Work: Moral Hazard: UK Health Care
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Moral Hazard and the UK Health Care System
How does the Moral Hazard Problem Affect Health Care in the United Kingdom?
Introduction
The essay will discuss adverse selection and moral hazard both before and after a patient has become ill. Moral hazard in the private health insurance market provides a justification for state intervention. Private insurance can be made to work with an insurance market which does not fail. For example no claims discounts can be introduced. However, the absence of market failure leads to inequality in healthcare with poorer people not receiving support. This again is a justification for state intervention through the National Health Service.
Adverse Selection
This section introduces the topic by providing a general discussion on the topic of adverse selection and the problem of information in the private health insurance market. There is a concern that a consumer can mislead an insurance company. There is asymmetric information as consumers (i.e. prospective patients) are better informed about their future health than the insurance companies. Insured individuals are better informed, because they can influence their probability of requiring treatment and the associated cost of their healthcare (Emmerson et. al 2000). There is an informational problem as insurance companies do not have full information in advance about each individual’s subsequent health actions.
Adverse selection presents a challenge for health care providers. Those consumers who will insure themselves are those who are the most likely to benefit from insurance. People who know that they have an inclination towards ill-health are more likely to demand health insurance than those who believe they will remain healthy. It may not be to an individual’s advantage to divulge health information to an insurer. This is because it could adversely affect the premium that they were charged. For example, with health care, “it would be tempting for a person not to divulge to the health care insurance provider that he or she may have inherited a genetic disorder that would be likely to require considerable future health care” (Munday 2000:42). “The problem of adverse selection is likely to occur in insurance markets as insurers find it hard to gain sufficient information about their potential clients” (Munday 2000:42).
This asymmetry of information, that the consumer has more knowledge about their health than the insurer, can create further problems. Additionally, the (risky) behaviour of an insured person may incur costs which are not factored into the calculation of the premium. The additional costs resulting from such risky behaviour have to be borne by the insured “pool as a whole” (Foubister et. al. 2006:90). This undermines the principle of fairness in health-insurance pricing (Foubister et. al. 2006). Those who are more likely to suffer ill-health are subsidised by other insured individuals who have to pay more for their cover. The discussion will continue with a detailed assessment of the market for health insurance and how this may affect behaviour.
The Market for Health Insurance: Moral Hazard before the Onset of Ill-Health
The change in health behaviour caused by insurance is a type of moral hazard. The concept of “ex ante moral hazard refers to the situation prior to the advent of illness” (Zwieifel and Manning 2000:473). The hypothesis is that through their preventative effort, individuals have an influence on their health. The presence of insurance coverage may affect the individual (Zwieifel and Manning 2000). There could be “a reduction of preventive effort in response to insurance coverage” (Zwieifel and Manning 2000:410). However, this cannot be easily predicted, in advance, as there is limited evidence to prove this concept (Zwieifel and Manning 2000).
Moral hazard can be understood as individuals taking higher risk decisions when they have (medical) insurance. The problem is that the “act of obtaining insurance sometimes results in individuals being less careful” to protect themselves (Finkelstein and Zuckerman 2008:70). The concept has been studied in the context of insurance markets. The argument is that “when (health care) costs go down, as a result of insurance ... many people will change their behaviour in response” (Finkelstein and Zuckerman 2008:71).
There is empirical evidence that insurance changes people’s behaviour. For example, “in Sweden, the number of days that a worker could receive sick pay was reduced” i.e. the ‘insurance’ level was reduced (Finkelstein and Zuckerman 2008:70). Consequently it was found that fewer sick days were claimed (Finkelstein and Zuckerman 2008). To summarise, if insurance, is reduced then people make fewer claims. Alternatively, in the case of additional insurance then this can lead to a greater number of claims.
