Moral Hazard is a term that Economist are familiar with when discussing market failures, or the inefficient allocation of resources. The definition of moral hazard is when there is hidden action taken by one party that incurs costs of another party. But this is just the definition of the term, what does moral hazard truly mean in everyday life? One example that is brought up a lot is when an auto mobile owner becomes more of a reckless driver and justifies it by saying, “It’s fine, I have car insurance.” Obviously auto insurance doesn’t quite work this way, but moral hazard does allow for inefficient allocation in other insurance markets, such as the health insurance market.
Health Insurance in the US has been a political topic for the past 40 years and it still surrounds every political debate. But as economists, we should take a look at this market from an economic angle. Insurance can come in many different forms, not just monetary value. For instance, one can insure themselves from deadly head injuries when riding a bicycle by wearing a helmet. If this person does a wear a helmet they are more likely to take risks that they normally wouldn’t on their usual bike ride. But because they know that they have a safety net to protect themselves, they are willing to take these risks. This type of behavior is where moral hazard comes into play when discussing the health insurance market.
Moral Hazard within the health insurance market becomes a problem as people are less likely to take care of their health and will try to use medical services more often. For economist this causes a problem because the consumer isn’t realizing the true price of every doctor’s visit. If an individual has health insurance and is covered for the cost of health related check-ups, isn’t he or she more likely to utilize this service? There becomes a difference between the high cost of producing these medical services and the price that consumers pay with their health insurance, which is very cheap in comparison. This allows consumers to purchase more health care than they would if they had to pay market price.
As more and more people look to purchase additional health care, the demand of these services will continue to rise. Government programs such as Obamacare help people obtain health care, but also hikes up the amount that medical services are being used and thus the price of medical services. Even if this is true, the moral dilemma needs to be taken into account as well. It is important to help people obtain health care and there are crucial operations and check-ups that people need. Health insurance helps prevent financial shock when these necessities come up. Both the economic and moral factors must be taken into account when trying to solve this debate of health insurance and moral hazard. As the study of economics never fails to do, we are once again led to question: where do we draw the line?