Moral Hazard

The term ‘moral hazard’ is surely one of the most controversial in the field of health economics. Although it would seem that the connotation must be pejorative – immorality is certainly implied if one is prey to the hazard (Dembe and Boden, 2000) – it is commonly used to describe a much more benign situation in which a person with health insurance will use more services. Indeed, as Pauly (1968) pointed out long ago, ‘‘the response of seeking more medical care with insurance than in its absence is a result not of moral perfidy, but of rational economic behavior’’ (p. 535).

In reality, though, health economists have not viewed the concept agnostically. Moral hazard has been linked inextricably to another concept: the welfare loss from excessive health insurance. This, too, is value-laden, as it implies that social welfare would be higher if people did not have so much insurance. Some estimates put the cost of this welfare loss as high as 30% of all spending on health care in the US (Manning et al., 1987; Feldman and Dowd, 1991). Evidence on the existence of moral hazard has led to increasing patient cost-sharing for health care services (Manning et al., 1987; Newhouse, 1993).

How one views the concept and evidence has a profound impact on the public policies espoused – and even carried out. Because raising cost sharing requirements can be shown to reduce welfare loss under the traditional theory, this has been a policy advocated by many health economists. Others, particularly those from outside of the US, have been less sanguine about such policies as they can lead to less use of necessary care, as well as more inequity. Many countries instead rely more on quelling unnecessary utilization by providing incentives to providers rather than demanders of care.

This article is organized as follows. It begins with an explication of the traditional economic theory of moral hazard. Next, it provides some challenges to this theory. After that, empirical evidence is provided, first, from the RAND Health Insurance Experiment (HIE) and a critique of it, as well as some more recent studies. It then raises a topic of some currency: the advisability of evidence-based cost sharing based on the value that services convey. Finally, alternative ways of controlling the use of unnecessary care are presented that focus on the supply rather than demand side of the health care market. The article concludes with a call for less value-laden terminology.

Traditional Economic Theory

Before addressing moral hazard, it is useful to consider the traditional concept of consumer demand more broadly. If some key assumptions – for example, consumers are rational and well-informed – are deemed to be true (or are ignored), then what people demand (that is, what they are willing to pay for goods at different prices) is a barometer of social welfare. This is because in asserting these demands, they ‘reveal themselves’ to prefer one set of goods over another. It is a short leap to conclude that for society as a whole, whatever people choose will make society best off.

Not everyone, of course, agrees that demand curves can be used in such a way. American economists Ellis and McGuire (1993) take a much less value-laden approach, asserting that, ‘‘[W]e are skeptical that the observed demand can be interpreted as reflecting ‘socially efficient’ consumption, [so] we interpret the demand curve in a more limited way, as an empirical relationship between the degree of cost sharing and quantity of use demanded by the patient’’ (p. 142). Nevertheless, not only is that the first interpretation by far the most common one, but it underlies the entire notion of welfare loss discussed below.

To understand that theory it is useful to begin with the concept of ‘consumer surplus.’ This is defined as ‘‘[t]he difference between what a consumer pays for a good or service and the maximum they would pay rather than go without it’’ (Culyer, 2010). The former is set by the marketplace, the latter by the consumer’s own preference. To illustrate, suppose a pound of apples costs US$2 and a consumer is willing to buy 4 lb at that price. This fourth pound, however, is probably of less value to him or her than are the previous pounds (unless a pie is being baked requiring that much). This is because of another economics concept, ‘diminishing marginal utility.’ In fact the consumer might be willing to pay US$5 for the first pound, US$4 for the second, and US$3 for the third. Fortuitously, they do not have to, as the market price is only US$2. As a result, in this example they have generated US$6 worth of consumer surplus: for each pound of apples, the difference between how much they are willing to pay and how much they actually have to pay. The term, incidentally, was first used in the mid-nineteenth century by a French engineer named Jules Dupuit as a way of calculating the value of railroad bridges (Ng, 1979) (A history of Dupuit’s contribution – and notably, the lack of contribution by John Marshall, who popularized the concept to the English-speaking world, can be found in Houghton (1958)).

