The Moral Hazard Myth
THE MORAL-HAZARD MYTH
by MALCOLM GLADWELL
The bad idea behind our failed health-care system.
Issue of 2005_08_29
Posted 2005-08-22
Tooth decay begins, typically, when debris becomes trapped between theteeth and along the ridges and in the grooves of the molars. The foodrots. It becomes colonized with bacteria. The bacteria feeds off sugarsin the mouth and forms an acid that begins to eat away at the enamel ofthe teeth. Slowly, the bacteria works its way through to the dentin,the inner structure, and from there the cavity begins to blossomthree-dimensionally, spreading inward and sideways. When the decayreaches the pulp tissue, the blood vessels, and the nerves that servethe tooth, the pain starts-an insistent throbbing. The tooth turnsbrown. It begins to lose its hard structure, to the point where adentist can reach into a cavity with a hand instrument and scoop outthe decay. At the base of the tooth, the bacteria mineralizes intotartar, which begins to irritate the gums. They become puffy and brightred and start to recede, leaving more and more of the tooth's rootexposed. When the infection works its way down to the bone, thestructure holding the tooth in begins to collapse altogether.
Several years ago, two Harvard researchers, Susan Starr Sered andRushika Fernandopulle, set out to interview people without health-carecoverage for a book they were writing, they talked to as many kinds of peopleas they could find, collecting stories of untreated depression and struggling singlemothers and chronically injured laborers-and the most common complaintthey heard was about teeth. Gina, a hairdresser in Idaho, whose husbandworked as a freight manager at a chain store, had "a peculiar mannerismof keeping her mouth closed even when speaking." It turned out that shehadn't been able to afford dental care for three years, and one of herfront teeth was rotting. Daniel, a construction worker, pulled out hisbad teeth with pliers. Then, there was Loretta, who worked nights at auniversity research center in Mississippi, and was missing most of herteeth. "They'll break off after a while, and then you just grab a holdof them, and they work their way out," she explained to Sered andFernandopulle. "It hurts so bad, because the tooth aches. Then it's arelief just to get it out of there. The hole closes up itself anyway.So it's so much better."
People without health insurance have bad teeth because, if you'repaying for everything out of your own pocket, going to the dentist fora checkup seems like a luxury. It isn't, of course. The loss of teethmakes eating fresh fruits and vegetables difficult, and a diet heavy insoft, processed foods exacerbates more serious health problems, likediabetes. The pain of tooth decay leads many people to use alcohol as asalve. And those struggling to get ahead in the job market quickly findthat the unsightliness of bad teeth, and the self-consciousness thatresults, can become a major barrier. If your teeth are bad, you're notgoing to get a job as a receptionist, say, or a cashier. You're goingto be put in the back somewhere, far from the public eye. What Loretta,Gina, and Daniel understand, the two authors tell us, is that bad teethhave come to be seen as a marker of "poor parenting, low educationalachievement and slow or faulty intellectual development." They are anoutward marker of caste. "Almost every time we asked interviewees whattheir first priority would be if the president established universalhealth coverage tomorrow," Sered and Fernandopulle write, "theimmediate answer was 'my teeth.' "
The U. S. health-care system, according to "Uninsured in America," hascreated a group of people who increasingly look different from othersand suffer in ways that others do not. The leading cause of personalbankruptcy in the United States is unpaid medical bills. Half of theuninsured owe money to hospitals, and a third are being pursued bycollection agencies. Children without health insurance are less likelyto receive medical attention for serious injuries, for recurrent earinfections, or for asthma. Lung-cancer patients without insurance areless likely to receive surgery, chemotherapy, or radiation treatment.Heart-attack victims without health insurance are less likely toreceive angioplasty. People with pneumonia who don't have healthinsurance are less likely to receive X rays or consultations. The deathrate in any given year for someone without health insurance istwenty-five per cent higher than for someone with insur-ance. Becausethe uninsured are sicker than the rest of us, they can't get betterjobs, and because they can't get better jobs they can't afford healthinsurance, and because they can't afford health insurance they get evensicker. John, the manager of a bar in Idaho, tells Sered andFernandopulle that as a result of various workplace injuries over theyears he takes eight ibuprofen, waits two hours, then takes eightmore-and tries to cadge as much prescription pain medication as he canfrom friends. "There are times when I should've gone to the doctor, butI couldn't afford to go because I don't have insurance," he says. "Likewhen my back messed up, I should've gone. If I had insurance, Iwould've went, because I know I could get treatment, but when you can'tafford it you don't go. Because the harder the hole you get into interms of bills, then you'll never get out. So you just say, 'I can dealwith the pain.' "
One of the great mysteries of political life in the United States iswhy Americans are so devoted to their health-care system. Six times inthe past century-during the First World War, during the Depression,during the Truman and Johnson Administrations, in the Senate in thenineteen-seventies, and during the Clinton years-efforts have been madeto introduce some kind of universal health insurance, and each time theefforts have been rejected. Instead, the United States has opted for amakeshift system of increasing complexity and dysfunction. Americansspend $5,267 per capita on health care every year, almost two and halftimes the industrialized world's median of $2,193; the extra spendingcomes to hundreds of billions of dollars a year. What does that extraspending buy us? Americans have fewer doctors per capita than mostWestern countries. We go to the doctor less than people in otherWestern countries. We get admitted to the hospital less frequently thanpeople