Unbiased Analysis of Today's Healthcare Issues

Moral Hazard in Action

Written By: Jason Shafrin - Aug• 12•10

About two weeks ago, I was driving to work and a rock from below a car in front of me flew of the ground and made a quarter-sized spiderweb on my windshield.  ₣@¢כ!!! Fortunately, my insurance company fixes a windshield for free if the damage is smaller than the size of a dollar bill.  I called the insurance company, they ordered a vendor to come to my office and fixed the windshield while I was at work. Perfect!

While the work was getting done, the first question I asked myself was: ‘Why does the insurance company do this?’  This could be a case of preventive care saving money.  If the small ding was not treated quickly, the whole windshield might break and the insurance company would be liable for these damages.  By paying a small amount of money up front, it can save money in the long run.  This is the argument many public health officials make for making insurance pay for more preventive care.  On the other hand, it could just be a low cost service that their customers appreciate.  In this case, no cost might be saved (if it was highly unlikely that a small ding would lead to a full windshield shatter) but providing this service may maintain consumer loyalty.  This is analogous to the modifications to the breast cancer screening that no insurance company will adopt.  Although reducing the breast cancer screening frequency for low risk women would reduce cost, failing to reimburse these services would likely lead to a large number of consumers leaving that insurance plan.

The second concept I want to talk about is moral hazard.  I learned from the windshield fixer that some companies are approaching individuals at carwashes and ask them if they want small dings fixed.  The consumer would not have fixed the ding if they had to pay for it (since they have not already).  When the service is free, however, then they often decide to have the ding fixed.  The windshield fixers benefit since they receive compensation from insurance companies. I even learned about cases of fraud where suppliers will claim to fix a friend or relative’s windshield ding, when none existed.  The supplier and their friend can split the insurance company payment.

After this post, maybe I’ll change my motto.  The Healthcare Economist: blogging on health care…and windshield dings.

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