When the price of something goes down, people tend to buy more of it. Is this true for health care? There are many aspects of health care over which people have little control. People do not decide to get sick. Also, when they do get sick, physicians make many decisions about what care they receive. However, people do have some role in their care. What people pay out of their own pocket can affect what services they use. For example, someone with complete insurance for prescription drugs might not give much thought to getting a prescription for a brand-name drug that costs $120, even if there is a similar generic drug that costs only $12. However, someone who is uninsured and pays for the prescription out their own pocket might look at the options and decide to get the $12 drug.

“Moral Hazard” means that people with more insurance use more health care than people with less insurance. The term moral hazard came from the idea that an insured person knows that insurance will pay for losses and becomes careless. The classic example was a driver who becomes reckless after getting car insurance. Such behavior was viewed as irresponsible, so “moral” was included in the term moral hazard.

However, moral hazard can be viewed as plain old economics instead of morality. An insured person pays less for additional services. In the extreme, complete insurance coverage makes additional health care services look free. Thus, we should not be surprised when insured people use more health care services. Although insured people do not pay for additional services at the time that they receive them, someone pays for them when insurance premiums go up. In the long run, everyone in the insurance pool pays part of the cost when one person gets additional services.

Have you ever been on the way to a restaurant with a group of people and had someone (probably a heavy drinker or eater) suggest that you all “split the bill evenly”? If so, what happened? Did everyone order more? Unless friendships or dirty looks hold people back, the group will probably spend more with a check split evenly than it would with separate checks. People in the group will order things that are not really worth the money because they don’t pay all of it. Who wants to order a cheap meal while others order expensive meals and drinks? Moral hazard causes excess consumption and a higher bill for everyone. The same thing happens with health insurance. Insured people use health care services with costs greater than benefits. For this reason, most insurance policies limit moral hazard in some way.

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