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August 24, 2005

POLICY: Gladwell on Moral Hazard, with UPDATE

Go read Malcolm Gladwell on Moral Hazard in the New Yorker.

Gladwell basically thinks that there's some moral imperative on the part of the political right to promote user fees at the point of care and that it's uniquely American.  The bit about it being uniquely American is not quite right, in that I first heard the term from a Japanese health ministry official explaining why they had (very low) user fees in Japan, and in the UK there have been user fees for Rx forever. But there's no question that we have more of them here. The wise Canadians Evans and Barer list user fees at the point of care as one of their Zombies -- bad health care ideas that won't die. Their interpretation of the RAND study is succinct and correct:

Contrary to the rhetoric, the RAND evidence demonstrated clearly that patients could not discriminate between necessary and unnecessary services. User fees were as likely to deter important health-preserving or enhancing care, as “frivolous” abuse. Moreover, the deterrent effects of user charges bear more heavily upon those with lower incomes, as this group is more sensitive to increases in price. In fact, low-income persons reduced use of care that was judged by researchers to be highly effective more frequently than did their higher-income counterparts.

They go on to note that user fees at the point of care are not designed to reduce overall health care costs -- after all here in the US we lead the league in both categories. Instead they're designed by providers to try to spike their incomes. Remember that as it'll be important later....

Gladwell of course acknowledges all that and realizes that the "actuarial" model of health insurance that is being promoted by the HSA and its backers (Hi Ron!) is designed to basically to allow those with the greatest ability to get out of paying for those with the greatest need. Of course social insurance is based on the idea of transferring resources from those who have them to those who need them. In fact there's nothing wrong with the idea at all and if you look at Americans when they're surveyed about it, by and large they agree.  Those of you who read my recent article on Why Hillarycare Failed may remember that Harris got the following answers on the subject in 2003:

By 75% to 21% (including a 66% to 30% majority of Republicans), most people agree that "people who are unemployed or poor should be able to get the same amount and quality of medical services as people who have good jobs and are paying substantial taxes".

By 69% to 27% (including a 63% to 32% majority of Republicans), most people disagree that "it’s fair that people who pay more in taxes (or in health insurance premiums) should be able to get better medical care than those who pay little or nothing."

But despite the fact that apparently Americans prefer the concept of social insurance, Gladwell doesn't really come up with an explanation for why the HSA legislation has done so well, other than the primacy of ideas. He makes a lot of the influence of Mark Pauly. Pauly is a complete idiot respected health economist at Wharton, who earnestly believes both that the individual market works well for 80% of the people forced to be in it and is therefore OK, and that the reason we spend so much money on health care in America is a result of the fact that the rest of our economy is so dang efficient. (Both in serious studies published in Health Affairs -- I shit you not). And his article on moral hazard is supposed to be the most influential ever published in the health policy literature, and that's why the right has bought into it.

Of course those of us in the reality-based as opposed to faith/idea-based world think that there may be a couple of other reasons other than the strenght of ideas as to why the HSA is so popular amongst the right, and why they want to spread it to all programs including Medicare.

The first is purely political. The two big government programs of Medicare and Social Security are very, very popular and identified correctly with Democrats. There is a strong element (e.g. Grover Norquist and the WSJ Editorial pages) in today's Republican party which wants to destroy those programs, or at least eliminate the middle classes' dependency on them, so that their recipients are less likely to identify with Democrats and less likely to elect them to power. Electing Democrats to power of course interferes with those Republicans' view of the real mission of government, which apparently is to plunder the treasury and hand out massive rewards to favored interests in the oil, defense, mining, pharmaceutical, etc, etc, industries, and ensure that the ultra-rich don't have to pay much or any tax. These Republicans see the vast army of baby boomers heading towards Social Security and Medicare as a huge threat to their political future, and rightly so. Putting all Social Security and Medicare into private accounts, and as a side issue removing the social insurance aspect of those programs, is a political solution to breaking what they believe to be (what's left of) a political machine-like dependency of the middle-class seniors on the Democrats. And I'm not convinced they're wrong about that.

