CASE STUDY 1: THE PROBLEM OF HIGH DEDUCTIBLES AND CONSUMER DIRECTED HEALTH CARE IN U.S. HEALTH INSURANCE

READING 1.A. – MORAL HAZARD

Every health care finance system must struggle with the problem classically called Moral Hazard.

By its very nature, insurance dramatically lowers the price of health care to the immediate consumer. Absent cost sharing, insurance lowers the price of health care to zero.

The demand for a valued good or service that is offered wholly without cost, however, could expand infinitely. If the only cost of health care services is the time and discomfort incurred in consuming them, the demand for health care products and services is potentially (theoretically) very large.

Moral hazard is a problem with respect to virtually all kinds of insurance (and indeed is an issue whenever the possibility exists for the costs of production or consumption to be externalized - that is, for someone other than the consumer to be incurring them).

But; it is in particularly a problem with respect to health insurance because the need for many health care services is determined by the professionals who provide those services.

There is, therefore, considerable opportunity in health care for providers to induce demand for their own services. If these services are free to consumers, however, consumers have no reason to constrain their use of services. They will also have no reason to question the prices charged for services. Indeed, physicians are likely to not discuss prices with patients (and perhaps not even to know or to consider the prices of the services that they recommend).

While insured services are free to consumers, however, insurers must still pay market prices for them. If consumers do not constrain the utilization and price of health care products and serviced, there is a danger that the costs paid by insurers for health care will expand uncontrollably.

But if insurers attempt to constrain demand either through their own utilization controls or through provider incentives, it is likely that rationing will result, either by the insurers, the providers, or both. Moreover, if health care is free, consumers may forgo taking measures like eating properly, exercising, and refraining from smoking, knowing that insurance will always pay to repair the damage later after they experience the health consequences of their bad behavior.

 

Health policy experts generally agree that moral hazard is a problem, but disagree as to how serious a problem it is.

· Some experts believe that it is not a major problem. People rarely consume health care services unless they really need them

· Other experts believe that the real problem is consumer demand encouraged by the collective sharing of risk among members of group health insurance pans. The way to solve this problem is the imposition of varying types and levels of cost-sharing and out-of-pocket expenditures on health insurance plan members.

· Other experts believe that the real problem is NOT consumer demand but rather demand induced by providers, and that there are ways of controlling this short of imposing cost sharing on consumers.

· Still others believe that insurance-induced demand is a problem, but that cost sharing, at least if it exceeds certain limits, is more of a problem than a solution because it discourages low-income patients from getting adequate care.

· Finally, some argue that cost sharing can discourage low cost preventive or primary care, necessitating more expensive care later once medical conditions get out of hand.