Who to Blame for Health Costs: The Poisoned Chalice of “ Moral Hazard ”

By JEFF GOLDSMITH How the Search for Perfect Markets has Damaged Health Policy Sometimes ideas in healthcare are so powerful that they haunt us for generations even though their link to the real world we all live in is tenuous. The idea of “moral hazard” is one of these ideas.   In 1963, future Nobel Laureate economist Kenneth Arrow wrote an influential essay about the applicability of market principles to medicine entitled “Uncertainty and the Welfare Economics of Medical Care”.     One problem Arrow mentioned in this essay was “moral hazard”- the enhancement of demand for something people use to buy for themselves that is financed and purchased through third party insurance. Arrow described two varieties of moral hazard: the patient version, where insurance lowers the final cost and inhibitions, raising the demand for a product ,and the physician version- what happens when insurance pays for something the physician controls by virtue of a steep asymmetry of knowledge between them and the patient and more care is provided than actually needed. Moral hazard was only one of several factors Arrow felt would made it difficult to apply rational economic principles to medicine. The highly variable and uniquely threatening character of illness was a more important factor, as was the limited scope of market forces, because government provision of care for large numbers of poor folk was required.   One key to the durability of Arrow’s thesis wa...
Source: The Health Care Blog - Category: Consumer Health News Authors: Tags: Health Policy Health Care Costs Jeff Goldsmith Kenneth Arrow Medicare Moral Hazard Source Type: blogs