Question

In the context of health care/health insurance, what is the moral hazard?

Answer 1

Moral hazard, in general in the context of insurance means the increased likelihood of individuals to indulge in riskier activities once they are insured. For example, once someone is insured against fire, they are more likely to indulge in risky behavior such as smoking, and less likely to be cautious as they themselves are not responsible for paying for the damage.

Equivalents of such behavior can take place in the health care sector once a person is insured. It is sometimes argued that health insurance in itself is a moral hazard, as it increases the likelihood of someone not taking good care of health, indulging in unnecessarily risky behavior or unhealthy lifestyle. If the person themself is not responsible for their medical expenses, they are less likely to exercise the same level of care and caution in their daily life they would have done otherwise.

A more commonly argued point in regard to moral hazard in health care is that it drives the cost of health care for an individual to effectively zero. This may lead to the abuse or overuse of certain healthcare services by an individual. For example, a person might overstay a day or two in a hospital or nursing home for convalescence, which they would not have done if they had may that bill themself. So here, it is a moral hazard as the insured individual has the incentive to use more resource than necessary as the insurance is responsible for paying for the said resource.

Thus, it can be said that moral hazard in health care, is the additional heath care cost that is incured when a person is insured.

Moral hazard is generally seen as an unfavorable behavior for the insurance companies as it leads them into paying more than what is strictly necessary. Effects of such behavior can be removed, if health care premiums is decided on the basis of individual risk and is not equal for everyone. Hence someone who requires health care services more frequently would have to pay higher premiums in order to compensate for the increased possibility of morally hazardous behavior at the cost of others.