Public policymakers are not very interested in the individual consumer as they are in the aggregation of all consumers. By summing up the consumer surplus, we can derive the value to society of a particular commodity or investment over and above its costs. This is useful to know in and of itself, but also can help policymakers choose among alternative projects in which to invest.

Pauly (1968) focused on the concept of moral hazard in critiquing a famous article by Kenneth Arrow (1963). Although Arrow raised the issue, he nevertheless argued, ‘‘The welfare case for insurance policies of all sorts is overwhelming. It follows that the government should under-take insurance in those cases where this market, for whatever reason, has failed to emerge’’ (p. 961).

Pauly showed that this is not necessarily the case because it fails to take into account moral hazard, which can chip away at consumer surplus. In essence, with full insurance, people would demand more services, even ones that had only marginal value. Because these services would cost (perhaps) as much to produce as others, society would suffer a welfare loss from this excessive amount of health insurance coverage. The welfare loss would equal the difference between how much it cost to produce the services and how much people were willing to pay for them. Suppose that a medical service cost $10, and a person would be willing to pay that much for up to three doctor visits per year. If, however, they had full insurance and had to pay nothing, they might demand six visits. Suppose for the fourth visit they would be willing to pay US$7, the fifth US$4, and the sixth US$1 (each still cost US$10 to produce). The sum of the welfare loss would be US$3+6+9=US$18.

Because people use more services when they have full insurance, it costs more to provide medical care than it would otherwise. Pauly’s point with regard to Arrow’s comment is critical. Arrow said that government should provide insurance if it is not available. Pauly shows that this is not necessarily true: people will have to pay (in taxes) for the insurance program, but much of the spending will go toward services that they would not have chosen to purchase in lieu of insurance – services, he argued, are of less value by definition. Stated more bluntly, the individual, and therefore society as a whole, could very well be better off with no insurance than with government-provided insurance, due to the concept of moral hazard. Or as Robert Evans (1984) states disparagingly of this line of reasoning, ‘‘The welfare burden is minimized when here is no insurance at all’’ (p. 49).

The word ‘could’ in the previous paragraph is there advisedly. Although Pauly argues that there is a welfare loss to health insurance, there is also a gain: people obtain utility from being protected against large medical expenses. The issue, then, is determining which is larger: the welfare gain from this security, or the welfare loss described above. Feldman and Dowd (1991) took both elements into account, and concluded that the loss was far greater than the gain.

The policy implication that is generally taken away from this analysis is that consumers should share in the cost of services, or, put more graphically, ‘have some skin in the game.’ Patient cost sharing will reduce service usage; it is assumed that the services that are forgone will be those that bring the lowest utility (a concept returned in the section The RAND Health Insurance Experiment). Although the RAND HIE has not been discussed yet, its authors touted the societal savings that they argue were generated by the uptick in cost-sharing requirements in the US that followed publication of the study results. The study cost US$285 million in 2010 dollars; they argue that this cost was made up in only a week from savings that resulted from the lower costs associated with the increased cost sharing (Manning et al., 1987).

Before going on, it needs to be pointed out that the discussion in this article focuses on ‘ex post moral hazard.’ This is the phenomenon that occurs when the out-of-pocket price of medical care is reduced through the possession of insurance, such that the quantity of services demanded subsequently increases. There is another type of moral hazard, known as ex ante. According to Culyer, this ‘‘refers to the effect that being insured has on behavior, generally increasing the probability of the event insured against occurring’’ (p. 331). For example, if you are insured you may be less likely to engage in preventive behaviors – or may take up skydiving – because of the financial protection afforded by insurance. Because ex ante moral hazard has received much less consideration in the health care literature, it is not discussed further here. It is more salient in other types of insurance, such as for fires. By possessing such insurance, business and homeowners may take less care in taking care of electrical wiring, installing fireproofing, etc.

Challenges To The Traditional Theory

Although it is probably fair to say that most health economists are largely comfortable with the traditional theory moral hazard, there have been both direct objections as well as indirect ones. The former concern the issue of whether there is substantial welfare loss from health insurance, and the latter relate to the notion that substantial patient cost sharing is an advisable policy.

