Health Reform and Moral Hazard

Would health reform boost frivolous doctor visits?

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Last week I debated the merits of health care reform in Grand Rapids, Mich. The crowd was mostly conservative, and a worry I heard voiced more than once was that expanding access to health care would increase the number of frivolous visits to the doctor.

The theory that artificially lowering the price of any commodity leads to its overconsumption is called “moral hazard.” In health insurance, the principal method for limiting moral hazard is to require consumers to pay a fee, or “copayment,” every time they go to the doctor. Copayments have become a significant, often unrecognized factor in medical inflation. Between 2001 and 2006, copayments for office visits paid for through employer-based health plans doubled. Between 1999 and 2003, the percentage of Medicare recipients who shelled out copayments exceeding $15 jumped from 0.3 percent to 24 percent for visits to primary-care physicians. For visits to specialists, the percentage increased from 1.2 percent to 63 percent.

The problem with the theory of moral hazard as applied to health care is that there are few experiences less pleasant than going to the doctor. “Do your patients like going to the doctor?” I asked a physician seated next to me at a dinner before the debate. “Of course not,” he said. “They go because their wives tell them to.” (He didn’t explain what motivates wives to go to the doctor.) The availability of health care to a potential patient is different from the availability of, say, federal bailout money to an investment bank. Getting rich off an investment with minimal downside risk is fun. Having your doctor poke his index finger up your rectum is not fun.

That isn’t to say you can’t find worrywarts or outright hypochondriacs who will abuse the access that health insurance provides to doctors. (Remember Bill Murray as a masochistic dental patient in Little Shop of Horrors?) But this group represents a minority. For most of us, increased access to health care will likely increase necessary doctor visits, not unnecessary ones. The relevant question, therefore, is whether reduced access to health care is more expensive, in the long run (by encouraging patients to defer treatment until they develop serious illness), than increased access. A study published last week in the New England Journal of Medicine (“Increased Ambulatory Care Copayments and Hospitalizations Among the Elderly“) suggests the answer may be “yes.”

As the study’s authors point out, there have been lots of studies showing that increased copayments lead to fewer doctor visits (duh). But there haven’t been a lot examining the consequences, particularly for the elderly (who would seem most likely to pester their doctors over every little discomfort, if only because old age brings many more of these). Their findings are striking:

Assuming an average reimbursement of $60 for an outpatient visit, seven annual outpatient visits per enrollee, and an average copayment increase of $8.50 per visit, a Medicare plan would receive an additional $5,950 in patient copayments and avert $1,200 in spending on outpatient visits for every 100 enrollees, for a total of $7,150 in savings for the health plan.

This is where discussions of moral hazard typically begin and end.

However, assuming an average cost of $11,065 for hospitalization of a person 65 to 84 years of age in 2006, our estimates suggest that expenditures for inpatient care will increase by $24,000 for every 100 health plan enrollees in the year after copayments for ambulatory care are increased.

Save $7,150, spend $24,000. Net loss: $16,850.

It may be that increasing copayments for the elderly is a riskier proposition than increasing copayments for the rest of us. Old folks pester their doctors more, but it seems logical that failure to treat their minor ailments would be more hazardous than failure to treat other people’s. In a 2006 report for the National Bureau of Economic Research, MIT health economist Jonathan Gruber reviewed data from a health-insurance study the RAND Corporation conducted between 1971 and 1982. He found that increasing copayments did not appear to harm the health of “the average person.” That discrepancy may help protect the elderly in the context of health reform, which is financed to a great extent through cuts in Medicare spending. These are to be achieved through reductions in payments to doctors and hospitals, not through any cutbacks in benefits. If these cutbacks prove politically difficult, legislators may be tempted to increase Medicare copayments. Should that possibility arise, the Congressional Budget Office could use the New England Journal study to conclude that this option would increase government spending, not decrease it.

Is moral hazard a problem for those who aren’t yet elderly? In reviewing the RAND data, Gruber cautioned it had certain limitations. It tracked people for only three to five years, which might not be sufficient, especially for children. Also, insurers’ rules on out-of-pocket spending were much more generous in the 1970s than they are today. Finally, medical advances during the past 30 years have increased the likelihood that a visit to the doctor will improve your health. Certainly, the statistics don’t suggest that healthy people are hogging health-care resources today. Economist Paul Krugman calls it the “80-20 rule.” Eighty percent of all health expenditures are spent on 20 percent of the population. It’s sick people who run up America’s doctor bills, not medical groupies.

At least some doctor visits can be judged unnecessary only in hindsight. Writing in The New Yorker (“The Moral-Hazard Myth“), Malcolm Gladwell—a onetime opponent of universal health care who later changed his mind—observed in 2005:

I just went to the dermatologist to get moles checked for skin cancer. If I had had to pay a hundred per cent, or even fifty per cent, of the cost of the visit, I might not have gone. Would that have been a wise decision? I have no idea. But if one of those moles really is cancerous, that simple, inexpensive visit could save the health-care system tens of thousands of dollars (not to mention saving me a great deal of heartbreak).

A different kind of moral hazard may exist based on lifestyle. A study released last summer found that people who had health insurance were more likely to gain weight than people who lacked it. The authors, from Stanford, RAND, and University College London, found that health insurance increased body mass index by 1.3 to 2.1 points. I’m a bit skeptical, partly because access to health care doesn’t do all that much to undo the poor health effects of obesity. But I can easily imagine that access to anti-cholesterol * drugs like Lipitor might increase consumption of unhealthy foods that would otherwise send the eater’s cholesterol into the stratosphere. To the small extent the health reform would affect problems like these, however, it would be to reduce such abuses by encouraging private employers to discount health insurance premiums for people who follow healthy lifestyles.

For the most part, it isn’t patients who are gaming the system. Writing in Slatein 2005, Austan Goolsbee, now a member of the White House Council of Economic Advisers, observed, “The moral-hazard problem is more and more about corporations rather than individuals.” One factor is what three physicians, writing in the New York Times in 2007, termed “an epidemic of diagnoses.” Doctors and hospitals are the true gatekeepers of health care, and they have a strong financial interest to increase the number of procedures performed. Patients typically lack sufficient knowledge to second-guess their judgments. Health care costs are out of control, and the health-reform bill would do almost nothing to bring them in line. But increasing the federal government’s financial stake in these costs at least offers some hope that it will someday use its muscle to bring the health care industry to heel. Who else has the clout? If you’re worried about health care and moral hazard, it makes more sense to support health reform than to oppose it.

E-mail Timothy Noah at

Correction, Feb. 4, 2010: An earlier version of this column referred to Avastin as an anti-cholesterol drug. Avastin is an anti-cancer drug. (Return to the corrected sentence.)