The other reason is of course much more basic and is to do purely with money. What creating tax-free HSAs does is to enable insurance companies to sell highly underwritten and incredibly profitable high-deductible insurance policies. HSAs and MSAs were developed by small insurance companies to incentivize the sale of high-deductible plans which cream-skim way healthy people from the big managed care companies. Golden Rule, run by loony Rooney, almost invented this category on its own, and massively funded Gingrich and the VRWC all the way through the 1990s. See this Mother Jones article on Rooney and Golden Rule in 1996 and one from 2004 on their success in getting HSAs through in the Medicare legislation.

Incidentally the AMA and America's doctors also started supporting HSAs because they thought it would enable them to get out from under their PPO and managed care contracts and charge their patients directly (and get more money, as Evans and Barer suggested earlier). Unfortunately for the doctors, now that Wellpoint, United et al have taken over the game, the high-deductible plans of now and the future will have the same negotiated contracts, the same confusion over who owes what, and will just change their office managers from chasing health insurers for big lump sum payments to chasing patients for tiny ones instead. Tough break, guys.

Meanwhile, back to the insurance side. The big insurance companies went down the managed care path in the 1990s because both they thought that they would get the continued support of the employers to beat up on the providers (which they didn't when the economy got better) and because they thought that Hillarycare would put everyone into big pools. Big pools are of course the world where managed care plans come from and they destroy the advantage of the smaller insurers -- their ability to underwrite on an individual patient basis. As it turned out the big guys were wrong (slightly in part because of what the HIAA and Golden Rule's money did to the Clinton Plan), and anyone who knows the story of the Aetna turnaround can see that it was by adopting much tougher underwriting that Aetna became the profit machine it now is. Imitation is not though the most sincere form of flattery, not when United Healthcare showed its admiration by buying Golden Rule for $900 odd million in 2003 and making loony Rooney even richer and even more able to spread his money around wacko-political operations.

Gladwell, however, fails to explain why putting HSAs into a social insurance program like Medicare is the beginning of the end for the program, and if you read the THCB comments section you'll see plenty of information from Ron about how HSAs are all sweetness, light, and crumbly candy bars.  So -- hopefully once and for all -- I'll explain why they are not. This will involve numbers, so pay attention.

Let's assume that Medicare has 100 people in it. Let's also assume that it costs $5,000 per person. (I'm using the $5,000 number because it's practically identical to the numbers and in the same ratio that Ron Grenier used when he tried to sell me a policy yesterday before he found that he can't in California, so we know they're correct for high-deductible plans). So in the HSA dreamtime world each of our 100 seniors gets $2500 in an HSA account, and then the remaining $2,500 goes into a pool totalling $250,000 which will pay for the care of anyone who's individual expenditures exceed $2,500. Now you need to know something about population health costs. They roughly follow the 80/20 rule, in that 80% of the money gets spent on 20% of the population. So in our 100 person Medicare, 80 people need $100,000 worth of care, while 20 need $400,000 worth of care.

Here's the maths problem that no one on the HSA-backing side will admit to. The 80 people spending $1,250 each are fine and happy and have a further $1,250 left in their accounts. The 20 sicker people have spent their full $2,500 each and in total need a further $350,000 from the pool to pay for their care. But there's only $250,000 in the pool because the rest of it is in the HSA accounts of the healthy 80. So now we have to make up the extra $100,000. So we can increase taxes, and spend $600,000 to provide $500,000 worth of care -- not too likely to be popular (although something like that happened in Medicare managed care in the 1990s). Or we can pay providers less money for caring for the sick. Or we can look to the sickies to come up with the extra. Or we can not provide them with that care.

Any which way you look at this, we are essentially starting down the track of destroying the social insurance nature of Medicare, and the willingness of providers to take part in it. We've basically already done it with every other form of health insurance with the exception of the unionized, large employer market, and so in the commercial market the HSA/high-deductible plan looks similar but better than what's already available. Unless of course you are sick, and then you run into those nasty underwriting trends because, guess what, insuring sick people breaks a pool financially -- even if it's a private-sector high-deductible underwriting pool. Which is why Golden Rule, Aetna and the rest don't do it much any more.