There is other evidence to suggest that private health insurance can lead to moral hazard and a greater burden on health care services. An American study found that the probability of being obese was “12.5 per cent greater for men with health insurance than for men without health insurance” (Finkelstein and Zuckerman 2008:72). Such a result is consistent with the theory of moral hazard that “men make less effort to control their weight after they purchase health insurance. However, it is unclear whether having insurance is causing men to gain weight or whether obese men are more likely to buy health insurance” (Finkelstein and Zuckerman 2008:72). Arguably, health insurance has also led to an increase in Body Mass Index (BMI) “among those with diabetes by as much as 10 per cent” (Finkelstein and Zuckerman 2008:73). The argument is that insurance has generated “a moral hazard such that diabetics rely more on medical treatments for their disease than on improvements in their diets or exercise patterns” (Finkelstein and Zuckerman 2008:73). Arguably, “new medicines ... funded by health insurance”, may have a detrimental effect on individuals as they may undertake less healthy diet and exercise choices (Finkelstein and Zuckerman 2008:73). The purchase of health insurance may mean that individuals do not give up a “western-type lifestyle” with “diets high in saturated fat and sugar, coincident with dramatic reductions in activity levels” (Zimmit 2004: xi).
The problems with health insurance and private health care are also relevant to the publically funded NHS. Despite an increase in obesity rates, the health consequences resulting from being overweight “have become less severe” (Finkelstein and Zuckerman 2008:75). The health impact of obesity has declined as a result of drugs such as the diabetes treatment Metformin. Nevertheless, if the potential NHS patient is aware of the benefits, of such diabetes drugs, then preventative action may not be taken to mitigate such disorders.
The problems associated with private health insurance provide a justification for intervention from the National Health Service. Insurers are unable to make “accurate assessments of risks” and so insurance premiums may prove to be set at “too generous a price” once behaviour has become “less careful after the insurance has been taken out” (Munday 2000:42). This may lead to insurance provision becoming unprofitable and the market for insurance failing (Munday 2000). However, “no claims discounts do much to reduce the problem of moral hazard. They create an incentive to behave carefully and not to claim, unlike systems, where is no penalty to claim” (Munday 2000:43). Higher health insurance rates can be set for people who smoke (Scrutiny Unit 2014:3). Nevertheless, the concern here is that the market functions properly as smokers with higher risk are charged more. Private healthcare then becomes prohibitively expensive for the smoker and they then do not receive the treatment. This also can be seen as a poor and an undesirable outcome which requires intervention on the part of the NHS.
The Market for Health Insurance: Moral Hazard after the Onset of Ill-Health
The moral hazard after the ill-health has occurred is relevant. “At this stage, health insurance reduces the net money price of medical care, while sick leave pay reduces” the cost of being off work (Zwieifel and Manning 2000:413). Such a reduction in cost may lead to increased use of health care or sick leave (Zwieifel and Manning 2000:413). The evidence for moral hazard, the over-use of health services, is arguably stronger after the patient has become ill.
After illness, there is “an increase in the demand for medical care” using a given technology (Zwieifel and Manning 2000:410). The concept of dynamic moral hazard, in medical care, is about existing and new medical technology. Medical insurance can provide money so that there is access to new technology. Therefore there is a possible incentive “for the insured to ask for the latest technology” (Zwieifel and Manning 2000:413). Insurance can lead to the patient asking for an excessive level of technology or more technological equipment then they actually need (Zwieifel and Manning 2000). The excessive demand for health care, in this context, provides a justification for National Health intervention.
The NHS though will still suffer from the effects of moral hazard. Patients’ reckless behaviour will increase costs for state healthcare too. To return to the topic of obesity and diabetes; “in the past diet and exercise ... might have been the primary treatment to help control” type 2 diabetes-related risk factors (Finkelstein and Zuckerman 2008:76). However, it is a concern that patients once they become ill may feel that they merely have to take a pill and that “diet and exercise are optional” (Finkelstein and Zuckerman 2008:77). Moral hazard is serious when a patient views having a costly medical procedure as a preferable option over engaging in a difficult “to sustain diet and exercise regimen” (Finkelstein and Zuckerman 2008:78). This is why the National Health Service is keen to promote ‘preventative health’ and healthier lifestyles to reduce its cost burden. In economic terms, there is market failure and an under-supply of exercise and nutritional information. Arguably, the “private sector is producing too few outlets for physical activity or not enough information concerning how best to consume a nutritious diet” (Finkelstein and Zuckerman 2008:109).
