Tag Archives: Christopher Conover

Birth control, keg stands, and moral hazard

A Colorado organization managed to produce ads promoting health insurance under the Affordable Care Act that are so goofy that some supporters thought they were a parody produced by over-caffeinated tea partiers. But the ads are more than just an unwitting parody. Some of them also unwittingly illustrate an economic principle that is crucial for understanding the cost of health insurance: moral hazard.

Two of the best examples are reproduced below.

lets get physical

keg stand

Source: www.doyougotinsurance.com

Contrary to what you might think after reading the ads, “moral hazard” does not mean health insurance is hazardous to your morals. (For some commentary on what these ads say about morality, look here.)

Moral hazard refers to an insured party’s incentive to take greater risk because the insurer will pay the costs if there is a loss. The two ads above pretty clearly say, “Go ahead and engage in risky behavior, because if there’s a cost, your health insurance will take care of it.”

In the health care context, moral hazard can also involve excessive use of health care services because the insurer is paying the bill. “Excessive,” in this context, means that the patient uses a service even though its cost exceeds the value to the patient.  For example, my Mercatus colleague Maurice McTigue tells me that before New Zealand reformed its health service, a lot of elderly people used to schedule monthly visits to the doctor’s office because it was free and provided a good opportunity to socialize with friends and neighbors. Visits dropped significantly after New Zealand’s health service instituted a $5 copay for doctor visits — which suggests that some of these visits were pretty unnecessary even from the patient’s perspective!

Moral hazard can have a big influence on the affordability of health insurance. Moral hazard losses in private insurance plans can equal about 10 percent of spending. Moral hazard losses in Medicare and Medicaid are much higher, equal to 28-41 percent of spending. (References for these figures are on page 8 of this paper.)

Duke University health care economist Christopher Conover and I examined the eight major regulations rushed into place in 2010 to implement the first wave of Affordable Care Act mandates. The government’s analysis accompanying these regulations failed to take moral hazard into account. In other words, federal regulators extended insurance coverage to new classes of people (such as “children” aged 21-26) and required insurance plans to offer new benefits (such as a long list of preventive services), without bothering to figure out how much of the resulting new health care expenditures would be wasted due to moral hazard.

Is it any wonder that health insurance under the Affordable Care Act has turned out to be less affordable for many people? Makes me want to do a keg stand to forget about it. After all, if I fall down and get hurt, I’m covered!

How many people still have their old health plans?

A few days ago, I pointed out that many people with employer-provided health insurance plans may not be able to keep the same plan, because even some small changes to employer-sponsored plans could make them forfeit their “grandfathered” status. Duke University health care economist Christopher Conover and I noted in 2012 that the “grandfathering” regulation could have been written much more flexibly to prevent some of this.

On October 30, Chris published an article in Forbes that put some numbers on this abstraction. Based on survey data showing what percentage of plans complied with various provisions of the Affordable Care Act (ACA), he estimated that 129 million (68%) will not be able to keep their old health insurance plans, even if they liked them.  That does not mean these people will go uninsured. Rather, they will have to buy more expensive plans that include coverages mandated in the ACA.

This result is consistent with figures the Department of Health and Human Services supplied in its 2010 analysis of the grandfathering regulation that established the very restrictive terms an insurance plan had to meet if employers or policyholders wanted to keep it.

The true promise of the ACA is now clear: “If you like your current health plan, tough luck; you will buy a plan with coverage the federal government has decided you must have.”