Health Care and Moral Hazard
From the Obama Campaign Health Care Plan FAQ:
"Q. Obama says his plan will save $2,500 annually for my family. How?A. ...[By] ensuring every American has health coverage, which will reduce spending on the "uncompensated" care of uninsured people who end up in emergency rooms and whose care is picked up by institutions and then passed through higher charges to insured individuals."
The claim that we can reduce spending by reducing costly and inefficient emergency care by extending health care to more people certainly made the rounds this past campaign. Obama mentioned this fact in the debates and in his stump speech. It is an ultimate political winner--think about it: "we are going to lower everyone's costs by giving health care to more people." Is there anything that people would support more than this idea?
Well, it's good politics, but it's not clear how accurate this claim is. This oft-touted myth of health care reform comes from a seemingly well reasoned argument. Certainly if, say, I come down with a case of pneumonia, and don't have health insurance so I don't do anything about it until I am staggering into an emergency room and the doctors have to operate on me, then that costs more money than showing up in early stages and getting a simple antibiotic treatment and being told to take it easy.
So clearly, spending for emergency care is more expensive then treating this disease early on as would have likely happened if someone were insured. But this case by case comparison is misleading.
In fact, having affordable health care coverage makes one more likely to seek medical attention. And for every case that could have ended up as pneumonia, someone with coverage may visit the doctor two or three other times for what was a common cold. In other words, having access to affordable health care means that one is more likely to seek care for things one would have previously ignored or lived with until they went away. Seeking more care means more tests and treatments, which means more spending.
As Katherine Baicker and Amitabh Chandra put it in their highly informative "Myths and Misconceptions About U.S. Health Insurance":
"This well-documented phenomenon is known as "moral hazard," [moral hazard, which has been a topic of endless conversation during the current financial crisis, is "the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk."--wikipedia] even though there is nothing moral or immoral about it. The RAND Health Insurance Experiment (HIE), the largest experiment in social science, measured people's responsiveness to the price of health care. Contrary to the view of many non-economists that using health care is unpleasant and thus not likely to be responsive to prices, the HIE found that it was responsive: people who paid nothing for health care used 30 percent more care than did those with high deductibles. This is not done in bad faith: patients and their physicians evaluate whether the value of the care exceeds the out-of-pocket costs, rather than the higher total costs."
You might call this the "Low-High-Low Principle of Health Care Affordability":
The lower the out of pocket cost of health care is, the higher the rate of consumption of health resources will be, even though the health benefits of this consumption are low.
This principle, while not necessarily something to trumpet in a campaign stump speech, is actually one of the most crucial variables in evaluating and executing the best plan for extending affordable health care coverage to uninsured Americans. If we, as a nation, want to create a health care system that provides coverage for every citizen, we need to truly understand the economic effects of implementing this system.