Moral hazard is a theory describing a phenomenon in economics and is based on the idea that a person can alter his behaviour and actions when protected against the consequences as compared to the situation when he has no protection. Thus, what it means is that for example, if one has a fire insurance for his home, he is likely to behave in a risky manner that could result in fire like smoking on his bed or burning dried leaves in his backyard. Contrast that with another person who does not have fire insurance for his home. The latter is likely to take vigilant steps to reduce the likelihood of a fire that could devastate his home. Likewise, the moral hazard argument is invoked by economists to argue against bailing out troubled financial institutions. A bank for instance makes reckless lending decisions to borrowers in funding their purchase of homes; the borrowers are unlikely to pay back on their loans and will default on them. Large scale defaulting on the loans will result in banks going belly under. The issue is that government bail-out of these troubled belly-under financial institutions only serve to “insure” them against poor lending decisions, and encourage them to continue with making such decisions.
Malcolm Gladwell wrote an essay entitled “The Moral-Hazard Myth” published in the Department of Public Policy section of New Yorker in which he argued against the moral hazard approach to health insurance. Moral hazard in health assumptions is based on the assumption that people consume healthcare like the way they consume other consumer goods. A little explanation is in order here. Basically, moral hazard in the context of health insurance as explained by Gladwell will lead to ‘wasteful behaviour’, i.e. unnecessary consumption of healthcare services. However, Gladwell points out that such a notion of healthcare consumption and in the same vein, moral hazard, does not make sense, citing economists like John Nyman and Uwe Reinhardt who pointed out that it is absurd to assume that patients will adopt the wasteful behaviour and no patient would want to visit the doctor unnecessarily. In spite of this, insurance companies adopt the co-payment approach as a means to prevent unncessary consumption of healthcare, i.e. for every consultation, a patient co-pays or foots part of his medical bills.
Gladwell launched into a further discussion of health insurance schemes, comparing social insurance to actuarial insurance. Social insurance is a public insurance programme that protects against economic risks as a result of old age, unemployment or even sickness. Essentially, the less healthy members of the population pay as much premium as the healthy members. The financial risk carried by the sick is thus borne by the entire population of insurees. Whiles the healthy pay the same premium as the less healthy, the social insurance is at least a cushion for the former to fall back on should he suffer a debilitating illness. On the other hand, the amount of premium one pays in the case of actuarial insurance is dependent on the amount of inherent risks borne by him. As Gladwell puts it, if one drives a sports car and has been receiving speeding tickets aplenty for the past two years, he will have to pay high premiums if he were to insure his car. Similarly for someone who has an underlying medical condition and wishes to purchase health insurance, he may have to pay higher premium. Hence, insurance companies fixated on the notion of moral hazard will insist that insurees fork out more from their pocket for their healthcare. As a result, 45 million Americans are without healthcare insurance coverage.
Gladwell approached the topic of moral hazard in healthcare from the conventional angle of health insurance, and showed the untenability of moral hazard in insurance policies that resulted in millions of Americans without coverage. However, the issue of moral hazard in healthcare is not is simple as it seems and Gladwell’s perspective is only but one angle. Consider this fictitious scenario. Mel C is a gentleman who was diagnosed with diabetes. His physician prescribed drugs to control his diabetes, and scheduled an appointment for him. The physician being the responsible doctor as he always was warned Mel that failure to control his diabetes will lead to medical complications such as coronary heart disease. Mel, however, does not believe he is sick, and thinks there is no need for him to take his medications. As a result of his uncontrolled diabetes, he gradually developed coronary heart disease. One day, he reported to the emergency department of a hospital with chest pain, suffering a condition known as angina when the heart is not receiving receiving enough blood supply due to blocked arteries. Specialists determined that the extensive blockage of blood supply of Mel’s heart meant that the only viable treatment is a heart transplant to ensure his survival. A heart transplant procedure is very expensive…
Revisiting John Nyman and Uwe Reinhardt earlier said point that patients do not unnecessarily visit the doctor as an argument against moral hazard, correct to a certain extent, patients don’t unnecessarily visit the doctor. The problem at the other extreme end is that patients don’t visit their doctors when they are supposed to. Therefore, one pertinent issue that the medical field has to grapple with is patient compliance. A compliant patient is one who adheres to his treatment regimen dutifully, and is up to date with his medical appointments. Thus, we have a non-compliant patient in Mel who neither takes medications nor turn up for scheduled appointments. The issue of non-compliance amongst patients is a persistent problem medical practitioners have to deal with. A wealth of medical literature have emerged that examine the issue of patient compliance, and suggestive approaches to improving patient compliance include improving physician-patient relationship, improved communication with patients and others. Besides that, other works in this area examine the patient-centric notion of health, i.e. health as defined from the patient’s world view. The implications of this is that the notions of sickness and health could differ from patient from patient. In the case of Mel, despite his diagnosis of diabetes, he still perceives himself as a healthy person.
Imagine now, in place of health insurance, we have the state or/and national government health budget that subsidises medical treatment of the citizens. In an ideal world, we hope that our health budget is infinite so that we can subsidise every single citizen who comes down with a debilitating illness requiring an expensive treatment. However, in our real world, the taxes we pay towards funding healthcare budgets are finite. And now, the same question as what Gladwell addressed for health insurance applies – do health subsidy invite moral hazard?
