The moral hazard of health insurance

I took a great continuing education course recently, and had an opportunity to review some useful skills and fascinating cases. Because health care knowledge areas expand more quickly than most and keeping current is an integral part of doing these jobs well, it was easily worth the time.

The cost seemed unreasonable, but I was only superficially interested in that anyway; like most, I’m fortunate that my employer offers a generous continuing education benefit. But in evaluating this course against its competitors, I felt some parallel to the way we, providers and patients both, use health insurance.

When we aren’t responsible for the expense of a course (or meal, or hotel room), we make different decisions than we do when our own money is at stake. This is how health policy texts define moral hazard, and moral hazards are rampant in this system of health care payment and delivery. They’ve distorted the marketplace, inasmuch as it is a marketplace, so much that it’s unrealistic to participate without insurance.

Realistically, without a dedicated continuing education budget, I would have skipped this course. It’s not that I didn’t expect real value from the material or instructor; the problem is that the price was largely artificial, reflective more of the availability of education budgets than the worth of the content. But I have this money to use, I know that it doesn’t benefit me at all to save it, and that I at least derive some measure of value by spending it.

These problems are not different than those created by our reliance on third-party insurers, like Tufts or Medicare, to reimburse providers for services. Almost-arbitrary prices based more on expected reimbursement than the actual costs of performing tests and procedures are a main reason that patients can’t realistically pay out of pocket for health care right now. And yet, we are forcing more of them to do precisely that by introducing plans with very large deductibles.

Like the cost of the course, the costs of hospitalization, of imaging, and of surgeries are all artificially inflated because, until recently, few patients receiving those services have paid directly for them. Instead, hospitals bill insurers who have already negotiated rates, paying sometimes half of what hospitals ask. This by itself isn’t a problem, but it becomes one when we charge those same prices to people rather than insurers.

Instead of repairing the price-cost mismatch, we’re creating more insurance plans which force patients to pay cash some services because they carry several thousand dollar deductibles. Those plans aren’t really health insurance as much as they are catastrophe insurance, and while they might reduce Medicare spending, they worsen a very real problem which lower-deductible commercial insurance plans handle effectively. Reliance on a third party for health care payment has artificially inflated prices to fictional values, and now that we’re talking about paying cash for some services, those prices have, for some, become very real.

Costs aside, utilization changes when patients don’t pay directly for the services they use. The problem of spending my employer’s money on a course I would have skipped on my own dime is a mirror of the problem managed-care organizations were created to fix, albeit on a different scale: They increase administrative oversight to reduce unnecessary spending, instead of meeting the problem at its source. Rather than address the fundamentals which fail to minimize overuse, they add greater costs through new administrative burden. Paradoxically, the jobs created to control costs don’t do much besides add administrators.

It’s clear that we have problems of both utilization and cost; their symptom is unsustainable spending. The interventions, managed-care gatekeepers and insurance plans with large deductibles, eschew the bigger picture of what’s happening in favor of the spreadsheet-friendly data. It’s more complicated to understand and report the fundamental pressures within this system, but we critically need to appraise and discuss them if we’re going to effect lasting change.

There’s one important thing which low-deductible insurance accomplishes very well, and one with substantial downstream financial impact: it nudges them towards seeking care sooner than later. Large-deductible plans, in contrast, create pressure towards a wait-and-see approach.

We have volumes of data to demonstrate that if a patient feels the warning signs of a stroke, immediate evaluation is critical. That’s why we spend public health dollars on F-A-S-T campaign ads: because lost minutes or hours of circulation to a clot, which can be treated within a narrow window of hours, lead to permanent disability and death all the time.

But if the patient feeling those symptoms knows he faces a $5,000 deductible for calling 911, accepting transport to the emergency room and agreeing to testing, he’s going to pause and consider his options a little longer. He wonders if the numbness will go away. We aren’t forcing his decision by selling him a large-deductible insurance plan, but we are creating an incentive towards the wrong choice.

Our public health campaigns are weak relative to the most tangible incentive for the patient – a $5,000 bill out of pocket – and particularly so considering that large-deductible plans are primarily sold on the ACA health connector to people with low incomes. Large-deductible plans incentivize delay at a time where waiting can be a costly mistake.

The idea of assigning a dollar value to a year of healthy life or a dollar cost to a lifetime of disability is challenging to confront. But the unfortunate reality of this problem is that health care dollars are a finite resource. In an effort to conserve a little each year by shifting costs to patients, not only do we create a wrong incentive that could guide them to worse decisions, it’s not clear that we generate longer-term savings through any reasonable means. And in the face of real potential change to payment and access, we need to focus first on how to best help people. Although it’s complicated to report, it’s unlikely that the cheapest way to care for them well is different than choosing what’s actually in their best interest.

John Corsino is a physical therapist who blogs at his self-titled site, John Corsino.

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