Moral hazard

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Overtreated: Why Too Much Medicine Is Making Us Sicker and Poorer Shannon Brownlee See book keywords and concepts

Other health care economists point to "moral hazard," the term they use to suggest that being insured changes the behavior of patients. The moral hazard argument says that because people don't pay out of pocket, they use more health care than they really need. If employers offered their employees vouchers for sports cars, goes the argument, or the government provided universal sports car coverage, we'd all have a little roadster sitting in the garage.

The concept of moral hazard lies behind the recent enthusiasm for the latest "cure" being prescribed for American health care: health savings accounts. These are low-cost, high-deductible plans that ask patients to pay for the first few thousand dollars of health care out of their pockets before the plan begins picking up the tab. Books like Harvard Business School professor Regina Herzlinger's Market-Driven Health Care and a recent presidential report emphasize the need for Americans to have some "skin in the game" in order to become more-prudent consumers of health care.

However, while all of these factors—wasteful bureaucratic overhead, malpractice, moral hazard, and high prices—contribute to the high cost of American medicine, throughout the political debate over our health care mess, the most important piece of the puzzle has been consistently overlooked. There's one more factor that contributes to our medical bills, and that's unnecessary care.

Financial Armageddon: Protecting Your Future from Four Impending Catastrophes Michael J. Panzner See book keywords and concepts

For one thing, the existence of the PBGC contributed to what is known as "moral hazard." Many companies offered retirement benefits that were overly generous and unsustainable in the long run, knowing full well that if the burden eventually became too great, they could walk away from their obligations. The fees that the Pension Benefit Guaranty Corporation charged also turned out to be too low, given the risks involved. Following several large corporate failures, including United Airlines, which swamped the agency with liabilities, PBGC found itself $23 billion in the red at the end of 2005.

But eventually the so-called benefit will turn out to have been seriously destabilizing because of the "moral hazard" problem. Because of the FDIC, those who are covered—customers with deposits of up to $100,000, in most cases—have less incentive to be as vigilant about their own interests as they would without such a backstop. In fact, this paradox is associated with any type of insurance protection. In contrast, prior to 1934, depositors who were worried about getting their money back would quickly move funds to another financial institution at the first sign of trouble.

Eventually, intense competition and pressure for deregulation only worsen the moral hazard effect. Like drivers with free or low-cost insurance coverage who are not penalized for accidents, bankers seemingly have little choice but to operate ever more recklessly, especially when their competitors are doing the same. Compounding the problem is the nature of the system itself. In the United States, lending institutions operate using a fractional reserve-based lending model. Typically, the Federal Reserve sets a minimum level of funds that must be held in case depositors come calling.

The FDICIA also scaled back the too-big-to-fail rule, or TBTF That tenet was based on the longstanding, widely held belief that, while it would be bad policy for the government to bail out all failed institutions—because of the moral hazard implications— there could be a "systemic risk" if a large financial operator was allowed to go under. In other words, the collapse of a major player could trigger a chain reaction that forced other, smaller banks into insolvency and inspire a contagious loss of confidence.

But it was only a matter of time until the combination of moral hazard, unintended consequences of government actions, and an increasingly competitive financial services environment transformed their mission into a crisis. Arguably, the turning point for both agencies occurred when they were converted into public companies. Once known as the less sexy-sounding Federal National Mortgage Association, Fannie Mae was privatized in 1970. Originally part of the Federal Home Loan Bank system, sister agency Freddie Mac was privatized in 1989.

Ironically, a 2006 report that the FDIC was disbanding many bank closure teams because of a lack of failures may well have been one of the most ironic moments in the long and sorry saga of moral hazard and unintended consequences. Like dominos, when one begins to fall, the others won't soon be far behind. C h a p t e r 4 DERIVATIVES "Beware of silent dogs and still water. " —Latin proverb w þ ? arren Buffett, chair of Berkshire Hathaway, has long warned about the dangers of derivatives.

Your Doctor is Not In: Healthy skepticism about national health care Jane M. Orient, M.D. See book keywords and concepts

One reason is the moral hazard of liability insurance. Another is that the court doesn't really believe what the plaintiff's attorneys love to tell doctors: "You're not God." Most bad medical outcomes are not under the doctor's control. Even if the doctor does make an error in judgment, the outcome usually results from a combination of factors: the patient's illness, the patient's choices, actions taken or not taken by hospital staff, and sometimes pure chance. But some court decisions seem to mark a reversion to the primitive belief that physicians really do have godlike powers.

Oxymorons: The Myth of a U.S. Health Care System J.D. Kleinke See book keywords and concepts

Such behavior will continue to be encouraged by the moral hazard underlying third-party payment of medical care. American medical consumers will always demand the best, and they will always expect it to be paid for with somebody else's money. If you believe that defined contribution health funding will fix this—at this writing, the twaddle du jour among numerous pundits—you need look no further than the marketplace failure of MSAs or the legislative fate of health marts as surrogates for peoples' unwillingness to bear financial responsibility for their own medical decisions.

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