Health Insurance: Moral Hazard

It is a law of “Economic Physics”.  Health insurance can not cost less than the cost of medical care.  If a group of people consume $10,000 worth of medical expenses per year, the sum of the premiums collected from all members of that group HAVE to be no less than $10,000.

The reason that our health insurance premiums are rising is that the cost of medical care is rising.  Further, a reason that medical care costs might be rising is that we have taken away the incentive to care about costs.

Take us for example.  Some time ago my daughter swallowed a nickel.  She started crying and complained to my wife that her throat hurt.  When she finally admitted that she swallowed a coin, my wife ran screaming up stairs telling me that we had to go to the emergency room; our daughter had swallowed a coin.  I was stunned.  I tired to calm my wife down but she was taking care f “her little girl” and really was not going to be talked off the cliff.

Now, my incentive too NOT go to the emergency room was not because it would cost me money; it wouldn’t, we would be covered.  My incentive was that it was a waste of my time.  Emergency rooms are HUGE time sinks and often provide no relief.  Plus, my daughter was just fine.

I was finally able to get my wife to relent by calling the emergency nurse line.  We were called back within minutes by a very calm and professional nurse.  She guided my wife through several self checks:

  1. Can the girl breath?  Yes.
  2. Can the girl swallow and drink water?  Yes.
  3. Can the girl chew, swallow and eat bread?  Yes.

She was fine.  Watch her stool for the coin and call us if it doesn’t pass.

Had we gone to the emergency room we would have incurred a cost that would have to be assumed by the “group”.  As a result, all of our premiums would have gone up.


When people are properly incented, they will respond and prices will fall, quality will improve and availability will rise.  In short, things, and life, will get better.

Leave a Reply