One objection raised by the present author (Rice, 1992; Rice and Unruh, 2009) relates to the notion that one can derive accurate estimates of social welfare from traditional methods. The way in which welfare losses are calculated assumes that individuals can accurately predict (at least on average) the benefits they will derive from using a medical service. They then compare this to the cost that they have to pay, and make a decision about whether such a service is worth purchasing. If they cannot predict these benefits accurately, then the method of ascribing welfare loss to excessive health insurance is invalid.

Why is this the case? Recall from above that welfare loss is defined as the difference between how much it costs to produce the services and how much people were willing to pay for them. How much people are willing to pay is defined by the demand curve, which shows, at all hypothetical prices, how many of an item a consumer will purchase. The traditional theory assumes that what people are willing to pay is an accurate measure of how much something is worth to them, or, which can call ‘utility’ or ‘welfare.’ It assumes that people know the benefit they will derive from a service – before purchasing it – and therefore can compare it to the cost to make a purchase decision that is in their best interest.

Consider the following. A person has a number of health ailments that include an ear infection and throat pain. Treating each will involve visiting a physician, so the out-of-pocket costs are the same. Researchers, however, probably unbeknownst to the person, have found that medical care has been shown to be highly effective in treating the ear infection, but rarely effective in treating throat pain (Lohr et al., 1986). It is logical to assume that a person would get more utility from the ear treatment and therefore would be willing to pay more for it – perhaps even the full price even in the absence of having insurance (This assumption is, admittedly, somewhat controversial. It may be that consumers are not interested in the conclusions of medical researchers but instead trust their own judgments in these matters. Here a different view is taken – that consumers would generally prefer to pay more for services that are judged to be more effective by medical research). In contrast, they would perhaps be willing to pay only the cost sharing amount – which is far less than the total cost of the service – to be treated for the cough. If the person actually behaved this way, then the welfare loss calculations would appear to be valid.

In reality, however, consumers are often unaware of which service will be more useful to them. If so, then examining what services they demand when they have to pay the full price, versus what they demand when they are insured, does not provide an indication of the utility or welfare derived. In the parlance of economists, the author is positing here that the demand curve does not necessarily reflect utility or welfare when consumers do not have good information about the benefits and costs of alternative services. Empirical evidence will be examined on this issue below. To give a preview, there is some evidence to suggest that when facing cost-sharing requirements, patients cut back on service usage somewhat indiscriminately, equally reducing use of services that are deemed by experts to be most and least useful. Moreover, there is growing evidence that cost sharing result in forgoing needed services.

A second objection to the welfare loss theory has been propounded by John Nyman (1999, 2002, 2007). The traditional model of welfare loss assumes that the only benefit of insurance is that (a risk-averse) people will receive utility from the financial protection afforded by insurance. Nyman, however, asserts that there is a yet more important aspect of insurance to purchasers: it allows them to be able to afford very expensive medical procedures that, in lieu of having insurance, they would not be able to obtain. If this is the reason why people use more services when they are insured, then, he argues, there is a welfare gain rather than a welfare loss to the additional utilization that occurs when a person is insured.

Nyman provides a hypothetical example. Assume that a mastectomy costs US$20 000 and breast reconstructive surgery, another US$20 000; the total cost of care for this episode of illness is therefore US$40 000. Further assume that an uninsured woman who has breast cancer can afford the US$20 000 surgery, but does not have the resources to pay for the reconstruction. Compare that to a second hypothetical situation, where the woman is insured and therefore can afford the mastectomy and the reconstruction. Under the conventional theory there would be a welfare loss associated with the reconstruction, because the woman only demanded it when having insurance made it cheaper.

According to Nyman, it is not the reduction in price brought about by insurance, but rather the increase in effective income that generates the demand for reconstructive surgery. In effect, having insurance has increased the woman’s income by making a heretofore unaffordable service, affordable. The woman, in turn, chooses to spend this new wealth on the reconstruction. When the insurance company wrote her a US$40 000 check, and the woman chose to use the money toward not only the mastectomy but also the reconstruction instead of spending it on something else, then the purchasing behavior is evidence of a welfare gain (Nyman 2007).