in other Western countries. We are less satisfied with ourhealth care than our counterparts in other countries. American lifeexpectancy is lower than the Western average. Childhood-immunizationrates in the United States are lower than average. Infant-mortalityrates are in the nineteenth percentile of industrialized nations.Doctors here perform more high-end medical procedures, such as coronaryangioplasties, than in other countries, but most of the wealthierWestern countries have more CT scanners than the United States does,and Switzerland, Japan, Austria, and Finland all have more MRI machinesper capita. Nor is our system more efficient. The United States spendsmore than a thousand dollars per capita per year-or close to fourhundred billion dollars-on health-care-related paperwork andadministration, whereas Canada, for example, spends only about threehundred dollars per capita. And, of course, every other country in theindustrialized world insures all its citizens; despite those extrahundreds of billions of dollars we spend each year, we leave forty-fivemillion people without any insurance. A country that displays an almostruthless commitment to efficiency and performance in every aspect ofits economy-a country that switched to Japanese cars the moment theywere more reliable, and to Chinese T-shirts the moment they were fivecents cheaper-has loyally stuck with a health-care system that leavesits citizenry pulling out their teeth with pliers.
America's health-care mess is, in part, simply an accident of history.The fact that there have been six attempts at universal health coveragein the last century suggests that there has long been support for theidea. But politics has always got in the way. In both Europe and theUnited States, for example, the push for health insurance was led, inlarge part, by organized labor. But in Europe the unions worked throughthe political system, fighting for coverage for all citizens. From thestart, health insurance in Europe was public and universal, and thatcreated powerful political support for any attempt to expand benefits.In the United States, by contrast, the unions worked through thecollective-bargaining system and, as a result, could win healthbenefits only for their own members. Health insurance here has alwaysbeen private and selective, and every attempt to expand benefits hasresulted in a paralyzing political battle over who would be added toinsurance rolls and who ought to pay for those additions.Policy is driven by more than politics, however. It is equally drivenby ideas, and in the past few decades a particular idea has taken holdamong prominent American economists which has also been a powerfulimpediment to the expansion of health insurance. The idea is known as"moral hazard." Health economists in other Western nations do not sharethis obsession. Nor do most Americans. But moral hazard has profoundlyshaped the way think tanks formulate policy and the way experts argueand the way health insurers structure their plans and the waylegislation and regulations have been written. The health-care messisn't merely the unintentional result of political dysfunction, inother words. It is also the deliberate consequence of the way in whichAmerican policymakers have come to think about insurance."Moral hazard" is the term economists use to describe the fact thatinsurance can change the behavior of the person being insured. If youroffice gives you and your co-workers all the free Pepsi you want-ifyour employer, in effect, offers universal Pepsi insurance-you'll drinkmore Pepsi than you would have otherwise. If you have a no-deductiblefire-insurance policy, you may be a little less diligent in clearingthe brush away from your house. The savings-and-loan crisis of thenineteen-eighties was created, in large part, by the fact that thefederal government insured savings deposits of up to a hundred thousanddollars, and so the newly deregulated S. & L.s made far riskierinvestments than they would have otherwise. Insurance can have theparadoxical effect of producing risky and wasteful behavior. Economistsspend a great deal of time thinking about such moral hazard for goodreason. Insurance is an attempt to make human life safer and moresecure. But, if those efforts can backfire and produce riskierbehavior, providing insurance becomes a much more complicated andproblematic endeavor.
In 1968, the economist Mark Pauly argued that moral hazard played anenormous role in medicine, and, as John Nyman writes in his book "TheTheory of the Demand for Health Insurance," Pauly's paper has becomethe "single most influential article in the health economicsliterature." Nyman, an economist at the University of Minnesota, saysthat the fear of moral hazard lies behind the thicket of co-paymentsand deductibles and utilization reviews which characterizes theAmerican health-insurance system. Fear of moral hazard, Nyman writes,also explains "the general lack of enthusiasm by U.S. health economistsfor the expansion of health insurance coverage (for example, nationalhealth insurance or expanded Medicare benefits) in the U.S."What Nyman is saying is that when your insurance company requires thatyou make a twenty-dollar co-payment for a visit to the doctor, or whenyour plan includes an annual five-hundred-dollar or thousand-dollardeductible, it's not simply an attempt to get you to pick up a largershare of your health costs. It is an attempt to make your use of thehealth-care system more efficient. Making you responsible for a shareof the costs, the argument runs, will reduce moral hazard: you'll nolonger grab one of those free Pepsis when you aren't really thirsty.That's also why Nyman says that the notion of moral hazard is behindthe "lack of enthusiasm" for expansion of health insurance. If youthink of insurance as producing wasteful consumption of medicalservices, then the fact that there are forty-five million Americanswithout health insurance is no longer an immediate cause for alarm.After all, it's not as if the uninsured never go to the doctor. Theyspend, on average, $934 a year on medical care. A moral-hazard theoristwould say that they go to the doctor when they really have to. Those ofus with private insurance, by contrast, consume $2,347 worth of healthcare a year. If a lot of that extra $1,413 is waste, then maybe theuninsured person is the truly efficient consumer of health care.
