Moral hazard and demand side cost sharing in health insurance: a closer look

Background: More and more social health insurance schemes include cost sharing, such as deductibles, to reduce moral hazard. Theoretical and empirical studies found evidence for the existence of moral hazard, and even indicate that this moral hazard is substantial. Several existing studies, however, indicate that a portion of moral hazard is desired. Ideally, cost sharing should only reduce the undesired moral hazard and not the desired. The question is how? Methods: A literature review is performed in order to verify the distinction between desired and undesired moral hazard, and if it indicates that the suggestion holds, to identify what ingredients can be obtained from the literature to distinct desired from undesired moral hazard. In turn, this distinction is analyzed in order to describe how cost sharing can be targeted exclusively on undesired moral hazard. Finally, it is argued to what extent cost sharing applied in the Netherlands takes into account the difference between desired and undesired moral hazard. Results: Results of the literature review indicate that still many economists hold on to the conventional theory, mainly to argument their decision to implement certain cost sharing policies. There are however strong suggestions for the existence of desired moral hazard, both from the theory of demand from John Nyman and empirical studies at the desirability of the consequences of cost sharing. The review of selected literature indicates that three overarching dimensions can be identified to distinguish desired moral hazard from undesired moral hazard: accessibility, necessity and efficiency of medical care. Desired moral hazard therefore can be defined as: medical care consumption that is efficient in terms of cost and value and medical necessary, which from a societal perspective should be accessible for everyone. One can speak of undesired moral hazard if it does not meet the definition of desired moral hazard. Conclusion: Cost sharing should not be uniform, but should be differentiated based on the accessibility, necessity and efficiency of medical care. This indicates that there is room for improvement of the cost sharing design applied in the Netherlands. However, the information required for such cost sharing design raises questions regarding the feasibility of the implementation of this cost sharing design. Furthermore, the possible explanation of the occurrence of undesired moral hazard determines the way in which undesired moral hazard best can be reduced. Three possible explanations of the occurrence of undesired moral hazard are: price effect, information asymmetry or a combination of both. If undesired moral hazard is caused by the price effect it makes sense to apply demand side cost sharing which is targeted at undesired moral hazard, otherwise the addition of provider incentives are expected to be useful.