Tag Archives: New Zealand

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!

California May Have a Budget!

Here are some facts:

  • The budget is 99 days overdue. PA and NY’s budgets were also-past due, but they were resolved long ago.
  • According to reports, the state’s $19 billion budget gap is closed:

with what lawmakers call solutions and creative accounting tactics, some of which push off payments to the next fiscal year [MM: Sound familiar?]

  • The deal was made possible by a recent ruling by the state’s Supreme Court. It upheld Governor Schwarzenegger’s mandate that 200,000 public employees take unpaid days off.
  • The deal required $5.3 billion in federal aid. If we extrapolate the result from Sobel and Crowley, the federal aid may stimulate anywhere from $1.7 to $2.2 billion in new state taxes. 
  • Last month, the Wall Street Journal reported:

On the brink of insolvency, California may have to pay its bills with IOUs soon. A budget was due three months ago, and the legislature hasn’t passed one.

The lawmakers can, however, point to a list of other achievements this year. Awaiting Gov. Arnold Schwarzenegger’s signature, for example, is a bill that would bar the state from filming cows in New Zealand. It’s the fruit of five committee votes and eight legislative analyses.

California lawmakers also voted to form a lobster commission. They created “Motorcycle Awareness Month,” not to mention a “Cuss Free Week.”

And they kept the California state rock safe. Senate Bill 624 had sought to bust the rock, serpentine. Adamant opposition protected it, but sponsor Gloria Romero declared this “an issue we should address again.”