Moral hazard says that people use too much care when prices are subsidized. Behavioral hazard, on the other hand, says that even when the price of care is subsidized by insurance, patient utilization of some healthcare services may be suboptimal. Why is this the case? A paper by Baicker, Mullainathan and Schwartzstein (2012) offers four explanations of this behavior:
- Attention: choice of care may depend on the salience of symptoms, which is particularly problematic because many severe diseases have few salient symptoms.
- Timing: people may overweigh the immediate costs of care such as co-pays and hassle costs of setting up appointment or filling prescriptions.
- Memory: people may simply forget to take their medications or refill prescriptions.
- Beliefs: people may have false beliefs and poor learning mechanisms about the efficacy of different treatments.
“In the standard model, the more responsive health care use is to price, the greater the efficiency cost of low copayments, as people overuse care to a greater extent. With behavioral hazard, the optimal copayment depends not only on how price affects the use of care but also on how the use of care affects health.”
The authors conduct an empirical test of their theory using large-scale field experiment examining drug use for recent heart attack victims. The groups were divided into those with no coinsurance and those with a 25% coinsurance rates. They found that:
“Per patient spending was $106 higher in the free care group. Under the traditional assumption that rational patients only use care that they value at least as much as its cost, this policy generated health benefits of at most $26.50 per patient and a cost of $79.50 per patient. Yet the increased use of prescription drugs in the treatment group was associated with a reduction in mortality rates, which the authors conservatively value at $3,000. Viewed in this way, the policy generated a surplus of $2,894 per patient, or a return of $28 for every $1 spent. In short, a policy that might be viewed as having a modest welfare cost under the standard way of thinking can be seen to generate a large welfare gain once behavioral hazard is taken into account.”
Will private insurers set coinsurance rates to account for both moral and behavioral hazard? The answer may be ‘no’ since many beneficiaries switch plans every year when they switch jobs.
- Katherine Baicker, Sendhil Mullainathan, Joshua Schwartzstein. Behavioral Hazard in Health Insurance. NBER Working Paper No. 18468, October 2012.