic approach, putting aside ideology and taking a hard look at facts on the ground. In his latest book, Levine shines a light that cuts through the miasma of party propaganda and reactionary thinking, and reveals a new path for American politics. This post is cross posted from his blog.

Author: ROBERT A. LEVINE, TMV Guest Voice Columnist

Political junkie, Vietnam vet, neurologist- two books on aging and dementia. Last book on health care reform- Shock Therapy for the American Health Care System. New book on the need for a centrist third party- Resurrecting Democracy- A Citizen's Call for a Centrist Third Party- will be available early October 2011

24 Comments

  1. And not a word mentioned about gunshot victims and their costs. Make gun owners pay for their victims.

  2. Insurance companies have for a long time asked questions on smoking and “dangerous” activities. To get the “preferred” (lowest) premium you have to be a non-smoker for a period of time and not engage in those dangerous activities and meet certain weight, BP and cholesterol requirements. Urine, blood and physical exams for larger amounts help keep you honest. Lastly, claims can be denied after death if the insurance company was lied to on the application and of course for outright fraud.

    As to the gamblers, they do raise the cost for everyone, due to adverse selection (the unhealthy try to get insured, the healthy sometimes don’t) in that famous pool.

    That’s why a single payer plan is the only one to capture the most insureds. And, yes, the quality of care might go down, as it already has. Why because some doctors are now trying to keep their incomes up by increasing volume and decreasing face time. Come December it could get worse and since their is a shortage of primary care docs, get even worse when the 20-30 million uninsureds hit their offices and clinics.

    We also should be working on subsidizing doctor’s schooling, as other countries do, so we can increase the doctor supply.

  3. Addendum (in lieu of EDIT), the first paragraph is mainly about individual policies. Although, there is some “underwriting” on group policies.

  4. I don’t believe you can completely eliminate moral hazards in a compassionate society. That doesn’t meant we shouldn’t be compassionate, but we should understand the price that we pay for it.

    In my view, a policy that creates a moral hazard does not justify other policies that restrict individual liberty in order to minimize the cost of the first policy.

    I’m in favor of allowing insurance companies to discriminate on behavior (not medical conditions). We would need some good regulation to ensure rates correspond to the predicted cost of certain behaviors, and to ensure companies don’t devise schemes to try to weasel out of paying for things due to technicalities. But I think it could be done in a few hundred pages or so.

  5. A, i was following and agreeing with you until the last sentence, when I almost spit my tea out.
    It’s unfortunate, but they can’t even do really simple stuff in a few hundred pages anymore.

    As far as weaseling out, there are two sides to that. Yes, some claims departments are weaselly, but there are plenty of people out there committing fraud on insurance companies and government programs also.
    Someone once said, trust but verify

  6. dduck,

    I said *could* be done, not *would* be done.

    Yes, there are two sides. The position that insurance companies should be able to discriminate implies that they do have some ability to deny benefits and/or pursue those that commit fraud. But there needs to be some limits placed on their power in order to protect innocent consumers. Here’s an borderline example:

    If a person agrees not to smoke, and then gets lung cancer. Should the insurance company be able to go back and look for evidence that they smoked and then deny them coverage if they can prove it? It’s a tough call. Certainly, from a purely “personal responsibility” perspective, the answer is Yes. But, considering the moral dilemma this raises, I’m inclined to err on the side of the consumer and not allow such retroactive cancellation when compliance is testable. To enforce the smoking rule, the insurance company should be required to conduct tests to ensure the consumer is not smoking, which would allow them to cancel the policy or raise premiums *before* the person gets sick. This would also serve as a motivator to stop smoking, because you are incurring a penalty whether or not you actually get sick, instead of rolling the dice.

    That only works for testable behavior though. If I agree to always wear a seat belt, and I don’t and I crash, what is to be done then? Maybe insurance companies can only apply this rule if the consumer agrees to install a device in the car that requires that seat belts are used for the car to function. If they consumer will not install the device, they will be charged as if they had not made the commitment.

    There are lots of cases like this which would need to be categorized: Testable vs. untestable. Entirely within the person’s control vs. not (such as weight or blood pressure). Which means the regulation needs to be carefully and smartly written. Another case of could vs. would.

  7. dduck..you mention that quality will suffer when 20-30 million additional patients hit the doctors offices due to being insured.