The problem of health costs being shared amongst ‘a pool’ as discussed on page one, also applies to the National Health Service. Arguably, moral hazard occurs within the National Health Service (NHS) when the costs of covering health risks are shared by the whole population (Scambler 2001). The cautious and healthier will in general subsidise the less cautious and less healthy. It can, though, be argued that the NHS is a more efficient method with which to deal with this problem.
Is the Privately Funded Health Care System Better Equipped to Solve the Moral Hazard Problem in Health Care than the Publicly Funded System?
Moral Hazard within the National Health Service
The National Health Care can be criticised in terms of moral hazard. Free healthcare encourages patients to “overuse health services and to disregard their personal responsibility for their health” (Morris et. al. 2005:165). To reduce these hazards, steps have been taken by successive governments to reinforce individual responsibilities for health and the responsible use of services (Morris et. al. 2005). For example, there are responsibilities for preventative health. The public are discouraged from making excessive demands of the NHS through healthier lifestyles. There are also responsibilities to use health services appropriately such as through punctual attendance.
Health service providers, whether in the private or public sector, also suffer from being charged excessive costs. Drug Manufactures have an incentive to stimulate demand to derive additional revenue. For example, pharmaceutical companies could over-promote drugs at the expense of the health provider. However, arguably the NHS is better at dealing with such manufacturing costs. The National Institute of Clinical Excellence (NICE) can be seen as a method of rationing pharmaceutical drugs and a way of reducing producer moral hazard i.e. excessive producer charges (Scambler 2001).
The Basis for the State Sector in Health Care
The significance of moral hazard is that it makes the funding of health services more expensive. However, it is “the presence of all these market failures operating together which justifies the more full-scale intervention seen in” the United Kingdom (Emmerson et. al. 2000:12). Additionally “the provision of treatment that is free at the point of delivery” should help address social inequalities in health (Emmerson et. al. 2000:13). The argument for health care to be situated in the public sector is also that it is a “way of addressing some of these equity issues and market failures” previously outlined (Emmerson et. al. 2000:12). For example, the NHS has economies of scale and so it can be an efficient purchaser of drugs to restrict the ability of pharmaceutical companies to overcharge for their drugs.
There are problems with alternative private systems such as billing costs. There are cost disadvantages such as making sure that insurers pay private hospitals for treatment (Emmerson et. al. 2000). Again, moral hazard causes problems to the private insured sector. “Individuals who have health insurance may tend to use private medical facilities more than they would if they were paying for treatment themselves. This will have the effect of increasing the insurance company’s costs and hence the premiums charged” (Emmerson et. al 2000:13). Insurance companies have attempted to alleviate this moral hazard problem. They have required individuals to make a contribution, in addition to the cost of any healthcare which has been purchased through insurance (Emmerson et. al 2000:13). However, this is still expensive and cumbersome and so the country may be better off with the state system.
Another advantage of the National Health Service approach is that “because doctors do not, in general, receive fees per treatment” then there is “little incentive to oversupply” health services (Emmerson et. al. 2000:13). Doctors in the private sector “do not bear the costs of treatment” and so presumably can over-supply or over-provide services in hospitals and so presumably can over-supply or over-provide services in hospitals (Carmichael 2012). Also universal, comprehensive coverage closes gaps in the market which could arise from the use of insurance (Emmerson et. al. 2000). The obvious benefit of the NHS in comparison to private health insurance leads to people not being able to pay for health services. The NHS is needed to stop people from being discouraged from seeking health treatments.
