The Moral Hazard Problem Of Socialized Healthcare

Ezra Klein quotes approvingly a section of Michael Pollans In Defense Of Food on the high level of diabetes in those eating a Western-style diet. In response, he almost seems to be suggesting that there’s a moral hazard problem of socialized healthcare:

A diagnosis of diabetes subtract roughly twelve years from one’s life and living with the condition incurs medical costs of $13,000 a year (compared with $2,500 for someone without diabetes).

This is a global pandemic in the making, but a most unusual one, because it involves no virus or bacteria, no microbe of any kind — just a way of eating. It remains to be seen whether we’ll respond by changing our diet or our culture and economy. Although an estimated 80 percent of cases of type 2 diabetes could be prevented by a change of diet and exercise, it looks like the smart money is instead on the creation of a vast new diabetes industry.

I’d just add a question: How many discrete interest groups would save money from a sweeping policy initiative aimed at reducing chronic disease through nutrition, exercise, and other low-cost lifestyle changes? How many discrete interest groups would make money from a sweeping policy initiative aimed at increasing the number of insured Americans able to purchase cutting edge medical care in response to the onset of chronic disease?

The questions asked are quite instructive, and thus I wonder if he is being facetious here.

Undoubtedly Americans would be best served by changing our diets and behavioral patterns to more “sustainable” options. As a libertarian, of course, I favor doing this through the freedom rather than bans of bad foods or mandates of exercise — and certainly support anyone wealthy enough to pay for the medical treatment being willing to abuse their body as much as their bank account can pay for the damage. I’m sure Ezra’s “policy initiative” is probably a mix of advertisement, tax policy, and the other sort of “libertarian paternalism” ideas championed by Cass Sunstein.

But what will happen if we do go for a “sweeping policy initiative” aimed at increasing the number of insured Americans able to purchase cutting-edge diabetes treatments? When we offer such “health bailouts”, does this not result in a moral hazard where individuals can make bad, risky decisions knowing that they won’t feel the full effect? This is no different from the corporate world, where CEO’s can embark upon ultra-risky business strategies knowing that the cost of failure will be blunted by federal bailout. Note also that this is a feature of all third-party payment system where the individual care-user is not even charged premiums based upon their risk-profile — it doesn’t matter if it’s an individual mandate plus a huge push towards company-paid insurance (the Massachusetts model) or a fully socialized system (the British model). The end result will be skyrocketing costs as the individual is not strongly incentivized to avoid poor health.

America, when it comes to “healthcare systems”, would be far better off breaking the employer-payment link and moving to a more free system. In this sort of a system, premiums would be somewhat tied to a risk profile (as makes sense for an insurance product), paid individually (so the individual has an incentive to adopt healthy practices), and [probably] would be more tailored to protection from high-cost services rather than pay for day-to-day health care needs. This is post-1930 America, so undoubtedly there’d be a safety net, but I’d rather see the government pay for healthcare for the indigent than for everyone — especially since the system will work better.

In fact, a free market would help bring about Ezra’s goal (healthier people who eat better and exercise) while avoiding his worry (a giveaway to the big healthcare corporations subsidizing bad decisions). Maybe someone should tell him that there’s an answer outside of government on this one.

  • trumpetbob15


    There is a third option here to go along with your suggestion: drastically cut taxes so those of us most likely to get diabetes have money to spare so we donate to diabetes research. I am sure more people would be helped if I could voluntarily choose to fund diabetes research rather than be forced at the point of a gun to fund AIDS research, a disease I have almost no probability of getting.

  • Quincy

    Brad –

    Spot on. One of the biggest problems today is the insane, irrational linkage of health insurance to employment. It was an accident, yet it has become a religion amongst most Americans.

    In addition, there’s the overregulation of health insurance products that prevents the creation of new types of insurance. One I’m a strong advocate of is “pay by occurance”, where a lump sum is deposited in a health savings account for every unforseen event. It would go a long way towards applying downward pressure on prices for health care, yet it’s totally illegal today.

  • Joshua Holmes

    The problem with the moral hazard argument is that the emotional and physical costs of poor health still hit the unhealthy person the most.

  • persnickety curmudgeon

    Socialized Healthcare: “I can’t afford the healthcare I think I need so I’m going to do my best to make sure no one else can afford theirs either.” Brilliant!

    And people need to stop confusing Healthcare with Health Coverage.

    Oh and follow the money!

    If a doctor can bill a procedure costing $10,000 for $100,000, collect $1,000, then either sell forward these uncollectible but performing receivables or use them as collateral for loans, why wouldn’t the government want in on this scam? It worked so well for housing didn’t it?