Morale hazard a major risk facing health plans
Insurance no matter what variety assumes two kinds of risk. First, the underlying peril that could result in a covered loss, such as a windstorm or a fire in the case of homeowners insurance. Second, human hazards that can increase the risk of loss. For example, there’s moral hazard (such as filing a fraudulent claim to collect on the insurance by setting one’s house on fire) and morale hazard. What’s morale hazard? This definition is a good one:
A term used to describe a subjective hazard that tends to increase the probable frequency or severity of loss due to an insured peril. Morale hazard, as contrasted with moral hazard, does not imply a propensity to cause a loss but implies a certain indifference to loss simply because of the existence of insurance. For example, an insured’s attitude may be indifferent if a loss occurs because they have insurance. (Emphasis added)
The emphasized part is directly applicable to and has major implications for health insurance. In the context of health insurance, a clear example of morale hazard would be the failure to engage in health promoting behaviors and lifestyles. For instance, an individual with a family history and propensity to develop cardiovascular disease eating an unhealthy diet and not regularly exercising. Granted, that individual may not want to have a stroke or heart attack. But if they have the attitude that they can shift the risk of costly medical care should that happen to their health plan, they may be less motivated to adopt a lifestyle to help head off those eventualities.
As one strategy to stem rising costs, health plans must strike a balance between providing people the peace of mind that comes with having coverage for potentially financially ruinous medical costs while also motivating those they cover to take responsibility to avoid them.
This becomes especially critical starting this October, when health plans in the individual market must begin pre-enrolling applicants for coverage beginning January 2014 regardless of medical condition or history. No longer will plans be able to practice risk avoidance to control claims costs, rejecting those deemed too risky to cover or charging small employers higher rates based on the medical condition of their employees.
That leaves mitigation of morale hazard as their only remaining form of risk management. Large employers as well as smaller ones are looking to so-called “workplace wellness” programs as a form of addressing morale hazard, including contingent wellness programs that provide employees economic incentive to engage in health promoting behaviors to reduce the likelihood of their incurring major medical costs. Whether such programs have a meaningful impact remains to be seen given mixed outcomes such as reflected in this 2011 survey and a study published this week in Health Affairs.
With limited financial incentives available to both plans and employers to reduce morale hazard, it will likely take a big shift in societal attitudes to achieve a measurable reduction. For example, viewing both personal health and health coverage as a common social good that should be respected and preserved. If the resources to pay for health care are shared and finite – and they are – we should regard them as a societal asset that should be preserved. That change in outlook will also require us to re-examine our values and strive for balance in our lives that supports preserving our individual and collective health.