Academic journal article Journal of Risk and Insurance

Moral Hazard and Health Insurance When Treatment Is Preventive

Academic journal article Journal of Risk and Insurance

Moral Hazard and Health Insurance When Treatment Is Preventive

Article excerpt


We consider a two-period model under moral hazard when treatment is preventive. In the second period, the treatment level under moral hazard is higher than that under no moral hazard. However, it may be lower than that under moral hazard when overinsurance is not allowed. In the first period, the treatment level is higher when treatment is preventive than when it is not. Treatment level is also higher as the discount factor increases. We demonstrate that a treatment increase following a coverage increase does not necessarily imply moral hazard. These findings imply that moral hazard is possibly overemphasized in the literature.


In general, preventive health care is defined as health care that is consumed before illness occurs. Prevention is often classified into primary prevention and secondary prevention. Simply put, primary prevention aims to lower the probability of illness, whereas secondary prevention aims to reduce the severity of illness. Primary preventive care includes healthy diet and smoking cessation. Secondary preventive care, on the other hand, includes medical examinations and diagnostic screening. (1)

Traditionally, the insurance literature excludes the costs of preventive care from insurance coverage, since such preventive care is considered the consumer's choice, not a random event (e.g., see Zweifel and Breyer, 1997). Prevention is discussed mainly in the context of moral hazard. When the insurance benefit cannot be contingent on the level of prevention, the level of coverage for treatment will affect the consumer's selection of prevention level (Ehrlich and Becker, 1972; Shavell, 1979; Dionne, 1982; Kenkel, 2000; Winter, 2000, for a survey). As a result, optimal insurance coverage for treatment should take into account the effect of insurance on prevention level. Recently, a few studies have suggested that insuring preventive care costs may be optimal if, for example, it facilitates more efficient risk sharing or lower treatment costs (Barigozzi, 2004; Ellis and Manning, 2007; Newhouse, 2006).

Although the literature makes a distinction between prevention and treatment, there may not be a clear distinction in practice, as pointed out by Ellis and Manning (2007). For example, early screening through self-examination for certain conditions may lead to more sophisticated diagnostic follow-up examinations. Such diagnostic examination can be considered preventive care because it lowers the severity of the potential illness by detecting it at an early stage. However, it can also be regarded as part of treatment care if it detects a disease. Moreover, treatment care itself may work as preventive care with respect to future illness. For example, one of the aims of treatment for diabetes is to lower the risk of developing complications such as heart disease. Treatment for a stroke includes preventive care to lower the risk of future strokes.

In accordance with this observation, we will attempt in this article to understand the optimal level of treatment and insurance coverage when treatment care is also preventive. For this purpose, we set up a simple two-period model where the consumer may be sick in each period. Insurance for treatment is available in each period. Departing from the existing literature, we assume that treatment in the first period may affect the probability of being sick in the second period. Insurance coverage and treatment care level in the first period will be affected by their influence on second-period outcomes.

A related issue is the trade-off between moral hazard and risk sharing, as the need for insurance for prevention is often discussed in relation to the need for more generous insurance coverage (Ellis and Manning, 2007; Newhouse, 2006). Since Arrow (1963), Pauly (1968), and Zeckhauser (1970), the moral hazard problem has been one of the main economic issues in health insurance. On the one hand, health insurance increases the welfare level by rendering more efficient risk sharing. …

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