The moral-hazard argument makes sense, however, only if we consumehealth care in the same way that we consume other consumer goods, andto economists like Nyman this assumption is plainly absurd. We go tothe doctor grudgingly, only because we're sick. "Moral hazard isoverblown," the Princeton economist Uwe Reinhardt says. "You alwayshear that the demand for health care is unlimited. This is just nottrue. People who are very well insured, who are very rich, do you seethem check into the hospital because it's free? Do people really liketo go to the doctor? Do they check into the hospital instead of playinggolf?"
For that matter, when you have to pay for your own health care, doesyour consumption really become more efficient? In the latenineteen-seventies, the rand Corporation did an extensive study on thequestion, randomly assigning families to health plans with co-paymentlevels at zero per cent, twenty-five per cent, fifty per cent, orninety-five per cent, up to six thousand dollars. As you might expect,the more that people were asked to chip in for their health care theless care they used. The problem was that they cut back equally on bothfrivolous care and useful care. Poor people in the high-deductiblegroup with hypertension, for instance, didn't do nearly as good a jobof controlling their blood pressure as those in other groups, resultingin a ten-per-cent increase in the likelihood of death. As a recentCommonwealth Fund study concluded, cost sharing is "a bluntinstrument." Of course it is: how should the average consumer beexpected to know beforehand what care is frivolous and what care isuseful? I just went to the dermatologist to get moles checked for skincancer. 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 awise decision? I have no idea. But if one of those moles really iscancerous, that simple, inexpensive visit could save the health-caresystem tens of thousands of dollars (not to mention saving me a greatdeal of heartbreak). The focus on moral hazard suggests that thechanges we make in our behavior when we have insurance are nearlyalways wasteful. Yet, when it comes to health care, many of the thingswe do only because we have insurance-like getting our moles checked, orgetting our teeth cleaned regularly, or getting a mammogram or engagingin other routine preventive care-are anything but wasteful andinefficient. In fact, they are behaviors that could end up saving thehealth-care system a good deal of money.
Sered and Fernandopulle tell the story of Steve, a factory worker fromnorthern Idaho, with a "grotesquelooking left hand-what looks like abone sticks out the side." When he was younger, he broke his hand. "Thedoctor wanted to operate on it," he recalls. "And because I didn't haveinsurance, well, I was like 'I ain't gonna have it operated on.' Thedoctor said, 'Well, I can wrap it for you with an Ace bandage.' I said,'Ahh, let's do that, then.' " Steve uses less health care than he wouldif he had insurance, but that's not because he has defeated the scourgeof moral hazard. It's because instead of getting a broken bone fixed heput a bandage on it.
At the center of the Bush Administration's plan to address thehealth-insurance mess are Health Savings Accounts, and Health SavingsAccounts are exactly what you would come up with if you were concerned,above all else, with minimizing moral hazard. The logic behind them waslaid out in the 2004 Economic Report of the President. Americans, thereport argues, have too much health insurance: typical plans coverthings that they shouldn't, creating the problem of overconsumption.Several paragraphs are then devoted to explaining the theory of moralhazard. The report turns to the subject of the uninsured, concludingthat they fall into several groups. Some are foreigners who may becovered by their countries of origin. Some are people who could becovered by Medicaid but aren't or aren't admitting that they are.
Finally, a large number "remain uninsured as a matter of choice." Thereport continues, "Researchers believe that as many as one-quarter ofthose without health insurance had coverage available through anemployer but declined the coverage. . . . Still others may remainuninsured because they are young and healthy and do not see the needfor insurance." In other words, those with health insurance areoverinsured and their behavior is distorted by moral hazard. Thosewithout health insurance use their own money to make decisions aboutinsurance based on an assessment of their needs. The insured arewasteful. The uninsured are prudent. So what's the solution? Make theinsured a little bit more like the uninsured.
Under the Health Savings Accounts system, consumers are asked to payfor routine health care with their own money-several thousand dollarsof which can be put into a tax-free account. To handle theircatastrophic expenses, they then purchase a basic health-insurancepackage with, say, a thousand-dollar annual deductible. As PresidentBush explained recently, "Health Savings Accounts all aim at empoweringpeople to make decisions for themselves, owning their own health-careplan, and at the same time bringing some demand control into the costof health care."