A third objection to the welfare loss theory is also ethical in nature but more general. As noted, the major policy implication of the welfare loss is that cost sharing (compared to free care) will increase social welfare. Two concerns rise from this. The first relates to the distribution of income; cost sharing is highly regressive, falling most heavily on those with low incomes. Moreover, the poor tend to be sicker and, if they avoid care due to its costs, are more likely to suffer the consequences of unchecked illness. This is well summarized by Evans et al. (1993), who wrote:

—– [P]eople pay taxes in rough proportion to their incomes, and use health care in rough proportion to their health status or need for care. The relationships are not exact, but in general sicker people use more health care, and richer people pay more taxes. It follows that when health care is paid for from taxes, people with higher incomes pay a larger share of the total cost; when it is paid for by the users, sick people pay a larger share…. Whether one is a gainer or loser, then, depends upon where one is located in the distribution of both income… and health…. In general, a shift to more user fee financing redistributes net income… from lower to higher income people, and from sicker to healthier people. The wealthy and healthy gain, the poor and sick lose (p. 4).

There is a final objection to relying on patient cost sharing, as implied by the welfare loss theory. If patient cost sharing defines efficiency by reducing welfare loss, this implies that the US has the most efficient health care system in the world (or is second to Switzerland, which also has substantial cost sharing). Although this is not the place to review the evidence, the assertion that the US health care system is among the most efficient in the world is hard to justify given the far higher costs, but mediocre at best process and outcome indicators that are available from international comparative research (Rice and Unruh, 2009, ch. 10).


The RAND Health Insurance Experiment

The RAND HIE was the most important empirical study done on the demand for medical care. It also provided evidence of the impact of cost sharing not only on use of services but also on patient health status. Researchers have used the results on moral hazard to estimate the welfare loss from excess health insurance.

Conducted between 1974 and 1982, approximately 5800 individuals in six sites (in a total of four US states) were randomized into groups that faced different cost sharing requirements. Although the actual experimental design was somewhat more complicated, the main intervention tested concerned cost sharing. Participants were assigned to pay 0%, 25%, 50%, or 95% of their medical care expenses. There were also maximums associated with how much they would have to pay each year.

The study’s findings with regard to use of services and costs showed that cost sharing indeed had a substantial impact. Those who received free care spent, on average, US$750 annually, compared to US$617 for those paying 25% of costs, US$573 for responsible for 50%, and US$540 for those paying 95% (in 1984 dollars) (Manning et al., 1987). Most income groups behaved similarly, as did those who were healthy versus sick. The reductions were similar for children and adults for outpatient services. However, cost sharing did not deter inpatient utilization for children. Of note is that nearly all of the impact of cost sharing was on seeking care in the first place. Once a person entered the medical care system for an episode of illness, it did not have a marked effect on usage.

With one or two exceptions, these results were not surprising. What was surprising was that for the most part, those who paid more and used less did not experience a reduction in health status. This was measured in numerous ways, including self-assessed health status, physical functioning, role functioning, health perceptions, and mental health (Brook et al., 1983). There were few exceptions to this for the sample as a whole (mainly slightly higher blood pressure and lower corrected vision). Those already at elevated risk of dying were also adversely affected, mainly due to the impact of cost sharing on blood pressure (Brook et al., 1983). If there was one group that did benefit from free care, it was those with low incomes. Their risk of dying was lower and they experienced fewer serious symptoms (Shapiro et al., 1986). Free care also led poorer individuals to obtain more medical examinations (Lohr et al., 1986).

Interestingly, another finding by the RAND researchers was that those facing higher copayments were rather indiscriminant in their reduction of services (Lohr et al., 1986). They categorized services into four groups: highly effective, quite effective, less effective, and rarely effective. The authors concluded that ‘‘cost sharing was generally just as likely to lower use when care is thought to be highly effective as when it is thought to be only rarely effective’’ (p. S32) and that ‘‘cost sharing did not lead to rates of care seeking that were more ‘appropriate’ from a clinical perspective. That is, cost sharing did not seem to have a selective effect in prompting people to forego care only or mainly in circumstances when such care probably would be of relatively little value’’ (p. S36). This was essentially the finding of another aspect of the experiment, which looked at the effect of coinsurance on the appropriateness of hospitalization (Siu et al., 1986).

