Finkelstein and Einav on moral hazard

NBER Working Paper No. 24055; Moral Hazard in Health Insurance: What We Know and How We Know It

By Liran Einav and Amy Finkelstein
National Bureau of Economic Research, November 2017


We describe research on the impact of health insurance on healthcare spending ("moral hazard"), and use this context to illustrate the value of and important complementarities between different empirical approaches. One common approach is to emphasize a credible research design; we review results from two randomized experiments, as well as some quasi-experimental studies. This work has produced compelling evidence that moral hazard in health insurance exists – that is, individuals, on average, consume less healthcare when they are required to pay more for it out of pocket – as well as qualitative evidence about its nature. These studies alone, however, provide little guidance for forecasting healthcare spending under contracts not directly observed in the data. Therefore, a second and complementary approach is to develop an economic model that can be used out of sample. We note that modeling choices can be consequential: different economic models may fit the reduced form but deliver different counterfactual predictions. An additional role of the more descriptive analyses is therefore to provide guidance regarding model choice.

From the Introduction

We make no attempt to review the voluminous empirical literature on the topic (moral hazard in health insurance). Rather, we select only a few specific papers - drawing (grossly) disproportionately on our own work - to illustrate the relationship and complementarities between different empirical approaches used to study the same topic. Our focus is thus not only on describing (some of) what we know, but also on how we know it.

We begin by defining the object of interest: what "moral hazard" means in the context of health insurance, and why it is of interest to economists. We then discuss work on three specific questions related to moral hazard in health insurance. First, we describe work that has tested whether moral hazard in health insurance in fact exists. There is a clear affirmative answer, with much of the most-convincing existing evidence coming from large- scale randomized experiments: Just like almost any other good, individuals increase their healthcare utilization when the price they have to pay for it is lower. Second, we describe work that tries to assess the nature of the consumer response. In particular, we ask whether individuals respond to the dynamic incentives that arise from the non-linear health insurance contracts. Again, the general finding is positive, with much of the evidence driven by quasi- experimental studies. Finally, we describe work that attempts to forecast what healthcare spending would be under contracts we do not observe in the data. This requires a more complete model of individual behavior.

In the final section, we conclude by returning to our main goal in writing this paper, and discuss the cross-pollination across the methods and approaches used in the three preceding sections. While all methods were used in the context of the same broad topic, the more specific questions they answer are slightly different. We highlight the value of each approach, and the important interactions between them.

From the Conclusions

It is a great time to be an empirical economist. We have a rich tradition of economic modeling and structural estimation to draw upon. And we are the beneficiaries of an improved (and improving!) reduced form tool kit for identifying causal effects. Both can be applied to the large, and rich administrative data sets that researchers are increasingly accessing. By combining these approaches - within and across papers - our production possibility frontier will expand even further.



moral: of or relating to principles of right and wrong in behavior

hazard: a source of danger



By Don McCanne, M.D.

What is the meaning of "moral hazard"? By a dictionary definition it sounds as if it is a source of danger emanating from wrong behavior. Whatever it is, it doesn't sound good.

In health insurance moral hazard refers to the inverse relationship between out-of-pocket spending and the amount of health care one attempts to access. The more one has to spend to access care, the less likely the individual will receive that care regardless of how beneficial it may be. Thus moral hazard does sound bad since cost sharing (deductibles, copayments, and coinsurance) cause individuals to forgo beneficial health care services. But wait.

That isn't what the supporters of cost sharing (consumer-directed health care) mean when they refer to moral hazard. They contend just the opposite - that it is a moral hazard (bad) when an individual accesses care for free (i.e., the care is fully covered by insurance) - care that would have been forgone had payment been required.

Think about this. We have some individuals in the policy community who believe that a health care financing system should assist individuals in getting the care they should have, and thus financial barriers are bad. Others in the policy community believe that individuals should be deterred from getting health care that would otherwise be paid for through collective funds, whether private insurance risk pools or publicly-financed government programs, and thus financial barriers are good whereas receiving care without a related payment is bad. Thus there is a sharp contrast in the belief in the social contract of solidarity.

It seems obvious. Preventing access to beneficial care is bad, and removing those barriers is good, even though the latter has been labeled by the pro-market policy wonks with the pejorative term, "moral hazard." And yet this concept has generated an entire industry within the policy community producing endless studies over how "beneficial" consumer-directed health care is. No wonder the authors, members of that camp, state, "It is a great time to be an empirical economist." It is also a great time to be a loan shark or a bankruptcy attorney.

We do not need more studies of moral hazard. When the advocates of consumer-directed health care advocate for more high deductibles, we should soundly reject the concept based on the dictionary definition of immoral hazard.

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