The country described in the President's report is a very differentplace from the country described in "Uninsured in America." Sered andFernandopulle look at the billions we spend on medical care and wonderwhy Americans have so little insurance. The President's reportconsiders the same situation and worries that we have too much. Seredand Fernandopulle see the lack of insurance as a problem of poverty; athird of the uninsured, after all, have incomes below the federalpoverty line. In the section on the uninsured in the President'sreport, the word "poverty" is never used. In the Administration's view,people are offered insurance but "decline the coverage" as "a matter ofchoice." The uninsured in Sered and Fernandopulle's book declinecoverage, but only because they can't afford it. Gina, for instance,works for a beauty salon that offers her a bare-bones health-insuranceplan with a thousand-dollar deductible for two hundred dollars a month.What's her total income? Nine hundred dollars a month. She could"choose" to accept health insurance, but only if she chose to stopbuying food or paying the rent.
The biggest difference between the two accounts, though, has to do withhow each views the function of insurance. Gina, Steve, and Loretta areill, and need insurance to cover the costs of getting better. In theireyes, insurance is meant to help equalize financial risk between thehealthy and the sick. In the insurance business, this model of coverageis known as "social insurance," and historically it was the way healthcoverage was conceived. If you were sixty and had heart disease anddiabetes, you didn't pay substantially more for coverage than aperfectly healthy twenty-five-year-old. Under social insurance, thetwenty-five-year-old agrees to pay thousands of dollars in premiumseven though he didn't go to the doctor at all in the previous year,because he wants to make sure that someone else will subsidize hishealth care if he ever comes down with heart disease or diabetes.Canada and Germany and Japan and all the other industrialized nationswith universal health care follow the social-insurance model. Medicare,too, is based on the social-insurance model, and, when Americans withMedicare report themselves to be happier with virtually every aspect oftheir insurance coverage than people with private insurance (as theydo, repeatedly and overwhelmingly), they are referring to the socialaspect of their insurance. They aren't getting better care. But theyare getting something just as valuable: the security of being insulatedagainst the financial shock of serious illness.
There is another way to organize insurance, however, and that is tomake it actuarial. Car insurance, for instance, is actuarial. How muchyou pay is in large part a function of your individual situation andhistory: someone who drives a sports car and has received twentyspeeding tickets in the past two years pays a much higher annualpremium than a soccer mom with a minivan. In recent years, the privateinsurance industry in the United States has been moving toward theactuarial model, with profound consequences. The triumph of theactuarial model over the social-insurance model is the reason thatcompanies unlucky enough to employ older, high-cost employees-likeUnited Airlines-have run into such financial difficulty. It's thereason that automakers are increasingly moving their operations toCanada. It's the reason that small businesses that have one or twoemployees with serious illnesses suddenly face unmanageably highhealth-insurance premiums, and it's the reason that, in many states,people suffering from a potentially high-cost medical condition can'tget anyone to insure them at all.Health Savings Accounts represent the final, irrevocable step in theactuarial direction. If you are preoccupied with moral hazard, then youwant people to pay for care with their own money, and, when you dothat, the sick inevitably end up paying more than the healthy. And whenyou make people choose an insurance plan that fits their individualneeds, those with significant medical problems will choose expensivehealth plans that cover lots of things, while those with few healthproblems will choose cheaper, bare-bones plans. The more expensive thecomprehensive plans become, and the less expensive the bare-bones plansbecome, the more the very sick will cluster together at one end of theinsurance spectrum, and the more the well will cluster together at thelow-cost end. The days when the healthy twenty-five-year-old subsidizesthe sixty-year-old with heart disease or diabetes are coming to an end."The main effect of putting more of it on the consumer is to reduce thesocial redistributive element of insurance," the Stanford economistVictor Fuchs says. Health Savings Accounts are not a variant ofuniversal health care. In their governing assumptions, they are theantithesis of universal health care.
The issue about what to do with the health-care system is sometimespresented as a technical argument about the merits of one kind ofcoverage over another or as an ideological argument about socializedversus private medicine. It is, instead, about a few very simplequestions. Do you think that this kind of redistribution of risk is agood idea? Do you think that people whose genes predispose them todepression or cancer, or whose poverty complicates asthma or diabetes,or who get hit by a drunk driver, or who have to keep their mouthsclosed because their teeth are rotting ought to bear a greater share ofthe costs of their health care than those of us who are lucky enough toescape such misfortunes? In the rest of the industrialized world, it isassumed that the more equally and widely the burdens of illness areshared, the better off the population as a whole is likely to be. Thereason the United States has forty-five million people without coverageis that its health-care policy is in the hands of people who disagree,and who regard health insurance not as the solution but as the.
by MALCOLM GLADWELL
The bad idea behind our failed health-care system.
