A health insurance moral hazard: When costly treatments raise costs for everyone

In the health insurance market, a significant number of consumers who have chronic illnesses choose more expensive insurance plans that needlessly drive up medical costs, a new study from Johns Hopkins suggests.

For the study, Jian Ni, an associate professor at JHU's Carey Business School, and his co-authors mined a broader data set than has been previously available to researchers, giving them a detailed view of consumers' health plan decisions over multiple years.

The researchers examined three years of detailed data from an unnamed health insurer that offered Preferred Provider Organization plans—basic, medium, and comprehensive—and focused on the nearly 3,000 chronically ill consumers who bought individual care plans.

Chronic illnesses—a category that includes conditions such as heart disease, cancer, hypertension, respiratory diseases, diabetes, Alzheimer's disease, and kidney disease—account for 75 percent of health care expenditures in the U.S. While many cases could be treated with preventive care plans—which includes diagnostic tests and drugs to keep an illness from getting worse—most consumers opt for more expensive, "curative" care that includes surgeries and drugs that, while expensive, provide a major boost to the patient's health.

The researchers found that about 14 percent of the people who would have been a good match for a medium plan and preventive care—that is, they were in moderate health, though they felt uncertain about their health status, and price likely would not be a factor in their purchasing decisions—nonetheless chose the more costly comprehensive plans and curative care. As Ni notes, this is an example of a "moral hazard," when a risk-taker is largely unaffected by the consequences of the action. In these cases, health care consumers don't mind choosing a more costly care plan, however unnecessary, because they know that the insurer will pay for the bulk of it.

"Certainly some people with more serious conditions will benefit from a comprehensive plan and curative care, but the 14 percent in our study pose the kind of moral hazard that contributes to health care expenses in the U.S. that are higher than they probably should be, roughly a fifth of gross domestic product," said Ni, an expert on the impact of consumer behavior on firm strategies.

Giving customers better information could go a long way toward easing the problem, the paper suggests. If consumers develop a habit of choosing plans that more properly fit their health status—with clearer instruction and guidance from their physicians and insurers—costs could be cut to customers and insurers alike.