Although generally viewed as the seminal study in the area of demand, there are a number of caveats that need to be kept in mind:

  • The study’s results are from 30 years ago. Much has changed since then, including a dramatic drop in hospital usage in the US. Moreover, there has been a shift from fee- for-service to managed care. Managed care implies that not only the patient and their cost sharing requirements, but the health plan itself, is involved in determining which services are used.
  • The study did not examine the impact of uninsurance. Everyone who participated in the study was assigned an insurance plan, so such comparisons were not possible.
  • Seniors were also excluded so the results do not apply directly to them.

Some more controversial concerns have also been raised. The first concerns the internal validity of the experiment. Nyman (2007) points out that those individuals who were assigned to cost sharing were much more likely to drop out of the experiment than those assigned to free care, presumably because they did not like the prospect of facing higher expenditures.(The experiment was designed so that no one could be made worse off financially by participating, but this might not have been clear to participants who noted that they were paying 50% or 95% of their medical costs.) Just half a percent of those who were assigned to free care dropped out compared to seven percent of others. He contends that this could not only bias the results on service usage but also the health status results. If those who dropped out had stayed in, their health would have been more likely to have been adversely affected because, facing higher coinsurance, they would likely have forgone needed medical care. These criticisms were not taken lightly by the researchers who conducted the experiment, who contended that it was not in people’s best interest to leave the experiment and that other factors provide more likely explanations for the differential drop-out rate. They also contend that those dropping out would have to have had remarkably different hospitalization rates than those who stayed in the study (Newhouse et al., 2008). At the time of writing there does not appear to be a consensus in the literature on these issues.

A second criticism relates to external validity. Although cost sharing may reduce patients’ demand, it is possible that the impact on overall utilization will be less. Consider that the experiment included, at most, 2% of the people in a geographic area – and those with considerable cost sharing, perhaps half that. This means that the experiment would have had almost no impact on the behavior of physicians and hospitals. In reality, though, if cost sharing were increased dramatically, suppliers would likely respond to reduced demand by trying to generate some more, to compensate. This implies that one cannot take the results from individuals and apply them to the population as a whole (Rice and Unruh, 2009). This criticism was raised at the outset of the experiment (Hester and Leveson, 1974), although the researchers conducting the experiment contended that the study was not ‘‘designed to replicate what would happen if various health insurance proposals were enacted into law’’ and that they ‘‘deliberately selected sites that vary considerably with respect to the amount of stress on the delivery system’’ (Newhouse, 1974, pp. 236–237).

More Recent Evidence

What is striking about the most recent evidence from the US is that it does tend to show that higher cost sharing reduces health status. It is important to note, however, that unlike the HIE, these studies are not based on true experimental designs. A few such studies are noted below:

  • Trivedi et al. (2008), focusing on the appropriate use of mammograms, examined Medicare beneficiaries aged 65–69 years in managed care plans, a group excluded from the HIE sample. In the period from 2001 to 2004, many more plans required modest copayments (US$10 or a coinsurance of 10%). The authors found that not only cost sharing reduced screening rates by 8.3 percentage points compared to those with full insurance coverage, but that the effect ‘‘was magnified among women residing in areas of lower income or educational levels. Screening rates decreased by 5.5% points in plans that instituted cost sharing and increased by 3.4% points in matched control plans that retained full coverage’’ (p. 375).
  • Much research has been conducted on the appropriate use of prescription drugs. Looking again at Medicare beneficiaries, Rice and Matsuoka (2004) report on five studies where it was possible to directly assess the impact of cost sharing on mortality, and 15 others where health status effects could be inferred by examining the appropriate use of medications. In two of the five studies examining mortality, cost sharing led to higher incidence of death; in three there were no effects. Of the other 15 studies, 12 found evidence that cost sharing led to less usage of appropriate medications, and three found no effects.
  • Studies have also been conducted on younger populations. For example, a study of more than half a million employees from 30 employers found that doubling of copayments reduces use of nonsteroidal anti-inflammatory drugs (NSAIDS) by 45% and antihistamines by 44%. The authors conclude that, ‘‘significant increases in copayments raise concern about adverse health consequences because of the large price effects, especially among diabetic patients’’ (Goldman et al., 2004, p. 2344). Indeed, among the diabetics, a doubling of copayments reduced their use of medications by 23%.
  • In a similar vein, a study from a single large employer found that enrollees in a high-deductible plan reduced substantially their filling of prescriptions for blood pressure and cholesterol medication (Greene et al., 2008). Furthermore, a study of examining an increase in copayments from US$2 to US$7 in the Veterans Administration found large reductions in drug adherence for cholesterol medication, even among those at high coronary risk (Doshi et al., 2009).

