Paying For Healthcare (and War, by the Way)

In August 2005, I wrote an op-ed article about war for The Washington Post that was inspired by our debate on health policy. The theme of the piece was the “moral hazard” of war. Because it stung, the column prompted a lively blog discussion in its day.

“Moral hazard” is a term commonly applied to certain financial contracts, under which one party is obliged to pay another money if a specified event (e.g., illness or a fire or an accident) occurs. The term refers to situations in which the very existence of the contract alters the behavior of one party, so that it increases the probability of the event’s occurrence or the size of the monetary payoff based on that event, or both.

In the context of health care, having an insurance plan will increase the likelihood that a person will actually use the health care system. It will also probably increase the resource-intensity of the treatments chosen by patients and physicians. Some economists even theorize that such coverage encourages unhealthy lifestyles and reckless behavior.

In the context of the wider financial sector, the now openly demonstrated willingness of our government — whether it be the Bush or the Obama administration — to make taxpayers bear the financial risk of serious mismanagement or risk within the private financial sector is likely to bring about the moral hazard of future mismanagement. Much has been written about that threat.