Morally hazardous

Why social or medical ‘insurance’ from government will never be a square deal

By Steven Miller
  • Tuesday, November 1, 2005

Television police dramas rely all the time on the concept of “moral hazard.”

A restaurant burns down, or a corpse turns up, and one of the first things detectives do is track down the insurance company.

“What? Fifteen million dollars on that dump?” Or, “The life insurance was how much?”

You might describe moral hazard as the level of risk you run by assuming that someone you’re dealing with is moral. If they’re not, and if they’re focusing on financial or other incentives that strike them as high enough, your situation may, indeed, be hazardous.

Since risk is the business of insurance companies, moral hazard is something they pay a lot of attention to. They’re well aware that among all the property owners seeking to guard against catastrophic loss there will be a few whose real goal is quietly scheduled arson.

Consequently, insurance companies work hard to make sure that, in helping people insure against one kind of risk, they don’t, at the same time, give people incentives to commit insurance fraud. In the case of fire insurance, for example, private insurers like to keep the value of the insurance payoff beneath the property’s present value to the customer.

What’s the relevance of all this for public policy in Nevada? It’s the fact that government, too, is fundamentally a collective attempt to insure against certain risks. We know that however much we do, there will still be fires and burglaries, hold-ups and homicides and other crimes. But by collectively employing government—goes the theory—we will at least improve the chances of reducing our individual risk.

Unfortunately, however, the unique nature of government always throws a monkey wrench into this plan. The defining characteristic of government, after all, is that it exercises a legal monopoly on the use of force, and even supports itself through force—i.e., the confiscatory takings of private property called “taxes.” In essence, government necessarily treats individuals as mere means to its ends; accordingly, therefore, it inculcates collectivist doctrines that see people as mere means, and it attracts to itself people with that same mindset.

The cumulative effect of these government realities, for most citizens here in Nevada and elsewhere, is moral hazard with a vengeance. Because the state gets its funds through coercion, it brings little of the conscientiousness of the private sector to the management of incentives—whether those facing beneficiaries of government largesse or those facing government employees.

A classic example of both here in the Silver State is Medicaid, the metastasizing federal-state health-care program for the poor. Although the federal government allows states to experiment with pilot programs to address out-of-control costs, the State of Nevada has repeatedly declined to seek the waivers to do so; instead the state has used the waiver process to expand services and taxpayer liabilities.

Yet the Medicaid program is simply crammed with perverse incentives. First, offering services to beneficiaries entirely free of charge encourages them to consume medical care without regard to cost. A Rand Corporation study showed that removing price-sensitivity leads patients to consume more medical care (about 43 percent in the test) but fails to produce measurable health gains.

Second, those nominally “free” services crowd out private efforts. After looking at 22 studies to see whether “free” government coverage crowds out private coverage, the Robert Wood Johnson Foundation concluded that the crowding-out “seems inevitable.” Over half of the 22 studies found that expansions of public coverage were accompanied by reductions in private coverage. Some even found that the growth of enrollment in government programs was completely offset by reductions in private coverage.

Finally, since Medicaid is price-controlled and makes doctors and hospitals work at below-market rates, providers end up keeping their doors open by charging private payers more. A study by Fiona Scott Morton of Yale University and Mark Duggan of the University of Maryland estimated that the price of your non-Medicaid prescriptions includes a 13.3 percent premium—your involuntary contribution to Medicaid.

In short, the reason that Medicaid makes taxpayers in Nevada and elsewhere its victims is because it maximizes moral hazard through bad incentives. Those incentives, in turn, are produced by lawmaker-politicians operating within the incentive structures of coercive government.

Moral hazard, we said earlier, is the level of risk you run by assuming that someone you’re dealing with is moral. When the modern, unlimited state defines you as merely a means to its ends, and your own moral agency as irrelevant, it also characterizes itself:

The word is: Sociopath.

Steven Miller is policy director for the Nevada Policy Research Institute.

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