In sum, these studies further impugn the notion that charging patients more increase social welfare. The author concludes this article by considering two alternatives: tailoring cost-sharing to medical effectiveness, and focusing on the supply rather than demand side of the health care marketplace.

Tailoring Cost-Sharing To Medical Effectiveness

Although the traditional economic model calls for patient cost sharing as a way of reducing moral hazard and the concomitant reduction in societal welfare, it has been suggested that there are a variety of reasons – both conceptual and empirical – that cast doubt on this interpretation. In the last section the author will address larger policy alternatives that rely on controlling service use by relying on suppliers. Here, examination is made of one other demand-side policy that is now receiving much attention: tailoring cost-sharing to the medical effectiveness of services.

This is commonly called value-based insurance design (VBID). According to Chernew and colleagues (2007), under VDIB, ‘‘cost sharing is still put to use, but a clinically sensitive approach is explicitly adopted to mitigate the adverse health consequences of high out-of-pocket spending’’ (Chernew et al., 2007, p. W196). Fendrick et al. (2010) write, ‘‘[t]he basic premise y is to align out-of-pocket spending with the value of medical services’’ (p. 2017). Cost sharing requirements can, in theory, be the same for everyone, or tailored to the individual. The latter, although probably more effective in matching reduced cost-sharing to medical need, is much more administratively cumbersome as well as difficult for the individual patient to understand. As Robinson (2010) notes, ‘‘[t]ailoring benefit design to differences among patients will depend on the development of reliable diagnostic tests that can identify ex ante which products will be effective for which patients’’ (p. 2012). He suggests that VBID move away from low-cost preventive services and chronic medications to surgery, specialty drugs, implantable medical devices, and imaging services, which ‘‘constitute the new frontier for insurance design and require that value principlesy’’ (p. 2015).

Thus far, VBID programs have focused more on reducing cost sharing for high-value and preventive services rather than raising them for low-value services. Although this does encourage more appropriate utilization, it may not be cost-saving and therefore could be unsustainable (Fendrick et al., 2010). To illustrate, one US company, Pitney Bowes, eliminated cost sharing requirements for cholesterol drugs and for a blood clot inhibitor; the policy did indeed improve drug adherence (Choudhry et al., 2010). On a larger scale, a large insurer, Blue Cross Blue Shield of North Carolina, showed similar results when it eliminated copayments on generic drugs and reduced them on selected brand-name drugs (Maciejewski et al., 2010).

Supply-Side Policies

An alternative to focusing on moral hazard on the patient is to instead focus on the suppliers of care. This has several potential advantages, including a greater potential to control costs, the ability of experts to target which services should be encouraged, and less distributional impact than demand-side policies, which focus on ability to pay.

Just as there can be cost sharing on the demand side of the market, Ellis and McGuire (1993) argue that there is an analogous concept, supply-side cost sharing, ‘‘which seeks to alter the incentives of health care providers to provide certain services’’ (p. 135). Examples they list include the use of a fixed payment per hospital stay (e.g., diagnosis-related groups or DRGs) and even more broadly, the use of Health Maintenance Organizations (HMOs) rather than fee-for-service medicine. Both DRGs and HMOs focus on influencing the behavior of the provider rather than the patient.

Supply-side policies have the potential of improving social welfare by focusing not on supposed over-insurance, but rather on encouraging the use of appropriate services and discouraging inappropriate ones – that is, removing some of the waste in the medical care system, which has been estimated to be up to 30% of services used (Leape 1989; Schuster et al., 1998). Much effort is being expended on this, through comparative effective research and the dissemination of practice guidelines.

