If you have health insurance, you may think your policy will cover all your medical expenses. This belief can make it easy to forget that there are costs involved with the services you use. This kind of possible overuse of medically insured services is called a moral hazard in health insurance. Let’s further explore it in this article.
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Moral hazard in health insurance is a concept that can occur when individuals feel that their actions won’t majorly impact their finances, thanks to their insurance coverage. This can possibly lead to a situation where an individual consciously takes on more risks when they are not primarily responsible for the financial repercussions of their actions.
Moral hazard in health insurance majorly consists of two types: Demand-Side Moral Hazard and Supply-Side Moral Hazard.
Demand-side moral hazard occurs when an insured patient uses more healthcare than they actually need, knowing that they don’t have to pay the entire cost of the services. This kind of misuse or overuse increases overall healthcare spending while also contributing to inefficiencies.
Healthcare providers like doctors and hospitals are responsible for supply-side moral hazard. This occurs when healthcare providers offer expensive and unnecessary services or treatments, knowing that they will be paid for by the insurer rather than directly by the patient.
To get an even better understanding of moral hazard, here’s another risk concept in health insurance that you can familiarize yourself with: Adverse Selection. When individuals with poorer health or with greater healthcare needs are likely to buy higher coverage, while healthier individuals opt for lower coverage or skip it altogether, the resulting imbalance is referred to as adverse selection.
| Moral Hazard | Adverse Selection | |
| Definition | Overuse of healthcare services because of reduced financial responsibility due to insurance | High-risk individuals are more likely to purchase health insurance at the same rates as those with lower risks |
| Impact on Insurance | Increased claims and higher premiums | Skewed risk pool, leading to higher premium for all |
| Timing of Impact | After insurance is purchased | Before insurance is purchased |
| Example - Consumer | A person undergoes unnecessary tests because they don’t have to pay for each service | An older person with health problems buys health insurance at a higher premium |
| Example - Provider | A hospital admits patients unnecessarily to increase reimbursement | Insurance companies struggle to assess and offer affordable coverage |
When the cost of medical care becomes the lesser concern, individuals may be more inclined to access treatments and medical services for conditions they would have otherwise chosen to ignore.
With the cost of regular check-ups and screenings covered by insurance, moral hazard could promote the use of preventive healthcare services potentially reducing the long-term burn of more serious health issues.
Increase in the demand for unnecessary medical services is easily one of the most obvious disadvantages of moral hazard. By driving up overall healthcare costs, it would only go on to make insurance expensive for the common man.
Overuse of healthcare services puts an extra strain on hospitals and medical professionals. This can result in reduced quality of care and could also divert attention from more urgent cases.
When faced with increased expenses due to moral hazard, insurers are more likely to pass those costs to policyholders in the form of higher premiums. This can make insurance unaffordable for some.
Health insurance exists to provide people with accessibility to healthcare without putting a dent to their personal finances. However, moral hazard continues to remain a complex issue. While it can encourage individuals to confidently seek treatments and explore services, its misuse can also lead to increased healthcare costs, overburdened healthcare systems, and higher premiums for policyholders. To try and overcome this hurdle, insurers may introduce measures to ensure that individuals still bear some of the financial responsibility for their healthcare.
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Reviewed by Dr. Harshita Dahiya 
Acko Technology & Services Private Limited
#36/5, Hustlehub One East, Somasandrapalya, 27th Main Rd, Sector 2, HSR Layout, Bengaluru, Karnataka 560102
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