Dying for Money: Overcoming Moral Hazard in Terminal Illnesses through Compensated Physician-Assisted Death

By Fung, K. K. | The American Journal of Economics and Sociology, July 1993 | Go to article overview

Dying for Money: Overcoming Moral Hazard in Terminal Illnesses through Compensated Physician-Assisted Death


Fung, K. K., The American Journal of Economics and Sociology


I

Introduction

IT IS WELL KNOWN that some parties to a contract who have an information advantage over the other parties may engage in post-contractual opportunistic behavior. This behavior is commonly known as moral hazard. In health-care insurance, moral hazard is usually associated with increased use of medical services after insurance (Pauly, 1968). Because the insurer usually cannot tell whether a treatment is motivated by actual need, or by lower marginal cost of services to the insured, there is room for the insured and the service provider to use more services than would be used without insurance. This information advantage on the part of the insured and the service provider thus determines the extent of moral hazard. The greater the information advantage is, the higher the cost of containing opportunistic behavior, and the greater the extent of moral hazard.

When moral hazard cannot be costlessly eliminated, the interest of the insurer is adversely affected if he cannot cover easily his loss from the insured's overuse by increasing the premium. It is as if some property right of the insurer have been converted into de facto property right of the insured. The extent of this de facto right is defined by the level of successful moral hazard. In other words, the gap between the ideal interest of the insurer under perfectly enforced property right (i.e., without moral hazard) and his effective interest under imperfectly enforced property right (i.e., with moral hazard) represents competitively capturable resources (Fung, 1991).

The higher the cost of containing moral hazard, the larger this pool of competitively capturable resources becomes. But these resources are likely to be lower in value than their equivalent market values to the insured because they must be captured in kind and not in cash. Therefore, the insured may be induced to give up his de facto property right in exchange for part of the competitively capturable resources, if such an exchange offers him greater utility. In turn, the insurer can keep the rest of the competitively capturable resources. This exchange, a benefit conversion, if successful, can make the insured better off and lower insurance premium for a given coverage.

Deductibles and copayments are incentives designed to contain this de facto property right of the insured. Their effectiveness in curtailing moral hazard, however, is limited to minor illnesses (Zweifel, 1988). For major illnesses of a terminal and/or chronic nature, treatment levels typically extend beyond the reach of deductibles and coinsurance. Here, comparable incentives to contain the insured's de facto property right do not exist. Not surprisingly, aggressive treatments of major illnesses have contributed significantly to health-care cost explosion.

This paper will look at a two-pronged incentive scheme that may curtail over-treatment and the spiralling of health-care costs in major illnesses. This scheme is based on a recognition of the insured's de facto property right to competitively capturable resources and the offer of a package of benefits that is more valuable, in some cases, to the insured than a futile resort to more medical treatment.

II

Budget Constraints of the Insured in Major Illnesses

WITHOUT INSURANCE, moral hazard is absent because the limit to medical services is determined by the individual's income and the market price of medical services. This income-price budget constraint is represented by AA|prime~ in Figure 1. This individual's (say John's) income can be spent on up to |M.sub.2~ units of medical services and nothing else, or up to OA units of other goods and services (other goods for short) and no medical services, or any other consumption bundles of medical services and other goods along the budget constraint AA|prime~. The slope of the constraint reflects the price of medical services in terms of the amount of other goods that must be given up in exchange. …

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