Issue of 2005_08_29
Posted 2005-08-22
Tooth decay begins, typically, when debris becomes trapped between theteeth and along the ridges and in the grooves of the molars. The foodrots. It becomes colonized with bacteria. The bacteria feeds off sugarsin the mouth and forms an acid that begins to eat away at the enamel ofthe teeth. Slowly, the bacteria works its way through to the dentin,the inner structure, and from there the cavity begins to blossomthree-dimensionally, spreading inward and sideways. When the decayreaches the pulp tissue, the blood vessels, and the nerves that servethe tooth, the pain starts-an insistent throbbing. The tooth turnsbrown. It begins to lose its hard structure, to the point where adentist can reach into a cavity with a hand instrument and scoop outthe decay. At the base of the tooth, the bacteria mineralizes intotartar, which begins to irritate the gums. They become puffy and brightred and start to recede, leaving more and more of the tooth's rootexposed. When the infection works its way down to the bone, thestructure holding the tooth in begins to collapse altogether.
Several years ago, two Harvard researchers, Susan Starr Sered andRushika Fernandopulle, set out to interview people without health-carecoverage for a book they were writing, they talked to as many kinds of peopleas they could find, collecting stories of untreated depression and struggling singlemothers and chronically injured laborers-and the most common complaintthey heard was about teeth. Gina, a hairdresser in Idaho, whose husbandworked as a freight manager at a chain store, had "a peculiar mannerismof keeping her mouth closed even when speaking." It turned out that shehadn't been able to afford dental care for three years, and one of herfront teeth was rotting. Daniel, a construction worker, pulled out hisbad teeth with pliers. Then, there was Loretta, who worked nights at auniversity research center in Mississippi, and was missing most of herteeth. "They'll break off after a while, and then you just grab a holdof them, and they work their way out," she explained to Sered andFernandopulle. "It hurts so bad, because the tooth aches. Then it's arelief just to get it out of there. The hole closes up itself anyway.So it's so much better."
People without health insurance have bad teeth because, if you'repaying for everything out of your own pocket, going to the dentist fora checkup seems like a luxury. It isn't, of course. The loss of teethmakes eating fresh fruits and vegetables difficult, and a diet heavy insoft, processed foods exacerbates more serious health problems, likediabetes. The pain of tooth decay leads many people to use alcohol as asalve. And those struggling to get ahead in the job market quickly findthat the unsightliness of bad teeth, and the self-consciousness thatresults, can become a major barrier. If your teeth are bad, you're notgoing to get a job as a receptionist, say, or a cashier. You're goingto be put in the back somewhere, far from the public eye. What Loretta,Gina, and Daniel understand, the two authors tell us, is that bad teethhave come to be seen as a marker of "poor parenting, low educationalachievement and slow or faulty intellectual development." They are anoutward marker of caste. "Almost every time we asked interviewees whattheir first priority would be if the president established universalhealth coverage tomorrow," Sered and Fernandopulle write, "theimmediate answer was 'my teeth.' "
The U. S. health-care system, according to "Uninsured in America," hascreated a group of people who increasingly look different from othersand suffer in ways that others do not. The leading cause of personalbankruptcy in the United States is unpaid medical bills. Half of theuninsured owe money to hospitals, and a third are being pursued bycollection agencies. Children without health insurance are less likelyto receive medical attention for serious injuries, for recurrent earinfections, or for asthma. Lung-cancer patients without insurance areless likely to receive surgery, chemotherapy, or radiation treatment.Heart-attack victims without health insurance are less likely toreceive angioplasty. People with pneumonia who don't have healthinsurance are less likely to receive X rays or consultations. The deathrate in any given year for someone without health insurance istwenty-five per cent higher than for someone with insur-ance. Becausethe uninsured are sicker than the rest of us, they can't get betterjobs, and because they can't get better jobs they can't afford healthinsurance, and because they can't afford health insurance they get evensicker. John, the manager of a bar in Idaho, tells Sered andFernandopulle that as a result of various workplace injuries over theyears he takes eight ibuprofen, waits two hours, then takes eightmore-and tries to cadge as much prescription pain medication as he canfrom friends. "There are times when I should've gone to the doctor, butI couldn't afford to go because I don't have insurance," he says. "Likewhen my back messed up, I should've gone. If I had insurance, Iwould've went, because I know I could get treatment, but when you can'tafford it you don't go. Because the harder the hole you get into interms of bills, then you'll never get out. So you just say, 'I can dealwith the pain.' "
One of the great mysteries of political life in the United States iswhy Americans are so devoted to their health-care system. Six times inthe past century-during the First World War, during the Depression,during the Truman and Johnson Administrations, in the Senate in thenineteen-seventies, and during the Clinton years-efforts have been madeto introduce some kind of universal health insurance, and each time theefforts have been rejected. Instead, the United States has opted for amakeshift system of increasing complexity and dysfunction. Americansspend $5,267 per capita on health care every year, almost two and halftimes the industrialized world's median of $2,193; the extra spendingcomes to hundreds of billions of dollars a year. What does that extraspending buy us? Americans have fewer doctors per capita than mostWestern countries. We go to the doctor less than people in otherWestern countries. We get admitted to the hospital less frequently thanpeople in other Western countries. We are less satisfied with