    This is possible, but I wonder if this will actually happen for two reasons. One, like my doctor, physicians have a limit on the number of patients they can see and once that limit is attained, they stop accepting additional new patients. So when some of these newly insured begin calling for appointments, many doctors will nto accept them as a new patient. And two, limited reimbursement will keep other physicians from accepting these new patients that are insured by the exchanges. Exchanges will reimburse at about the same levels as Medicaid and many physicians will not accept that low reimbursement rate. That is why so many Medicaid patients end up in the emergency rooms today.

  8. A, I was referring to lying about smoking, for example, on an initial application, and the possibility of the insurance company denying the claim. Perhaps a better example would be someone lying about skydiving, motorcycle and snowmobile use, private plane piloting, and then having an accident.
    Workman’s Compensation and Disability are rife with fraud and how many people burn down their house or business. Every month or so their is a group accused of Medicaid or Medicare fraud.
    I am not an apologizer for the insurance companies, btw, just like to get two sides to a story out.

  9. Yes, I agree and understand your point.

    My point is that I’d consider someone who didn’t commit fraud, which implies intentional deceit, being denied critical benefits to be a worst-case scenario. With that in mind, in order for an insurance company to deny benefits, they must prove that the person committed fraud, and the burden of proof should be very high. It’s not enough, in my view, just to show that someone did something they said they wouldn’t do. Maybe they misunderstood the agreement, or maybe they forgot that they had agreed to something years earlier.

    Since it may be difficult to prove fraud after-the-fact, there would be an incentive for insurance companies to ensure compliance *before* illness or accident happens, through testing, frequent re-commitments, voluntary behavior-limiting devices (the seat belt enforcer), database crosschecking (such as for motorcycle licenses), etc. And there may be certain behaviors that just can’t be checked for compliance, which would just have to be left out.

    The more difficult problem, I think, is how to account for behavior that is not a “yes or no” question. You can’t prevent people from drinking sugary soda or eating french fries, or from watching TV instead of running. You could monitor weight and blood pressure and other indicators, but then you have to account for natural variability. I wouldn’t be in favor of charging someone more for being heavy, for example, unless perhaps it were stipulated that the person can pay the lesser rate if they agree have a yearly checkup where weight it specifically discussed. Of course, the person is free to ignore the advice of the doctor, so the free-rider problem still exists (as I mentioned, I don’t think it’s possible to get rid of it entirely), but partly mitigated at least, without the government dictating individual behavior.

  10. “We also should be working on subsidizing doctor’s schooling, as other countries do, so we can increase the doctor supply.”

    Dduck, we actually have a great deal of doctors, many of whom are looking for work because the AMA gets to arbitrarily set limits on the # of licenses that get handed out. Where they get this power is beyond me, but we have LOTS of trained doctors out there that can’t get certified as a result. And when I say the AMA “arbitrarily” decides the # of licenses what I really mean is they reduce the ones for the specialties they feel should make more money so they are rarer. Its pretty much a scam. The AMA is an unregulated non government agency that really should be looked into more.

  11. Addendum. The AMA is an unregulated non-government association that wields TREMENDOUS influence over an industry that costs this nation more money than anything, and should really be looked into more.

  12. Slam, there is an excess of plastic surgeons and dermatologists, but too few primary care doctors, as we speak, and many doctors are quitting because they can’t or won’t be doing “volume” business. (I invite any doubters to come sit with me in my urologist’s or oncologists office, both heavy Medicare patient loaded. 2.5 hours waiting, last time) It will get worse when the 20-30 million start showing up at PC offices.

  13. It is indeed something where there are no easy answers. We keep addressing it piecemeal (like when we deal with the uninsured or consider smoking taxes). I think this article is good because it would be better if we could come to a consensus on the broader principal.

  14. I watch a cable channel called TruTV. Some of the shows profile tremendously foolish acts (World’s Dumbest being the best of them). These people are (often) doing things that are much more than likely to cause them harm. Are we now going to dictate that such people are no longer free to try these things? Where would you draw the line? How would you discriminate between an idiot and a (reasoned) thrill seeker?

    When it comes to weight or alcohol or cigarette consumption, why should those who are doing perfectly legal acts be branded as lesser persons? Are we now going to have three types of acts: 1) legal 2) illegal 3) legal but you lose societal benefits?

  15. RC, There will always be idiots, thrill seekers, careless sorts. That’s Ok, and sometimes, there are laws to try and protect them from themselves (helmets).
    Insurance actuaries take into account some of these and price accordingly, but a good underwriting encompassing some of the more dangerous activities and health issues goes a long way towards providing a fair premium structure for a selected demographic population that they market to. Oh, and they always use a fudge factor, just in case.

