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Moral Hazard and the Case for Socialized Medicine

The theory of the free market is predicated on consumers having choices while making decisions; if the cost of an item exceeds its worth, then no one will pay for it, which in turn puts downward pressure on prices and leads to a more equitable distribution of goods. Unfortunately, this theory doesn’t work if the product is priceless. Healthcare, simply put, is the method by which individuals protect themselves and their families from medical disasters.

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Not only is healthcare priceless, but it operates differently from almost every other commodity. Therefore, in order to provide a reasonable standard of living for the population of the United States, a socialized based healthcare system must be instituted.

Moral hazard has frequently been raised as an objection to the possibility of universal coverage. Moral hazard is the theory that people will change their behavior if they realize that they have limited personal risk in the outcome. For example, an individual playing a videogame would have much less compunction about charging a group of enemy soldiers by himself than someone who was actually in that situation.

Applying the theory to healthcare, it has been argued that people are increasingly likely to consume more healthcare than they need because they are not personally paying for it; “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” (Gladwell 2). If this theory holds true, then it would follow that individuals must have a large personal risk in obtaining health care so that they don’t abuse the privilege.

However, moral hazard does not apply to healthcare the same way that it does to free Pepsis as the office. According to Gladwell, “The moral-hazard argument makes sense only if we consume health care in the same way that we consume other consumer goods” (3). If individuals did indeed make as flippant decisions about healthcare as they did consumer products, there would be a reason for concern. Yet, beyond cosmetic or clearly optional procedures (such as hair removal), what kind of healthcare would individuals be abusing? Indeed, it is more likely that individuals would actually seek out the proper level of preventative care, which would save the system from the costs of catastrophic care later on.

Gladwell uses the example of going in to have possibly cancerous moles examined. Even though a dermatology exam may seem initially like an unnecessary expense that was enabled by moral hazard if it reveals cancer that would have costs tens of thousands of dollars at a later point it was well worth the cost. Therefore, moral hazard does not operate enough with regards to healthcare to avoid the potential savings associated with people feeling comfortable with preventive care; “If you are preoccupied with moral hazard, then you want people to pay for care with their own money, and, when you do that, the sick inevitably end up paying more than the healthy” (Gladwell 4).

A major problem with moving towards a more socialized form of healthcare is the question of “who will pay for it?” According to Gladwell, “Health insurance here has always been private and selective, and every attempt to expand benefits has resulted in a paralyzing political battle over who would be added to insurance rolls and who ought to pay for those additions” (2). Insurance is generally convinced as a method in which risk is distributed throughout a group of people. In other words, because everyone who belongs to the insurance plan paying a fixed fee, the system can absorb the shock of an individual who has catastrophic needs.

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However, this principle only works smoothly if the risk pool is acceptable compared to people who probably won’t get sick. For example, if an insurance company only insured individuals who were all at a high risk of getting sick, they would have to charge almost the cost of the final care in order to turn a profit. Therefore, the only way to ensure that everyone can afford coverage without putting a high burden on those at low risk is to make the risk pool as large and expansive as possible. By spreading the cost through as large of a system as possible, the question of “who pays for it” is answered: everyone in an equal and more cost-efficient way.

Another reason to consider a socialized system is the elimination of the profit motive by making healthcare a public good. Under the status quo, insurance companies seek to make a profit from selling health insurance. These companies’ profits are comprised of taking in more in premiums than they give out in benefits. This inefficiency means that the general risk pool doesn’t get everything that they put into the system.

However, a government-run program does not have to make a profit. In fact, in the event that there are more costs associated with giving citizens quality healthcare, the government has the ability to appropriate more funds and compensate with increased taxes.

There can be little doubt that the healthcare system in the United States needs to be reformed. Between 2000 and 2006, health insurance costs surged an amazing 76% (msnbc.com). Furthermore, as Gladwell points out, healthcare in the US is not only more expensive, it is frequently less effective than in other Western countries (4). The time has come to put aside the petty argument over a moral hazard and give the citizens of the United States coverage that allows preventative, effective, and universal care.

Works Cited

“Health Insurance Jumps Twice Inflation Rate.” MSNBC. 2006. Web.

Gladwell, Malcolm. “The Moral-Hazard Myth.” The New Yorker. 2005. Web.

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StudyCorgi. (2021, November 18). Moral Hazard and the Case for Socialized Medicine. Retrieved from https://studycorgi.com/moral-hazard-and-the-case-for-socialized-medicine/

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StudyCorgi. (2021, November 18). Moral Hazard and the Case for Socialized Medicine. https://studycorgi.com/moral-hazard-and-the-case-for-socialized-medicine/

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"Moral Hazard and the Case for Socialized Medicine." StudyCorgi, 18 Nov. 2021, studycorgi.com/moral-hazard-and-the-case-for-socialized-medicine/.

1. StudyCorgi. "Moral Hazard and the Case for Socialized Medicine." November 18, 2021. https://studycorgi.com/moral-hazard-and-the-case-for-socialized-medicine/.


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StudyCorgi. "Moral Hazard and the Case for Socialized Medicine." November 18, 2021. https://studycorgi.com/moral-hazard-and-the-case-for-socialized-medicine/.

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StudyCorgi. 2021. "Moral Hazard and the Case for Socialized Medicine." November 18, 2021. https://studycorgi.com/moral-hazard-and-the-case-for-socialized-medicine/.

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StudyCorgi. (2021) 'Moral Hazard and the Case for Socialized Medicine'. 18 November.

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