Addressing this question requires us to dwell into two different aspects healthcare – preventive healthcare and curative treatment, especially for end stage organ disease (heart failure, lung failure, liver failure, kidney failure). Preventive healthcare as its name suggests refers to the branch of healthcare that prevents disease. Curative treatment, especially for end stage organ disease, refers to the curative treatment of end stage organ failure, like for example transplantation with a donor’s heart when the host’s heart is diseased to the extent that it can no longer perform its function properly.
Preventive healthcare involves approaches like screening and picking up vulnerable segments of the population and also immunisation strategies to protect the population against infectious diseases. It also aims to treat common diseases that can lead to end organ failure such as diabetes. Besides coronary heart disease, diabetes can also result in cancers and kidney diseases. Thus, preventive healthcare involves an exhuastive list of strategies to prevent serious diseases. The main argument in favour of promoting the preventive healthcare approach is that an investment in it will save future costs in treatment of serious diseases (including end organ damage) that could have been prevented.
Researchers from Harvard Medical School did a study of mobile health clinics aimed towards preventive care. The results they found was significant -every USD$1 invested in such mobile preventive programmes yielded a return of investment of $36, which includes savings in hospital emergency department expenditures.
Thus, herein lies the questions – Is there moral hazard if preventive healthcare is generously subsidised? In the same vein, is there moral hazard if expensive curative healthcare is generously subsidised? Let’s consider for argument’s sake the scenario in the event of wholesale subsidy of preventive healthcare e.g. women go for mammography to pick up breast cancer or pap smear to detect cervical cancer, all these done at no cost to the citizens and all expenses paid for by the government. A moral hazard scenario will predict widespread consumption of preventive healthcare services. This could be a possibility as there are those who are health consciousness and are up to date with their interval health checks. If they come free with all tabs picked by the government, maybe the interval between health checks will be shorter, for example from once a year to one in 6 months.
Next, what can we say of moral hazard in the case of generous or full subsidy curative treatment of end organ disease? The moral hazard in this case is similar to the fire insurance example – since curative treatment is subsidised, there is no need for the patient to pay attention to his health, regardless of prevailing risks of suffering end organ disease. The question is whether such a view is tenable?
It is very tempting to bark up the moral hazard tree based on practices of other healthcare systems, particularly the German one. Article 62 of the German Social Security code states that patients who comply with cancer screening and treatment will enjoy lower co-payment (higher subsidy) for their cancer treatments than those who do not comply (for simplicity sake, we consider cancer another form of end organ disease). In other words, what the Germans are doing is equivalent to a stick approach designed to address moral hazard – to get people to be more responsible with their health in terms of complying with treatment and screening. Thus, if Mel is in a healthcare system that bases curative treatment subsidies on ability to comply to his preventive healthcare treatment for his diabetes, he will not get as much subsidy due to his non-compliance, and will have to foot part of his heart transplant and future cardiac care bills from his own pocket. Similarly, in the fire insurance example, moral hazard is addressed by getting the insuree to co-pay some of the damages to his property caused by the fire.
However, the question is whether the implementation of a stick approach that makes the patient more wary of end organ diseases they may suffer from necessarily indicates the moral hazard of wholly subsidised curative treatment? To rephrase, would one not take his health seriously in the full knowledge that treatment of any catastrophic disease he may suffer as a consequence will be fully subsidised? There is no straightforward answer to that question. Moral hazard theorists who approach from the perspective of the insurance school of thought will see fully subsidised curative treatment as similar to insurance where clients will behave in an irresponsible way despite insurance, and hence the need for co-payments. Yet others will disagree that just because curative treatment for end organ diseases are fully subsidised does it mean that they will not take care of their health. During the late stage of end organ damage, the decline of quality of life is not something they would contemplate.
The German healthcare system is an interesting one, and its policies are worth considering. Besides the stick approach, it also has a carrot approach. Article 65a of the German Security Code provides incentives for health conscious behaviour which includes health promotion, screening and check-up programmes. Incentives come in the form of gifts, cash and even reduction in insurance contribution. To a large extent it is a good model to follow, incentivise preventive healthcare, and enforcing the stick approach in pegging co-payments for curative treatments according to the patient’s compliance and in the larger picture, responsibility for his health.
Dual healthcare policies based on the German experience worth considering is giving generous subsidies, whole subsidies or even incentivising preventive healthcare, as part of the carrot approach. Studies have shown the huge return of investment for preventive healthcare. The stick approach is pegging subsidies of curative treatment of serious diseases (which can be otherwise prevented) on the patient’s history of caring for his health such as attending health screenings or complying with treatments. One main disadvantage of the stick approach is that it is a political liability that will not go down well among the citizens. However, what the double policies is able to achieve is to promote a higher level of health consciousness among the citizenry; since subsidy for curative treatment is based on degree of responsibility for one’s health, it will make more sense to utilise preventive healthcare services, which is totally subsidised and has incentives to go with it. At the end of the day, the long term benefit is in terms of savings for the healthcare system with a lower incidence of end organ damage diseases and their treatment requiring subsidy. As for the final verdict over the existence of moral hazard in wholly subsidised preventive healthcare, although Nyman and Reinhardt are right in that no one in his right frame of mind would want to unnecessarily consume healthcare services, we also cannot rule out the fact that the total subsidy will attract health conscious citizens to consume preventive health services at higher frequencies. For moral hazard in heavily or totally subsidised curative treatment, arguments for and against it is a matter of patient perspective; those who take their health for granted due to subsidies versus those who care about quality of life not to let their health degenerate to the level of organ failure. Thus, it will be premature to consider moral hazard in healthcare subsidy a myth.