Problems with the National Health Service
NHS patients though will have the incentive to over-demand health services “because the price they face for each (health) intervention is zero” (Emmerson et. al. 2000:13). The lack of a market means that demand is not rationed through the market. However, rationing can be achieved through the use of waiting lists. These can be criticised given that they have been politically determined through “centrally decided health budgets” (Emmerson et. al. 2000:13).
Disadvantages of the Private Health Care System
Patients with private health insurance “will demand more health care resources than they actually need, which will cause a welfare loss” (Xie 2012:33). The NHS can help deal with such moral hazard. The NHS solves the problem as doctors decide who needs treatment. General Practitioners act as both guides to the appropriate specialist and as a filter. The patient would not be able to have further treatment without the permission of the GP. “This helps overcome the problems of consumer ignorance and provides a means of controlling the level of demand” (Xie 2012:34).
Also “a consumer with insurance might stay an extra day in the hospital or undergo a procedure that he would not have received without insurance. This additional health care is presumed to be worth less to the consumer than it costs to produce” (Nyman 2007:5). This explanation explains why the state-run health service in the UK is a better way of dealing with moral hazard and offers greater value for money than the private sector. “The United Kingdom health care system spent 7.3% of its GDP on health care, compared to 13 per cent in America. The UK per capita health care spending is less than half of what it is in the United States. While the UK may not use as much of the latest technology and their hospitals may not be quite as modern, the UK still has a lower infant mortality rate and a higher life expectancy than America” (Nyman 2007:6).
The Benefits of the Public Sector National Health Service
“The key justifications for health such charges is that charges act as a deterrent to ‘frivolous’ or inappropriate demand and thus combat the ‘moral hazard’ of over-consumption in a service without a price restraint” (Kings Fund 2005:2). However, there are problems with the health insurer having to pay for the cost of the claim. If the private hospital can charge the insurer, then the hospital could overcharge the insurer which wastes money. The insurer can then over-charge the holders of the insurance. The state run NHS can reduce such private sector costs. Moral hazard means that it is not a good idea to have a private system. “Moral hazard can be argued to cause a negative externality to the extent that it causes the insurer (assumed to be unable to discriminate between individuals) to increase premiums for everyone (Zwieifel and Manning 2000:413).
Private healthcare systems are strong with regards to responsiveness and choice. However, “their ability to achieve social objectives is limited. Private health insurance markets (greatly) suffer from “market failure” caused by adverse selection and moral hazard”. Insurers try to avoid problems of adverse selection by adjusting premiums for risk and by imposing high additional payments. “This method renders health insurance unaffordable particularly for those population groups who most urgently need it, i.e. sick and poor individuals. Furthermore, private insurers intend to reduce uncertainty by excluding pre-existing medical conditions from the benefit package or by completely denying coverage for an applicant” (Cacace et al. 2008:12).
If private sector systems were to be introduced then “fixed costs of billing and advertising would tend to inflate (insurance) premiums” (Donaldson 2011:10). Health ‘consumers’ would have to pay the administration costs. Insurance encourages people to think that a third party, that is the insurer, will pay. Therefore the market fails to input cost considerations into the decisions of consumers and providers. This leads to “cost inflation without much return in health benefits” (Donaldson 2011:10-11). These problems exist in public systems too but “the government can control costs through supply-side controls” i.e. rationing (Donaldson 2011:11). The state is needed to correct market failure where the market fails to transfer resources from richer (and healthier) individuals to poorer and (less healthy) individuals (Donaldson 2011:11). Another advantage of the NHS is that middle class demands for quality can have wider benefits for more vulnerable groups in society (Donaldson 2011).
Conclusion
Moral hazard can occur in both the private sector insurance based system and the public sector NHS system. However, the funding of health services publicly is a more efficient system, in comparison to the sale of insurance products which can lead to additional costs. The privately funded health care system is generally not better equipped to solve the moral hazard problem in health care.
Afterthought
There can be moral hazard and inefficiency in the state system. However, it is not clear that this inefficiency is higher than the wastefulness inherent in the private sector system (see Donaldson).
References
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