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Nyman_MMA Publications

Nyman_MMA Publications - Publications Minnesota Medicine...

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Publications Minnesota Medicine Published monthly by the Minnesota Medical Association February 2004/Volume 87 Are the Additional Health Expenditures Generated by Insurance Bad for Society? by John A. Nyman, Ph.D. ABSTRACT Conventional economic theory has concluded that the additional health expenditures generated by insurance coverage are bad for society and lead to inefficiently high health care expenditures. To reduce costs, economists have promoted solutions—cost sharing insurance policy and managed care—designed to reduce this additional care. This article discusses a new theory of insurance that suggests that much of these additional health expenditures are actually efficient and good for society. As a result, insurance coverage is much better for society than economists have thought. Also, the policy prescriptions are different. The new theory suggests that cost sharing should be applied sparingly, that policy should focus on reducing high prices in order to reduce health expenditures, and that the uninsured should be insured under some type of national insurance program. Conventional Theory and the Moral Hazard Welfare Loss “Moral hazard” is an insurance term that refers to the change in behavior that occurs when a person becomes insured. For example, an insured person might spend an extra day in the hospital or he might purchase some procedure that he otherwise would not have purchased. Insurers generally view this behavior negatively because it often means that they are paying out more in benefits than they anticipated when setting premiums, hence the pejorative term. Economists have also viewed moral hazard negatively because, under the conventional theory, the additional health care expenditures generated because of insurance are a welfare loss to society. That is, when persons become insured, insurance pays for their care. Economists see this as insurance reducing the price of care to zero.
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When the price falls in this way, consumers purchase more health care than they would have purchased at the normal market prices— this is the moral hazard. But, because consumers purchase care (that they would not have purchased at the market price) at a zero price, the value that they place on that care is reflected in the low amount they are willing to pay for it. The additional care, however, is still expensive to produce. The difference between the high cost of the resources devoted to producing this care and its low apparent value to insured consumers represents a welfare loss to society. Thus, health care spending increases with insurance, but the value of this care is lower than its cost, generating what economists have called the moral hazard welfare loss. For example, an uninsured consumer might not purchase a certain surgical procedure to improve her appearance because the price is higher than what she is willing to pay for it. But if the price were to drop to zero as a result of insurance paying for the health care, an insured consumer might purchase this procedure. The cost of
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