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Moral Hazard in Healthcare Insurance


Health care insurance is an important facet in one’s life because it increases one’s access to health care. However, individuals tend to take advantage of this fact by seeking services even if it is not necessary, all because it is being catered for by an insurance company: Moral Hazard. This behavior results in increased healthcare costs and strained healthcare services. In order to ensure a balance between the costs and services individuals receive, insurance companies have resorted to imposing copayments and deductibles. This paper gives insight into Moral Hazard and its implication on public health.

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Concept of Moral Hazard

Moral hazard in health insurance refers to the additional medical care that an individual gets on the basis of higher insurance coverage. Usually, this prevails among individuals with a health insurance cover only; otherwise, these individuals would not pursue this additional care if they did not have an insurance cover. For example, just because one is insured, he or she does not mind spending more or undergoing unnecessary procedures, which he or she would not have undergone without the cover.

Implication on Public Health

In his explanation, Thoma (2013) indicates that moral hazard on its own, without limitations proposed above by the various health economists, would be detrimental to public health because it would promote irresponsibility and unnecessary costs that would overwhelm the insurance companies as well as the healthcare providers. On the contrary, scholars like Nyman (2007) have remained adamant that the current high incidences and prevalence rates of various health conditions and associated high rates of mortality are attributed to the misconception of the term moral hazard. Hence, the concern for increased health costs warrants better and complete models that will aid in accurate estimates of healthcare utilization. Whereas the rationale behind moral hazard is to increase access to healthcare, the general implication of this concept without some form of limitation is detrimental to public health.

Initially, Nyman (2004) presented a two-sided debate on the impact of moral hazard on public health. He presented the typical argument by health economists using the conventional theory that this additional care is not economically valuable because it is worth less in comparison to its costs of production. Whereas this may be true in reference to utilization of healthcare services on the basis of insurance cover, Geyman (2007) advocates for a consumer-driven healthcare characterized by more co-payments and deductibles while imposing some restrictions. A survey by Einav, Finkelstein, Ryan, Schrimpf, and Cullen (2013) using employee-level data indicates that moral hazard has implications on public health due to increased healthcare costs. Einav et al. (2013) seconds Geyman (2007) on the use of high-deductible plans to reduce spending in healthcare. Aron-Dine, Einav, Finkelstein, and Cullen (2015) indicate that moral hazard has great implications on the nonlinear nature of health insurance as individuals respond to the dynamic incentives contained herein. The development of dynamic incentives in healthcare using the concept of cost sharing has led to remarkable declines in healthcare costs because low coinsurance rates are linked to lower expenditure, and the converse is also true.

Justification for the Detrimental Effects of moral hazard

In agreement with Pauly (2008), moral hazard escalates disparity in healthcare provision. Regardless of the heated debate and need for high deductibles, these are largely imposed on an individual because employer-provided insurance benefits pose a challenge to the implementation of such plans. Dave and Kaestner (2009) mention, moral hazard is associated with avoidance of preventive practice; instead, individuals take up more of the unhealthy behaviors that tend to overwhelm the health care system. Dave and Kaestner (2009) are seconded by Stanciole (2008), who shows a similar behavioral pattern associated with moral hazard. Despite the fact that such effects are realized based on empirical and opinion facts, feasible frameworks to ensure responsible behavior in preventive care and medical utilization are paramount.


Aron-Dine, A., Einav, L., Finkelstein, A., & Cullen, M. (2015). Moral hazard in health insurance: Do dynamic incentives matter? The Review of Economics and Statistics, 97(4), 725-741.

Dave, D., & Kaestner, R. (2009). Health insurance and ex ante moral hazard: Evidence from Medicare. International Journal of Health Care Finance and Economics, 9(4), 367.

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Einav, L., Finkelstein, A., Ryan, S. P., Schrimpf, P., & Cullen, M. R. (2013). Selection on moral hazard in health insurance. American Economic Review, 103(1), 178-219.

Geyman, J. P. (2007). Moral hazard and consumer-driven health care: a fundamentally flawed concept. International Journal of Health Services: Planning, administration, evaluation, 37(2), 333-351.

Nyman, J. A. (2004). Is ‘Moral Hazard’ inefficient? The policy implications of a new theory. Health Affairs, 23(5), 194-199.

Nyman, J. A. (2007). American health policy: Cracks in the foundation. Journal of Health Politics, Policy, and Law, 32(5), 759-783.

Pauly, M. V. (2008). Adverse selection and moral hazard: Implications for health insurance markets. In F. A. Sloan & H. Kasper (Eds.), Incentives and Choice in Health Care (pp. 103-130). Cambridge, MA: MIT Press.

Stanciole, A. E. (2008). Health insurance and lifestyle choices: Identifying Ex ante moral hazard in the US market. The Geneva Papers, 33, 627-644.

Thoma, M. (2013). Explainer: What is “moral hazard”? Web.

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