RAND HEALTH INSURANCE EXPERIMENT: HIGHLIGHTING MORAL HAZARD IN HEALTHCARE INSURANCE MARKETS

The RAND Health Insurance Experiment (HIE) was the first and biggest health insurance experiment conducted to gain insights on consequences of free health care on utilization of health services by patients and in turn to also understand free healthcare consequences on individual health. The study recruited more than 7,700 people under the age of 65 from six sites across the country. Families were randomly assigned to one of five types of health insurance plan:

•  Plan 1: Free care under a fee-for-service plan (Patient fee was zero).
• Plan 2: Cost sharing under a 25% fee-for-service plan
• Plan 3: Cost sharing under a 50% fee-for-service plan
• Plan 4: Cost sharing under a 95% fee-for-service plan
• Plan 5: Free care from a nonprofit health maintenance organization (HMO)

Consistent with the notion of hidden action, the term “moral hazard,” came into light as it is observed that health insurance may induce individual patients to exert less (being ignorant) effort in maintaining their health. As health insurance covers the financial costs that is caused by poor health behaviors, individuals may have less incentive to maintain a healthy lifestyle which will decrease their quality of life. Also, the frequency of unnecessary hospital visits might increase which would impose an increased burden on health care providers and facilities which might downgrade the quality of care for patients who needed it.

Insurance is valuable because it creates a channel for transferring consumption sources and resources from healthy individual to sick individual. But moral hazard is of high economic interest in this concept because it counters the core principle of health insurance which revolves around providing best healthcare services and maintaining a good quality of life. A balance is needed between the insured cost and patient share in paying for healthcare services as patients will be too negligible if patient share is zero or less, while if the cost of providing insurance will be too high, individuals may no longer be willing to pay the break-even price of full insurance. Therefore, the presence of moral hazard also positively impacts insurance and leads to optimize between reducing risk and maintaining incentives.

Ultimately, the existence and sign of any moral hazard effects of health insurance is a challenging empirical question. People who have more generous health insurance premiums and coverage differ in ways from people with less generous health insurance coverage, which leads to extreme differences accounting towards expected healthcare spending.

Do you think those who have more health insurance coverage can be on average in worse health due to negligence? Where do you think a line needs to be drawn for keeping moral hazards at is lowest, and at the same time increasing access to medical care?