ourhealth care than our counterparts in other countries. American lifeexpectancy is lower than the Western average. Childhood-immunizationrates in the United States are lower than average. Infant-mortalityrates are in the nineteenth percentile of industrialized nations.Doctors here perform more high-end medical procedures, such as coronaryangioplasties, than in other countries, but most of the wealthierWestern countries have more CT scanners than the United States does,and Switzerland, Japan, Austria, and Finland all have more MRI machinesper capita. Nor is our system more efficient. The United States spendsmore than a thousand dollars per capita per year-or close to fourhundred billion dollars-on health-care-related paperwork andadministration, whereas Canada, for example, spends only about threehundred dollars per capita. And, of course, every other country in theindustrialized world insures all its citizens; despite those extrahundreds of billions of dollars we spend each year, we leave forty-fivemillion people without any insurance. A country that displays an almostruthless commitment to efficiency and performance in every aspect ofits economy-a country that switched to Japanese cars the moment theywere more reliable, and to Chinese T-shirts the moment they were fivecents cheaper-has loyally stuck with a health-care system that leavesits citizenry pulling out their teeth with pliers.
America's health-care mess is, in part, simply an accident of history.The fact that there have been six attempts at universal health coveragein the last century suggests that there has long been support for theidea. But politics has always got in the way. In both Europe and theUnited States, for example, the push for health insurance was led, inlarge part, by organized labor. But in Europe the unions worked throughthe political system, fighting for coverage for all citizens. From thestart, health insurance in Europe was public and universal, and thatcreated powerful political support for any attempt to expand benefits.In the United States, by contrast, the unions worked through thecollective-bargaining system and, as a result, could win healthbenefits only for their own members. Health insurance here has alwaysbeen private and selective, and every attempt to expand benefits hasresulted in a paralyzing political battle over who would be added toinsurance rolls and who ought to pay for those additions.Policy is driven by more than politics, however. It is equally drivenby ideas, and in the past few decades a particular idea has taken holdamong prominent American economists which has also been a powerfulimpediment to the expansion of health insurance. The idea is known as"moral hazard." Health economists in other Western nations do not sharethis obsession. Nor do most Americans. But moral hazard has profoundlyshaped the way think tanks formulate policy and the way experts argueand the way health insurers structure their plans and the waylegislation and regulations have been written. The health-care messisn't merely the unintentional result of political dysfunction, inother words. It is also the deliberate consequence of the way in whichAmerican policymakers have come to think about insurance."Moral hazard" is the term economists use to describe the fact thatinsurance can change the behavior of the person being insured. If youroffice gives you and your co-workers all the free Pepsi you want-ifyour employer, in effect, offers universal Pepsi insurance-you'll drinkmore Pepsi than you would have otherwise. If you have a no-deductiblefire-insurance policy, you may be a little less diligent in clearingthe brush away from your house. The savings-and-loan crisis of thenineteen-eighties was created, in large part, by the fact that thefederal government insured savings deposits of up to a hundred thousanddollars, and so the newly deregulated S. & L.s made far riskierinvestments than they would have otherwise. Insurance can have theparadoxical effect of producing risky and wasteful behavior. Economistsspend a great deal of time thinking about such moral hazard for goodreason. Insurance is an attempt to make human life safer and moresecure. But, if those efforts can backfire and produce riskierbehavior, providing insurance becomes a much more complicated andproblematic endeavor.
In 1968, the economist Mark Pauly argued that moral hazard played anenormous role in medicine, and, as John Nyman writes in his book "TheTheory of the Demand for Health Insurance," Pauly's paper has becomethe "single most influential article in the health economicsliterature." Nyman, an economist at the University of Minnesota, saysthat the fear of moral hazard lies behind the thicket of co-paymentsand deductibles and utilization reviews which characterizes theAmerican health-insurance system. Fear of moral hazard, Nyman writes,also explains "the general lack of enthusiasm by U.S. health economistsfor the expansion of health insurance coverage (for example, nationalhealth insurance or expanded Medicare benefits) in the U.S."What Nyman is saying is that when your insurance company requires thatyou make a twenty-dollar co-payment for a visit to the doctor, or whenyour plan includes an annual five-hundred-dollar or thousand-dollardeductible, it's not simply an attempt to get you to pick up a largershare of your health costs. It is an attempt to make your use of thehealth-care system more efficient. Making you responsible for a shareof the costs, the argument runs, will reduce moral hazard: you'll nolonger grab one of those free Pepsis when you aren't really thirsty.That's also why Nyman says that the notion of moral hazard is behindthe "lack of enthusiasm" for expansion of health insurance. If youthink of insurance as producing wasteful consumption of medicalservices, then the fact that there are forty-five million Americanswithout health insurance is no longer an immediate cause for alarm.After all, it's not as if the uninsured never go to the doctor. Theyspend, on average, $934 a year on medical care. A moral-hazard theoristwould say that they go to the doctor when they really have to. Those ofus with private insurance, by contrast, consume $2,347 worth of healthcare a year. If a lot of that extra $1,413 is waste, then maybe theuninsured person is the truly efficient consumer of health care.
