Complaints About Moral Hazard In Health Care Are Frequently Immoral

Mutilitarianism is money-metric utilitarianism in which ‘the social good’ is measured in money according to each individual’s willingness and ability to pay (WAP).  One of the immoral tenets of standard economics is the mutilitarian idea that the demand curve (WAP) represents a measure of the marginal benefit to society.  This is illustrated by the water-diamond paradox.  The marginal benefit (WAP) of having one more liter of water in any particular year is very small because we already have so much water whereas the marginal benefit (WAP) of having one more liter of diamonds is enormous because diamonds are so scarce and they are both very pretty and very useful for industry.  If diamonds were as common as water and water were as scarce as diamonds, then the marginal benefit of water (and its price) would be much higher than the marginal benefit (and price) of diamonds.

When something like water is nearly free, people who are rich or poor consume about the same, but for something like diamonds, wealthy elites have a lot more WAP than the rest of us.  Most of us are comfortable with the mutilitarian justification for determining who should get diamonds and who should not because diamonds are fairly frivolous, but health care can be as expensive as diamonds and mutilitarianism produces unethical judgements about who should live.  For example, libertarian economist, Steven Landsburg wrote an article asking “Do the Poor Deserve Life Support?”  Landsburg argued that it is acceptable that, “A woman who couldn’t pay her bills is unplugged from her ventilator and dies”.  His logic is that if poor people are not willing to pay for their own health insurance, then they don’t value it enough to be worth the expense for them to have it.

The same kind of mutilitarian analysis has produced the American preoccupation with moral hazard in health insurance. Moral hazard was originally defined as a situation where a party takes more risks because an insurance company will pay for the potential costs.  From the insurance industry’s point of view, this is unprofitable and immoral.  It is true that people with health insurance get more medical care than people without insurance and this would seem to fit the definition of moral hazard, but is it really immoral?  People get a lot more care when they have insurance than they would get without it because insurance increases their ability to pay for healthcare.  This is particularly true for poor people.  If the poor woman on the ventilator had had insurance, she would not have died, so is it moral hazard to get lifesaving healthcare if you are poor?  Standard economic analysis says yes–it is immoral for poor people to get lifesaving healthcare because the benefit is measured in WAP and poor people don’t have enough WAP to be worth saving.

Now you may think that this is merely an obscure academic idea that only oddball mutilitarians like Steven Landsburg would believe in, but mutilitarian ethics has infected the national dialog about health insurance.  Most of my economics students come to class with the preconceived notion that the moral hazard of patients is the main reason US healthcare expenditures are so high, but that notion is completely wrong.  Countries that give 100% free healthcare to all citizens have much lower healthcare expenditures than the US.  About the only kind of medical care that patients can independently overconsume without a prescription is the office visit, but there is no evidence of moral hazard here.  The US has fewer physician visits than any other rich nation (of the twelve I found data for) except Sweden.  Healthcare is never a free market where patients can simply choose to buy anything they want, so patients’ ability to overconsume is much more limited than in most markets.  Almost everything that insurance covers except physician visits requires a physician’s explicit written permission.  The 10% costliest patients account for almost 90% of health spending, and all of the expensive healthcare requires a doctor’s orders.  So if you are worried about reducing healthcare expenditures, you need to follow the money and doctors are the ones controlling the the big money decisions.  It is immoral for a doctor to prescribe unnecessary treatment (although Atul Gawunde points out that it commonly happens anyway), and it turns out that doctors decide to give more expensive lifesaving treatments, like a ventilator, to patients with insurance than patients without it.  Patients must acquiesce to the doctors’ orders and bear some responsibility for these choices, but it is illegal for patients to buy almost all medical care without a doctor’s explicit orders.

The decision to withhold healthcare based on the ability to pay strikes many people as being immoral, but it is exactly the opposite of ‘moral hazard’.  According to the original mutilitarian concept of moral hazard, doctors should withhold lifesaving treatments from people who are too poor to have the WAP to pay on their own.  The idea of moral hazard is that health insurance reduces the price of healthcare which makes people overconsume it wastefully.  As Malcolm Gladwell wrote, “If your office gives you and your co-workers all the free Pepsi you want—if your employer, in effect, offers universal Pepsi insurance—you’ll drink more Pepsi than you would have otherwise.” But whereas most people wish they had the self-control to drink less soda, few of us wish we had the self-control to go to fewer doctor visits.  I wish I had the self-control to go to the doctor more often for preventative care.  If my health insurance encouraged me to get more preventative care, that is technically called ‘moral hazard’, but what a stupid name for a useful increase in life-giving healthcare.

The main point of buying health insurance is to increase our ability to pay for treatment if we need it.  If my kids get into a terrible health crisis, I want to be able to spend like Bill Gates to save their lives and make them comfortable.  Economists take the insurance industry perspective that it is morally hazardous for me to spend more money on my kids than I would have been able to spend without insurance.  The insurance industry likes the judgmental term ‘moral hazard’ because it would be more profitable to them if I just let my kids die in pain rather than spending insurance money.

Many of my health economics students are healthcare professionals who are convinced that Medicaid produces much more moral hazard than other parts of the insurance industry.  I have even had a student that was currently on Medicaid who joined in on Medicaid bashing because “those people” don’t deserve such generous health insurance.  I have spent hours trying to figure out where they get this idea from and I can’t find any empirical evidence to confirm their impression that Medicaid patients spend more than patients with private insurance.  I think this is another example of mutilitarian ethics infecting the American psyche.  Medicaid covers poor Americans and according to moral hazard analysis, poor people are by far the most guilty (“¡¿immoral”) of getting too much healthcare for two reasons.  First of all, people are only worth their WAP and poor people have the lowest WAP, so almost any amount of spending on their healthcare is wasted because their lives are cheap.   Secondly, poor people cannot normally spend much on healthcare, so they spend a lot more when they have insurance than without, and moral hazard analysis says that insurance should not cause people to spend more money on healthcare.  Rich elites like Bill Gates cannot ever have problems with moral hazard because they will always get the same amount of healthcare regardless of whether they pay out of pocket or not.  So insurance doesn’t change the behavior of rich elites, but it can completely change a homeless person’s behavior who might be dead without it.  Death is a big behavioral change.

I suspect that part of the real problem healthcare providers have with Medicaid is not that Medicaid patients spend too much on healthcare, but that they spend too little.  Medicaid pays lower prices than any other insurance, and healthcare providers like more profitable patients better.  Healthcare professionals often complain that they lose money on every Medicaid patient.  Perhaps if Medicaid paid as generously as every other insurance, healthcare professionals would be less vocal in expressing concern about the “moral hazard” of these patients.