Although demand-side policies are certainly in vogue now, it is still true that most policies worldwide – including in the US – focus on suppliers. Common supply-side policies such as the movement away from fee-for-service payment of physicians, incentivizing providers to provide high-quality care and avoid wasteful procedures, utilization management, and global budgets, are aimed directly at providers, not patients. It is not that they eschew patient input but the focus is clearly elsewhere. If, as is argued here, these strategies are designed to reduce waste, then it can be argued that nearly all nations act as though the waste in medical care is more through the provision of unnecessary services, and not much through excess demand stemming from overinsurance.


At the beginning, the author noted Pauly’s comment that it is rational economic behavior rather than ‘moral perfidy’ that drives people to seek more care when they are insured. Despite this, there is undoubtedly a lingering effect to term ‘moral hazard’ that influences economists’ views on the subject, and perhaps therefore, their policy prescription. In his Dictionary of Health Economics, Culyer (2010) argues, ‘‘before rushing to the conclusion that moral hazard must be controlled through coinsurance, copayments and other forms of rationing, it needs to be borne in mind that there may be reasons for wanting individuals to consume more care. Even more fundamentally, there may be reasons for entirely eschewing the idea that the demand curve reveals anything worth knowing about the value placed on health care. In that case, even if the behavioral account given of moral hazard may still stand, the ethical accusation of ‘waste’ fails entirely’’ (pp. 331–332).

Thus, one thing that might be helpful is coming up with a more neutral term for the concept. The phenomenon one wants to capture in the health insurance context is similar to what Ellis and McGuire (1993) were attempting to do when redefining the demand curve to reflect nothing about social efficiency but rather simply ‘‘an empirical relationship between the degree of cost sharing and quantity of use demanded by the patient’’ (p. 142). The concept to be captured here is the additional use of service as a result of possession of insurance. As such, one value-neutral term could be ‘insurance-driven utilization.’

Indeed, analyzing the history of moral hazard in the context of the workers compensation field, Dembe and Boden (2000) also call for the use of less value-laden terms, ‘‘[u]nless economics intend to pass judgment on the moral conduct of system participantsy’’ (p. 273). They further state that, ‘‘Attention is focused on the costs of increasing benefits and not on the adequacy of those benefits. Insurance is characterized as leading to more time lost from work, not as providing a valuable buffer against the economics stresses resulting from workplace injuries and illnesses. Recipients of workers’ compensation benefits are characterized as engaging in malingering or fraudulent behavior and are thus classified as undeserving of those benefits. They are not characterized as hard-working individuals who have suffered an injury and who may nevertheless receive inadequate benefits from their insurance carrier’’ (p. 274).

The same argument can be made in the field of health economics. Charactering additional utilization that comes about from possessing health insurance in nonvalue-laden terms can widen the scope of policy options beyond simply charging people more, and provide a more positive view of the benefits that people derived from health insurance.


