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As we've explained in previous episodes, insurance is complicated. Even John gets confused (watch the video!). But there's a reason we have all these deductibles, co-pays, and co-insurance. It's because of the moral hazard, and a very important research study known as the RAND Health Insurance Experiment. Watch this episode and learn all about it.

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Here's more info on the RAND HIE:

John Green -- Executive Producer
Stan Muller -- Director, Producer
Aaron Carroll -- Writer
Mark Olsen - Graphics


John Green: I'm trying to figure out my plan, I have to decide if I want a high deductible, a high co-pay, or a high monthly premium.  

Dr. Aaron Carroll: Would you rather pay the money up front or would you rather pay it later?

John: I don't know, what's better?

Aaron: Totally depends on how you like it.

John: Well, I don't--I mean, I guess, I guess I would like to pay--I guess I would like it to be future-me's problem rather than current-me's problem.  

Aaron: Then probably--

John: --pay later 

Aaron: Then probably, okay, then go with the low deductible. But you're gonna have a high co-pay, you might also have high co-insurance, you're certainly gonna have a high deductible.

John: What is co-insurance?

Aaron: That's the stuff that doesn't fall under the co-pay but still is responsible for you.

John (confused): What?

Aaron: Yeah, remember? Okay, fine, you got the premium which is the now money, and then you got the deductible, but on top of the deductible you either have to pay the co-pay or the co-insurance every time you see a doctor.

John: This seems inefficient to me.

Aaron: This is what we get.


Aaron: We didn't stumble onto this system by chance. The reason all of this exists is because of a very important research study done a couple of decades ago. It's probably the most ambitious, largest study of health insurance that has ever been done or ever will be done. It was called the RAND (abbreviation for Research and Development) Health Insurance Experiment, and I'm gonna tell you all about it in this week's Healthcare Triage.

[Healthcare Triage theme plays]

 The Moral Hazard in Healthcare (1:08)

The RAND Corporation is a think tank that was established in 1948. They perform research in all kinds of areas including health, and in 1972 they began an 11-year study of health insurance.

You see, there was an ongoing debate about how insurance affects spending on healthcare in the United States. A number of people thought that insurance caused us to spend more than we otherwise would have on health care. It's part of what we refer to as the "moral hazard."

Basically, the "moral hazard" is the idea that people who are insulated from risk behave differently than people who are exposed to it. For instance if you have good car insurance you might drive less carefully because you're more protected. In healthcare, some apply the moral hazard to say that once you have good insurance, you're more likely to use health care even if you don't need it.

In my favorite example of this --because I find it amusing, not because I agree --if we all had employer-paid grocery insurance, we might all demand filet mignon instead of hamburger. This would evidently lead to skyrocketing food costs, mass starvation, and huge piles of rotting ground beef.

It's important to understand that people who apply the moral hazard to healthcare believe that people are using too much of it and that's why our costs are so high. They believe that if we somehow changed how we pay for healthcare and exposed people to the true costs, they would become better consumers and the whole system would cost less.

As a theory, the Moral Hazard in Healthcare was first described only about forty years ago in a seminal paper by the economist Mark Pauli and it's still just a theory. Like many theories, it has good parts and bad. It's not an undisputed law. For instance, recent work by another economist named John Neiman (Nyman?) explains that the moral hazard may actually do good in healthcare, by encouraging people who otherwise wouldn't get care to do so. We want sick people to get care!

And think about it: That supermarket example isn't even remotely comparable. If I made colonoscopies free tomorrow, no one would start picking them up by the dozen. If I declared that no one would ever have to pay for chemotherapy again, you wouldn't ask for extra. If surgeons refused to accept payment for appendectomies anymore, would anyone go and get one just for the hell of it?

We have a hard enough time getting people to do the things we want them to do to be healthy, without making it harder for them to do so. Anyone who loves meat, loves filet mignon; no one loves going to the doctor.

 The Experiment (3:20)

What really matters is whether people are getting unnecessary healthcare. What we'd really like to know is whether people would spend less if the moral hazard was removed but stay as healthy. If that's the case, it's a good argument for making people pay more of their own bills. But if they get sicker, then it's a good argument for insurance covering all the costs.

If you want to see if one thing causes another, though, you need a randomized controlled trial. You might think that a randomized controlled trial of health insurance would be incredibly difficult. You'd be right! There have been two that I know of in the history of the United States and the RAND Health Insurance Experiment is by far the biggest. It contained about twenty-seven hundred families made up of people all under the age of 65. They came from six places across the United States to give it a nice geographic spread and they were all randomly assigned to one of four levels of insurance coverage.

They ranged in how much one had to pay in co-insurance from none to 25 percent to 50 percent to 95 percent. In other words, they measured different levels of the moral hazard. The "none" plan would involve no cost at all to people. The 95 percent plan is much like a health savings account where almost all of the spending is out-of-pocket.

The researchers' interests were varied, but centered on spending and health outcomes. The purpose of the study was to see if increasing the amount of cost-sharing would change how people used health care and how their health was affected.

The results are complicated, and have been interpreted and misinterpreted too many times to count, but here's the gist of what they found.

 The Results (4:45)

People in the high deductible plans --those who are most exposed to healthcare costs -- did spend significantly less and they consumed less healthcare. And yes, much of that care was unnecessary as healthy people did not suffer negative consequences from forgoing care.

Removing the moral hazard did no harm in the majority of patients, which is often touted as the result of the study. Because they were healthy! And of course, getting less care when you're healthy leads to few short-term negative results.

So it quickly became accepted fact that increasing cost-sharing was a good thing. People would use less care. They'd spend less. Insurance expenses --and therefore premiums --would come down. Everyone wins, right? This is why we have deductibles, co-pays, and co-insurance.

BUT --and this is important --there were other findings in the Rand Health Insurance Experiment. Poorer participants with hypertension saw their mortality rates rise significantly. They died more. This is because it turns out that people are pretty bad at telling the difference between necessary and unnecessary care. If you're not healthy and you aren't rich, then you're more likely to go without necessary care and you're more likely to die.

 The Debate Continues (5:55)

This debate isn't over. You can still find lots and lots of arguments from people who think that we're still too shielded from healthcare spending. They want high-deductible healthcare plans or even the elimination of all comprehensive insurance where only catastrophic things are covered. People who push for this believe that removing the moral hazard will not hurt people and will lead to significantly reduced healthcare spending.

They're not totally wrong: Removing the moral hazard is fine for most people. Yes, if we make it more expensive for individuals, if we demand "more skin in the game," if we remove the moral hazard, people will seek less care, and that's fine for healthy people. But it's terrible for those who are ill.

So as we continue to reform the system, keep this in mind: Higher deductibles, co-pays, and co-insurance may be good for overall healthcare spending, but they may be bad for people's health.