  16. rcoutme,

    Firstly, this conversation, partly due to my own comments, has turned in the “people doing stupid things causes our healthcare problems” direction. I fully admit this is a gross oversimplification. I think the bigger problem lies in the more subtle every-day decisions we make, such as what to eat and how much to exercise, that are much more difficult to measure and control. As I said, much care would have to be taken in constructing legislation that allows insurance companies to take such things into account.

    But to answer your question, there would still only be two types of acts: legal and illegal. But like any legal act, it can be restricted by private contracts. Insurance coverage that is allowed to discriminate on behavior is a private contract that says “we’ll cover your healthcare expenses at rate R as long as you agree to not do risky/stupid things X, Y, and Z, and agree to allowing us to ensure that you aren’t, and agree to see the doctor once a year for your blood pressure problem, etc.”

    No one’s creating a “lesser person” here. People are free to say no to that arrangement and opt for a slightly more expensive option that doesn’t require any restrictions on behavior or additional testing (insurers should be required to offer it and the difference in price should be regulated so that smokers and others are not priced out of the market.)

  17. A, an insurance contract, does not and never will, ask you to act a certain way (eat your broccoli), it is a commercial contract, not a social one, and each policy is filed with the insurance department of each state it offers the policy in. Yes, that means dealing with 50 state insurance departments, many of which frankly stink and are just fee gathering entities.
    You are trying to make insurance companies into what they are not. It’s simple, If we accept you, we insure you for any losses specified in the contract, providing you haven’t lied or misrepresented such that the risk was not presented correctly. (you forgot to mention that you are a bush pilot). Of course, the gray areas provide sufficient basis for the lawyers to get involved.

    Insurance is just a business, and most people have very little knowledge of the basics, and certainly not the complicated aspects. That doesn’t mean it is good, or evil; it is just a fantastic tool.

  18. dduck,

    I don’t know if I’m misunderstanding you or you’re misunderstanding me, but I don’t feel like I’m disagreeing with you. Yes, an insurance contract is a commercial contract. My point is that it needs to be smartly regulated such that consumers are treated fairly and insurers and not defrauded, and to the extent possible we minimize that gray area in between.

  19. A, I am saying it is well regulated, since it is filed in each state as to terms and conditions and has to be approved by that state’s insurance department. Smartly is a social term or a marketing term. Insurance companies can write the contract to cover any insurable event and then when approved, you know what you are getting. If you have a claim, it is judged against the insuring clause and approved or not. Less honest companies may try to weasel, delay or deny a claim, but the claimant has the right to avail himself of the services of that state’s insurance department or seek legal remedies.
    That is why it is wise to go with better companies (ones that are licensed in NY is a good guage).
    Fairly is not an insurance term.
    Hope this helps.

  20. “Fairly” is a policy term, and I’m talking about the policy that regulates the insurance contracts, whether it be state or federal level policy doesn’t matter to me for the purpose of this discussion.

    Yes, I understand insurance contracts are already highly regulated, especially now under ACA. I’m arguing for a way to make that regulation better. “Better” it terms of helping people with pre-existing conditions to get coverage at a reasonable rate, which the ACA does, while still allowing insurance companies to charge more for people who choose risky or unhealthy lifestyles, which the ACA does not allow.

  21. And “better” in terms of avoiding the problem of people thinking they have coverage but then having it be cancelled when they need it (regardless of the insurance company was justified) by encouraging a mechanism of proactive compliance checking *before* a sickness or accident occurs.

  22. We are talking past each other so I going to check out of this thread.

  23. I concur.

  24. Aren’t the “others” trying to game the system by making people who don’t need the insurance buy it so they might pay less? If I pay taxes, and I do pay property taxes, my taxes include my county hospital. That is my “insurance” for catastrophic care and I pay out of pocket for the rest. You don’t think that I’ve payed more then I will ever cost the hospital, well you are wrong I have. Now I also must also provide enough of a profit for a private company that they will lower their premiums on someone else? Or if not I’m cheating? As to the cost of risky behaviors the truth is it saves money. Better for the Govt people die years early of cancer or a motorcycle accident then linger on with unending conditions and end of life care. At 65 we all go on the govt ticket right? So anything that cuts short our stay saves money so screw your cost and your moral hazard. It’s just another attempt to control people

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