  1. Arrow, K. J. (1963). Uncertainty and the welfare economics of medical care. American Economic Review 53(5), 940–973.
  2. Brook, R. H., Ware, Jr., J. E., Rogers, W. H., et al. (1983). Does Free Care Improve Adults’ Health? New England Journal of Medicine 309(23), 1426–1434.
  3. Chernew, M. E., Rosen, A. B. and Fendrick, A. M. (2007). Value-based insurance design. Health Affairs 26(2), W195–W203.
  4. Choudhry, N. K., Fisher, M. A., Avorn, J., et al. (2010). At Pitney Bowes, valuebased insurance design cut copayments and increased drug adherence. Health Affairs 29(11), 1995–2001.
  5. Culyer, A. J. (2010). Dictionary of health economics. Cheltenham, UK: Elgar.
  6. Dembe, A. E. and Boden, L. I. (2000). Moral hazard: A question of morality? New Solutions 10(3), 257–279.
  7. Doshi, J. A., Zhu, J., Lee, B. L., Kimmel, S. E. and Volpp, K. E. (2009). Impact of a prescription copayment increase on lipid-lowering medication adherence in veterans. Circulation 119, 390–397.
  8. Ellis, R. P. and McGuire, T. G. (1993). Supply-side and demand-side cost sharing in health care. Journal of Economic Perspectives 7(4), 135–151.
  9. Evans, R. G., Barer, M. L. and Stoddard, G. L. (1993). The truth about user fees. Policy Options 14, 4–9.
  10. Feldman, R. and Dowd, B. (1991). A new estimate of the welfare loss of excess health insurance. American Economic Review 81(1), 297–301.
  11. Fendrick, A. M., Smith, D. G. and Chernew, M. E. (2010). Applying value-based insurance design to low-value health services. Health Affairs 29(11), 2017–2021.
  12. Goldman, D. G., Joyce, G. F., Escarce, J. J., et al. (2004). Pharmacy benefits and the use of drugs by the chronically ill. Journal of the American Medical Association 291(19), 2344–2350.
  13. Greene, J., Hibbard, J., Murray, F., Teutsch, S. M. and Berger, M. L. (2008). The Impact of consumer-directed health plans on prescription drug use. Health Affairs 27(4), 1111–1131.
  14. Hester, J. and Leveson, I. (1974). The health insurance study: A critical appraisal. Inquiry 11(1), 53–60.
  15. Houghton, R. W. (1958). A note on the early history of consumer’s surplus. Ecnomica 25(97), 49–57.
  16. Leape, L. (1989). Unnecessary surgery. Health Services Research 24(3), 351–407.
  17. Lohr, K. N., Brook, R. H., Kamberg, C. J., et al. (1986). Effect of cost sharing on use of medically effective and less effective care. Medical Care 24(supplement), S31–S38.
  18. Maciejewski, M. L., Farley, J. F., Parker, J. and Wansink, D. (2010). Copayment reductions generate greater medication adherence in targeted patients. Health Affairs 29(11), 2002–2008.
  19. Manning, W. G., Newhouse, J. P., Duan, N., et al. (1987). Health insurance and the demand for medical care: Evidence from a randomized experiment. American Economic Review 77(3), 251–277.
  20. Newhouse, J. P. (1974). The health insurance study: Response to Hester and Leveson. Inquiry 11(3), 236–241.
  21. Newhouse, J. P. (1993). Free for all? Lessons from the RAND Health Insurance Experiment. Cambridge, MA: Harvard University Press.
  22. Newhouse, J. P., Brook, R. H., Duan, N., et al. (2008). Attrition in the RAND Health Insurance Experiment: A response to Nyman. Journal of Health Politics, Policy, and Law 32(5), 295–308.
  23. Ng, Y.-K. (1979). Welfare economics. London: Macmillan and Co.
  24. Nyman, J. A. (1999). The value of health insurance: The access motive. Journal of Health Economics 18, 141–152.
  25. Nyman, J. A. (2002). The theory of the demand for health insurance. Stanford, CA: Stanford University Press.
  26. Nyman, J. A. (2007). American health policy: Cracks in the foundation. Journal of Politics, Policy, and Law 32(5), 759–783.
  27. Pauly, M. V. (1968). The economics of moral hazard: Comment. American Economic Review 58(4), 531–537.
  28. Rice, T. (1992). An alternative framework for evaluating welfare losses in the health care market. Journal of Health Economics 11(1), 88–92.
  29. Rice, T. and Matsuoka, K. Y. (2004). The impact of cost sharing on appropriate utilization and health status: A review of the literature on seniors. Medical Care Research and Review 61(4), 415–452.
  30. Rice, T. and Unruh, L. (2009). The economics of health reconsidered. Chicago, IL: Health Administration Press.
  31. Robinson, J. C. (2010). Applying value-based insurance design to high-cost health services. Health Affairs 29(11), 2009–2015.
  32. Schuster, M. A., McGlynn, E. A. and Brook, R. H. (1998). How good is the quality of health care in the United States? Milbank Quarterly 76(4), 517–563.
  33. Shapiro, M. F., Ware, Jr., J. E. and Sherbourne, C. D. (1986). Effects of cost sharing on seeking care for serious and minor symptoms. Annals of Internal Medicine 104(2), 246–251.
  34. Siu, A. L., Sonnenberg, F. A., Manning, W. G., et al. (1986). Inappropriate use of hospitals in a randomized trial of health insurance plans. New England Journal of Medicine 315(20), 1259–1266.
  35. Trivedi, A. N., Rakowski, W. and Ayanian, J. Z. (2008). Effect of cost sharing on screening mammography in medicare health plans. New England Journal of Medicine 358(4), 375–383.


Private Health Insurers In The Commercial Market