Question

Do you agree or disagree and why? (js)

One of the major factors contributing to the high cost of healthcare is increased utilization caused by moral hazard. A majority of healthcare expenses are paid by third-parties so consumers receive an excess quantity of health care services to a greater degree than with a single-payer system. Another factor for the high cost of healthcare is the overemphasis of medical intervention over preventative care. These are just some of the many factors that explain the high cost of healthcare (Shi, 2017).

Answer 1

Healthcare spending in the United States is dominated by government and insurers, which are collectively called “third-party payers.” In 1960, patients controlled how almost 50 cents of each dollar spent on health care was paid. That number is now down to just over 10 cents, with the rest controlled by third-party payers. This separation of payer from consumer is associated with a significant increase in real healthcare spending per capita, with poor quality, and with waste that amounts to about one-third of healthcare spending. However, this result is not a natural economic outcome. Rather, it is the consequence of public policy that can, and should, be amended or reversed. This is commonly believed to be the result of market imperfections. However, federal and state governments have long suppressed the functioning of the market system in the medical industry. Third-party payment, with its moral hazard, has increased demand and thereby driven up prices. Medical suppliers that work with relatively low levels of third-party payment have seen significantly lower price increases over time. The Patient Protection and Affordable Care Act (PPACA) has increased the usage of high-deductible insurance, but has other features that work against cost containment.

In order to function properly, insurance can only cover insurable risks. For a risk to meet this qualification, it must share three common characteristics: the chance of a loss is small; the magnitude of the loss is financially devastating to an individual; and when the risk is spread over a large group of people, premiums are affordable. For example, getting hit by a car is an insurable risk because the chance of such an occurrence is small; the required medical services are too expensive for many individuals to afford; and when the risk is spread over a large group, the premiums are affordable. Yet, many of the services covered by health insurance do not fit this definition, and instead involve predictable expenses or minor care. In fact, the Patient Protection and Affordable Care Act (PPACA) mandates coverage of immunizations, alcohol misuse screening and counseling, blood pressure screening, depression screening, diet counseling, obesity screening and counseling, tobacco use screening, anemia screening, breastfeeding comprehensive support and counseling, folic acid supplements, and iron supplements, among other “preventive” services.

Insurance and Moral Hazard
Health insurance reduces price sensitivity because patients do not pay for medical care at the point of service. Third parties provide the bulk of medical payments in the U.S. Insurance companies pay for these services using patients’ monthly premium payments or, in the case of governmentfunded health insurance, tax revenue. This separation of consumption and payment makes people act as though they are receiving low-cost or even free services. The tendency to overconsume medical care as others bear the cost is an example of moral hazard. More generally, moral hazard is a term used by economists to describe the tendency to take on more risk as the costs are shifted to others. In medical care, the overall effect is to shift the demand curve for medical services to the right, raising the equilibrium price. The level of distortion in the quantity of these services demanded varies with the price elasticity for each service. For example, a decline in out-of-pocket price due to insurance would be expected to have little effect on the number of heart surgeries purchased, but a large effect on the number of cosmetic surgeries.

Overuse, to whatever extent it is occurring, implies an efficiency loss since consumed services are worth less to the patient than what it actually costs to provide them. For every dollar of services consumed, on average the patient only pays 11 cents out of pocket. On average, then, patients would have an incentive to consume medical care services up until the value of the service is worth 11 cents on the last dollar spent.

In a free market, prices “restrain costs by providing incentives for the individual to use a given good or service only to the extent that its incremental value to that individual is greater than its incremental costs.” In our current system, patients are unintentionally consuming medical services that have marginal costs that exceed their marginal value. For some patients, and some services, the monetary
cost may well be zero, which means that the price rationing system has been replaced by some other form of rationing. That rationing alternative could take a variety of forms. One is rationing by “willingness to wait.” Where the out-ofpocket cost to patients is very low, this form of rationing is likely to be more significant. Herrick cited studies showing that two-thirds of Medicaid patients were unable to obtain appointments for urgent ambulatory care within a week. As moral hazard makes patients “poor shoppers” and increases demand overall, insurance companies will increase premiums. Government mandates on what must be included in health insurance coverage (famously expanded in the misnamed “Patient Protection and Affordable Care Act”) further drive up costs.

Government payers have an even worse costcontainment record than privately provided medical care. The costs of Medicaid have risen 35 percent more, and the costs of Medicare have risen 34 percent more, per patient, than the combined costs of all health care in America apart from these two flagship government-run programs.

Furthermore, insurance and government-provided medical care causes the behavior of physicians to change in a way that does not necessarily benefit the patient. Specifically, because people with third-party payers behave in a manner consistent with the fact that someone else is footing their bills, physicians who accept insurance do not have to compete for patients on the basis of price. Also, the low Medicare fees function as a price ceiling, inducing physicians to compensate by increasing the volume of services. Visits are rushed, and many physicians hire those who have less medical training (e.g., nurse practitioners or physician assistants) to increase the number of patients seen per day. Moreover, because these physicians have to deal with third-party payers, they have to allocate their resources toward costly administrative expenses. In other words, funds that could have gone toward the quality of care are instead going towards files, staff, and office space. Third-party payers themselves introduce another layer of expenditures, relative to out-of-pocket systems: the companies must cover the expense of administering insurance plans, providing cushions for contingencies, and delivering a profit to the owners who put up their expertise and capital.

Unlike physicians who rely on third-party payers, those who rarely or never accept health insurance run their practices in a much more efficient and effective manner. Since patients are paying a larger fraction of the cost outof-pocket, they are price-sensitive, which means that the physicians have to compete with other physicians on the basis of quality and price. There is a growing national trend toward direct primary care.

Conclusion
On the whole, legislation is pushing medical care in the wrong direction. It attempts to use regulation, rather than freer markets, to resolve the problems caused by earlier regulation. The only way to reduce prices while increasing quality and accessibility is to take a free-market approach.