The moral-hazard argument makes sense, however, only if we consumehealth care in the same way that we consume other consumer goods, andto economists like Nyman this assumption is plainly absurd. We go tothe doctor grudgingly, only because we're sick. "Moral hazard isoverblown," the Princeton economist Uwe Reinhardt says. "You alwayshear that the demand for health care is unlimited. This is just nottrue. People who are very well insured, who are very rich, do you seethem check into the hospital because it's free? Do people really liketo go to the doctor? Do they check into the hospital instead of playinggolf?"
For that matter, when you have to pay for your own health care, doesyour consumption really become more efficient? In the latenineteen-seventies, the rand Corporation did an extensive study on thequestion, randomly assigning families to health plans with co-paymentlevels at zero per cent, twenty-five per cent, fifty per cent, orninety-five per cent, up to six thousand dollars. As you might expect,the more that people were asked to chip in for their health care theless care they used. The problem was that they cut back equally on bothfrivolous care and useful care. Poor people in the high-deductiblegroup with hypertension, for instance, didn't do nearly as good a jobof controlling their blood pressure as those in other groups, resultingin a ten-per-cent increase in the likelihood of death. As a recentCommonwealth Fund study concluded, cost sharing is "a bluntinstrument." Of course it is: how should the average consumer beexpected to know beforehand what care is frivolous and what care isuseful? I just went to the dermatologist to get moles checked for skincancer. 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 awise decision? I have no idea. But if one of those moles really iscancerous, that simple, inexpensive visit could save the health-caresystem tens of thousands of dollars (not to mention saving me a greatdeal of heartbreak). The focus on moral hazard suggests that thechanges we make in our behavior when we have insurance are nearlyalways wasteful. Yet, when it comes to health care, many of the thingswe do only because we have insurance-like getting our moles checked, orgetting our teeth cleaned regularly, or getting a mammogram or engagingin other routine preventive care-are anything but wasteful andinefficient. In fact, they are behaviors that could end up saving thehealth-care system a good deal of money.
Sered and Fernandopulle tell the story of Steve, a factory worker fromnorthern Idaho, with a "grotesquelooking left hand-what looks like abone sticks out the side." When he was younger, he broke his hand. "Thedoctor wanted to operate on it," he recalls. "And because I didn't haveinsurance, well, I was like 'I ain't gonna have it operated on.' Thedoctor said, 'Well, I can wrap it for you with an Ace bandage.' I said,'Ahh, let's do that, then.' " Steve uses less health care than he wouldif he had insurance, but that's not because he has defeated the scourgeof moral hazard. It's because instead of getting a broken bone fixed heput a bandage on it.
At the center of the Bush Administration's plan to address thehealth-insurance mess are Health Savings Accounts, and Health SavingsAccounts are exactly what you would come up with if you were concerned,above all else, with minimizing moral hazard. The logic behind them waslaid out in the 2004 Economic Report of the President. Americans, thereport argues, have too much health insurance: typical plans coverthings that they shouldn't, creating the problem of overconsumption.Several paragraphs are then devoted to explaining the theory of moralhazard. The report turns to the subject of the uninsured, concludingthat they fall into several groups. Some are foreigners who may becovered by their countries of origin. Some are people who could becovered by Medicaid but aren't or aren't admitting that they are.
Finally, a large number "remain uninsured as a matter of choice." Thereport continues, "Researchers believe that as many as one-quarter ofthose without health insurance had coverage available through anemployer but declined the coverage. . . . Still others may remainuninsured because they are young and healthy and do not see the needfor insurance." In other words, those with health insurance areoverinsured and their behavior is distorted by moral hazard. Thosewithout health insurance use their own money to make decisions aboutinsurance based on an assessment of their needs. The insured arewasteful. The uninsured are prudent. So what's the solution? Make theinsured a little bit more like the uninsured.
Under the Health Savings Accounts system, consumers are asked to payfor routine health care with their own money-several thousand dollarsof which can be put into a tax-free account. To handle theircatastrophic expenses, they then purchase a basic health-insurancepackage with, say, a thousand-dollar annual deductible. As PresidentBush explained recently, "Health Savings Accounts all aim at empoweringpeople to make decisions for themselves, owning their own health-careplan, and at the same time bringing some demand control into the costof health care."
