HJAR May/Jun 2025

HEALTHCARE JOURNAL OF ARKANSAS I  MAY / JUN 2025 19 ciples such as copayments, coinsurance, and deductibles exist. These mechanisms are the insurer’s attempt to overcome the moral hazard of excessive consumption of healthcare servic- es when an individual member is divorced from the financial repercussions of when and where to seek care. In recent years, insurers have made attempts to guide member behavior using differential levels of cost sharing. For ex- ample, emergency rooms, by the nature of the types of care they offer as well as their overhead costs, are much more expensive than a primary care office visit. So, a payer, in an attempt to dissuade their members from using the most expensive venue for care, might charge a $250 copay for an ER visit while making a visit to a primary care provider available at no copay. Cost-sharing barriers are often applied to ex- pensive imaging services, such as MRI. I recall one time seeing a patient who was experienc- ing a new complaint of back pain who was both expecting and demanding that I order an MRI of his back. He had no red flag symptoms, no signs or symptoms of neurological compro- mise, and no pain radiating down into his legs or feet — meaning that he had no clinical indi- cation for an MRI. Since my organization owned the MRI machine, I would have indirectly finan- cially benefitted from ordering the test, which costs well over $1000, but that was not the right thing to do clinically. Instead, I educated the patient on why he did not need an MRI, at least not at that point in time, with my recollection being that he was quite unhappy to hear that. That is an example of moral hazard, and it can lead to the mistaken belief that care is be- ing rationed. But it is only rationing if the care provides medical benefit. Copays and deduct- ibles are designed to discourage medically unnecessary testing and care. Unfortunately, it is quite difficult to tease out nuanced clinical indications for medically necessary services, and sometimes these copays and deductibles backfire and prevent members from being able to access and afford a service that is both clinically indicated and medically necessary. they retired since by the aging process alone, they were now considered very high-risk mem- bers whose premiums were priced accordingly. This set the stage for government intervention and the creation of Medicare and Medicaid as forms of government-based healthcare financ- ing. In part one, we introduced the concepts of community rating, where everyone pays the same premium, and experience rating, which denotes the relationship of pricing based upon risk, where healthier, low-risk people pay less and sicker, high-risk people pay more. Moral Hazard Before we dive more deeply into the nuances of community versus experience rating, let us introduce another term related to health insur- ance: moral hazard. This is a situation in which one party engages in riskier behavior because they do not bear the full consequences of that risk. This scenario typically occurs when an individual or organization is protected from risk, often through insurance or government intervention, leading to less incentive to act responsibly. An example of moral hazard as it relates to the health insurance industry is that if a person has comprehensive health insurance, they may be more likely to seek unnecessary medical treatments because they are not pay- ing the full cost of those treatments. Anyone who’s ever had to foot the bill for a wedding reception understands the consequences of moral hazard when trying to decide between a cash bar or an open bar. More alcohol will be consumed — and paid for by individual or family — if there is an open bar. Very simply, when someone else bears the cost of a service, people often consume more of that service than they would have otherwise if there were cost-sharing barriers (e.g., a cash bar) in place. Conversely, providers delivering care may be incentivized to deliver more care, even medi- cally unnecessary care, if their customer, the patient, is financially insulated from the cost of those services. And if the payer declines to pay for such services, they are instantly villainized. Health insurers know all too well the dangers of moral hazard. It is why cost-sharing prin- In part one of this series, we attempted to begin answering the question of what’s wrong with healthcare by reviewing the history of health insurance and how it evolved in this country from the 1920s to the present day. Healthcare financing originated with out-of- pocket payments where patients paid hospitals and healthcare providers for services rendered. The problem with this method of financing was that not everyone was able to afford healthcare services, which created problems both for pa- tients in need of those services as well as the providers who seek remuneration for delivering them. Health insurance in the U.S. began in the private marketplace, where the first Blue Cross and Blue Shield plans collected premiums from members to pay for healthcare services, thereby fulfilling the needs of their members to receive care and providers to be compen- sated in return. The success of those early Blues plans attracted other private commercial insur- ance companies to the marketplace to com- pete for members. These new entrants intro- duced a market share growth strategy in which they charged higher premiums to higher-risk members and lower premiums to lower-risk, healthier members — a strategy that became wildly successful in attracting a membership composed of healthier, less costly individuals. This approach also threatened to put the Blues plans out of business, as they were being sad- dled with a disproportionate share of extremely expensive, high-risk members. The Blues had no choice but to abandon community rating, where they charged everyone the same amount, in favor of the experience rating strategy that had successfully eroded their market share. Due to an accident of history — namely World War II and government-imposed wage controls implemented to support the war ef- fort — health insurance became tied to em- ployment in this country, as companies com- peted for workers by offering various fringe benefits, including health insurance. However, the combination of pricing premiums based on risk and the link between insurance and employment meant that by the 1960s, older adults could no longer afford coverage once “Health insurance is not merely a financial transaction; it is a social contract — a collective promise to share burdens and protect one another in times of need.” — Generated by AI (ChatGPT), inspired by Deborah Stone’s “The Struggle for the Soul of Health Insurance.”