Health Insurance and Moral Hazard: A Misdiagnosis

20 Pages Posted: 3 May 2016

See all articles by David Chandler Thomas

David Chandler Thomas

Ball State University - Department of Economics

David Henderson

Naval Postgraduate School

Date Written: April 15, 2016

Abstract

A common misunderstanding of moral hazard emerges from an inaccurate definition of health-care insurance. What we call health insurance is actually a bundle of two services — insurance for catastrophic care and subsidies for routine care. The insurance portion covers insurable medical events and the subsidized portion provides additional compensation to employees and taxpayer-funded coverage for the poor and elderly. This bundling approach has made it difficult to draw a bright line between what is medical insurance and what is merely a tax-free subsidy of the cost of routine care. As a result, many economists have chosen to include the over-consumption of routine care in the moral hazard bundle instead of attributing the behavior to the subsidy. This approach leads to confusing discussions of public policy.

Keywords: moral hazard, subsidies, health care, insurance

JEL Classification: I12, I13, I18

Suggested Citation

Thomas, David and Henderson, David, Health Insurance and Moral Hazard: A Misdiagnosis (April 15, 2016). Available at SSRN: https://ssrn.com/abstract=2774555 or http://dx.doi.org/10.2139/ssrn.2774555

David Thomas (Contact Author)

Ball State University - Department of Economics ( email )

Muncie, IN 47306-0340
United States
408-859-8185 (Phone)

HOME PAGE: http://www.davidchandlerthomas.com

David Henderson

Naval Postgraduate School ( email )

555 Dyer Road
Monterey, CA 93943
United States

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