The country described in the President's report is a very differentplace from the country described in "Uninsured in America." Sered andFernandopulle look at the billions we spend on medical care and wonderwhy Americans have so little insurance. The President's reportconsiders the same situation and worries that we have too much. Seredand Fernandopulle see the lack of insurance as a problem of poverty; athird of the uninsured, after all, have incomes below the federalpoverty line. In the section on the uninsured in the President'sreport, the word "poverty" is never used. In the Administration's view,people are offered insurance but "decline the coverage" as "a matter ofchoice." The uninsured in Sered and Fernandopulle's book declinecoverage, but only because they can't afford it. Gina, for instance,works for a beauty salon that offers her a bare-bones health-insuranceplan with a thousand-dollar deductible for two hundred dollars a month.What's her total income? Nine hundred dollars a month. She could"choose" to accept health insurance, but only if she chose to stopbuying food or paying the rent.
The biggest difference between the two accounts, though, has to do withhow each views the function of insurance. Gina, Steve, and Loretta areill, and need insurance to cover the costs of getting better. In theireyes, insurance is meant to help equalize financial risk between thehealthy and the sick. In the insurance business, this model of coverageis known as "social insurance," and historically it was the way healthcoverage was conceived. If you were sixty and had heart disease anddiabetes, you didn't pay substantially more for coverage than aperfectly healthy twenty-five-year-old. Under social insurance, thetwenty-five-year-old agrees to pay thousands of dollars in premiumseven though he didn't go to the doctor at all in the previous year,because he wants to make sure that someone else will subsidize hishealth care if he ever comes down with heart disease or diabetes.Canada and Germany and Japan and all the other industrialized nationswith universal health care follow the social-insurance model. Medicare,too, is based on the social-insurance model, and, when Americans withMedicare report themselves to be happier with virtually every aspect oftheir insurance coverage than people with private insurance (as theydo, repeatedly and overwhelmingly), they are referring to the socialaspect of their insurance. They aren't getting better care. But theyare getting something just as valuable: the security of being insulatedagainst the financial shock of serious illness.
There is another way to organize insurance, however, and that is tomake it actuarial. Car insurance, for instance, is actuarial. How muchyou pay is in large part a function of your individual situation andhistory: someone who drives a sports car and has received twentyspeeding tickets in the past two years pays a much higher annualpremium than a soccer mom with a minivan. In recent years, the privateinsurance industry in the United States has been moving toward theactuarial model, with profound consequences. The triumph of theactuarial model over the social-insurance model is the reason thatcompanies unlucky enough to employ older, high-cost employees-likeUnited Airlines-have run into such financial difficulty. It's thereason that automakers are increasingly moving their operations toCanada. It's the reason that small businesses that have one or twoemployees with serious illnesses suddenly face unmanageably highhealth-insurance premiums, and it's the reason that, in many states,people suffering from a potentially high-cost medical condition can'tget anyone to insure them at all.Health Savings Accounts represent the final, irrevocable step in theactuarial direction. If you are preoccupied with moral hazard, then youwant people to pay for care with their own money, and, when you dothat, the sick inevitably end up paying more than the healthy. And whenyou make people choose an insurance plan that fits their individualneeds, those with significant medical problems will choose expensivehealth plans that cover lots of things, while those with few healthproblems will choose cheaper, bare-bones plans. The more expensive thecomprehensive plans become, and the less expensive the bare-bones plansbecome, the more the very sick will cluster together at one end of theinsurance spectrum, and the more the well will cluster together at thelow-cost end. The days when the healthy twenty-five-year-old subsidizesthe sixty-year-old with heart disease or diabetes are coming to an end."The main effect of putting more of it on the consumer is to reduce thesocial redistributive element of insurance," the Stanford economistVictor Fuchs says. Health Savings Accounts are not a variant ofuniversal health care. In their governing assumptions, they are theantithesis of universal health care.
The issue about what to do with the health-care system is sometimespresented as a technical argument about the merits of one kind ofcoverage over another or as an ideological argument about socializedversus private medicine. It is, instead, about a few very simplequestions. Do you think that this kind of redistribution of risk is agood idea? Do you think that people whose genes predispose them todepression or cancer, or whose poverty complicates asthma or diabetes,or who get hit by a drunk driver, or who have to keep their mouthsclosed because their teeth are rotting ought to bear a greater share ofthe costs of their health care than those of us who are lucky enough toescape such misfortunes? In the rest of the industrialized world, it isassumed that the more equally and widely the burdens of illness areshared, the better off the population as a whole is likely to be. Thereason the United States has forty-five million people without coverageis that its health-care policy is in the hands of people who disagree,and who regard health insurance not as the solution but as the.
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