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Moral Hazard - Hazard for Whom? by David F. Torchiana, MD

Economic theory states that having insurance – of any kind – can change the behavior of the person being insured. This is known as “moral hazard,” a theory that has driven American health policy for most of our lifetimes. Moral hazard comes in many forms; spending someone else’s money is just not the same as spending your own. How many fewer $200 hotel rooms would there be without business expense accounts? With budgets in the billions, this is how the Pentagon ends up with the infamous $640 toilet seat.

When it comes to healthcare, proponents of moral hazard fear that, absent a financial stake, patients will demand more expensive and unnecessary tests and treatments. They argue that a “brake” on this demand is needed to assure efficient consumption of healthcare. It’s one of the reasons co-payments, deductibles, and the notion of “skin in the game” are solidly entrenched in our health care system and the reason why we’re likely to see more cost sharing in the name of consumer-driven healthcare.

But how does economic self-interest affect health care consumption?

It definitely makes a difference in utilization. For a practicing clinician, switching patients from a brand-name drug to a less costly generic is challenging when both choices are fully covered and much easier when there is a substantial difference in co-pay. Primary care physicians are sometimes faced with patients who want a costly, but unnecessary test – say an MRI for a sprained ankle or a headache – when no test is indicated. Since it makes no economic difference to them, some patients bristle when the physician advises against the high-cost test, convinced that HMO cost controls, not evidence-based medicine, are the reason. Physicians may feel pressured to appease the patient and protect against that infinitesimal chance that something more serious is indeed involved or simply find it easier to order the test than to spend the time dissuading the patient when time is already so limited.

Co-pays can limit this tendency, and there is a school of thought that this will reverse the trend in healthcare spending. There is, of course, a downside. Back in the late 1970’s, the Rand Corporation did a famous study of the decisions consumers made as their co-payments rose. Sure enough, the higher the co-pay, the less health care was consumed. The problem was that people were as likely to forgo necessary treatment – like care for diabetes or hypertension – as they were to cut out unnecessary care.

An article in this week’s Journal of the American Medical Association makes the same point using prescription drug cost sharing as the example. A review of 132 different studies confirmed that increased cost sharing is associated with lower pharmaceutical use. However, for chronically ill patients, the downside is troubling: Patients with congestive heart failure, lipid disorders, diabetes and schizophrenia who also had more “skin in the game” used fewer drugs but as a result needed more inpatient and emergency medical services, a sign that co-pays or cost sharing can lead to higher health care costs in some cases.

Ultimately, co-payments are a blunt instrument – the cost sharing reduces the employers’ contribution and reduces utilization but there isn’t a reliable way to calibrate them to maximize “good” health – and consumers are not always able to distinguish the difference. There are ways to limit the downside. First dollar coverage for preventative services, for example, will promote better health. Making certain that critical drugs – like anti-hypertensives and diabetes medications – do not require co-pays also can help. The problem is where to draw the line and what the long-term impact will turn out to be.

Ultimately, the big costs in healthcare result from serious illness, not moral hazard. A higher co-pay may change one’s thinking around taking a generic rather than a brand-name drug, but major cost items like cancer care or hospitalization for heart attacks are harder to manage because they are neither elective nor discretionary and patients are unlikely to shop around for the best deal.

As we work to expand coverage and better control health care costs, it would be hazardous to our collective health to forget that preventing and managing serious illnesses are the real challenges in health care today and have the greatest impact on rising health care costs.

David F. Torchiana, MD
Chairman and CEO
Massachusetts General Physicians Organization (MGPO)

This program aired on July 5, 2007. The audio for this program is not available.

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