And although Gladwell doesn't seem to quite get the politics, the incentives or the mechanism, he does understand the overall impact.

The issue about what to do with the health-care system is sometimes presented as a technical argument about the merits of one kind of coverage over another or as an ideological argument about socialized versus private medicine. It is, instead, about a few very simple questions. Do you think that this kind of redistribution of risk is a good idea? Do you think that people whose genes predispose them to depression or cancer, or whose poverty complicates asthma or diabetes, or who get hit by a drunk driver, or who have to keep their mouths closed because their teeth are rotting ought to bear a greater share of the costs of their health care than those of us who are lucky enough to escape such misfortunes? In the rest of the industrialized world, it is assumed that the more equally and widely the burdens of illness are shared, the better off the population as a whole is likely to be. The reason the United States has forty-five million people without coverage is that its health-care policy is in the hands of people who disagree, and who regard health insurance not as the solution but as the problem.

I agree with the sentiment, but I though prefer the language of this great American hero who described essentially the same problem in 1945.

No, but you . . . you . . . you're thinking of this place all wrong. As if I had the money back in a safe. The money's not here. Your money's in Joe's house . . .(to one of the men). . . right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can. Now what are you going to do? Foreclose on them?

Apparently we're all leaving Bedford Falls and going to live in PottersVille.

August 24, 2005 in Policy | Permalink


I've read the article. He makes a good point about social insurance vs actuarial insurance.

What I don't understand is his obsession with teeth. It costs about 100 bucks to get your teeth cleaned in the two states I've lived in. According to this guy people are unwilling to spend 200 bucks a year on routine dental maintenance. I know of single moms paying thousands of dollars for orthodontics because this was not covered by insurance. Also, does it make sense to spend 1200 dollars in dental insurance premiums when the plan limits the amount it will spend to 2000 (1000 on each covered individual.) I'm done with dental insurance. It doesn't make financial sense.

He also makes statements and offers no support for them. Is it just assumed dogma that most bankruptcies are caused by medical bills?

Posted by: rdg | Aug 23, 2005 9:54:27 AM

I love that someone is taking the dental-care-seems-like-luxury problem seriously. I can vouch personally about the way dental problems affect your diet, and that it seems more prudent to live with the pain than spend a few hundred dollars on a dentist. Furthermore, when he talks about the woman with the front tooth - I hope people make the leap to what this means about first impressions, ability to network, likelihood of being selected for jobs (note the "social" black mark on top of the "aesthetic" one). Dental problems are one of the biggest reasons that poor people don't fit in and are stigmatized with "character" or "personality" problems just because they are poor.

And yes when these problems do go untreated, they just get worse.

This country's class system is partially based on lookism. This is a class system based on "luck", but it's still a class system. The idea of equal opportunity is laughable when hiring managers are "casting" their FTEs like the workplace is some sort of movies. And HR gurus have been making the situation worse by pumping up how important it is to have the right look and network with the right people: they are validating this class demarcation as "professional advice". Let's see them fall down some stairs, lose half their teeth, and then try to get a job. The person who interviews them will be thinking, "This person doesn't care enough to fix their teeth. Plus isn't a mouth full of missing teeth a sign of moral depravity? Get thee hence, Satan!"

I don't have a car, don't know how to drive, don't live anywhere near a laundreymat. Now I don't even have a job so I can have a few suits drycleaned occasionally. I have to handwash all my clothes, and they look ratty. I look poor. Believe me, this doesn't make people compassionate - it gives them a bad vibe, like I might be "needy" or I might not "care" or even that I might have some "mental" problem. All these explanations suit people who want to deny that they have endorsed social rules that keep poor people poor.

And as a member of the Prudent Uninsured, I had to go to the emergency room last week for a problem that could have been handled in any doctor's office. I have to apply for public support (i.e., YOUR pocket) for more money than I would have if I had been able to resort to a regular health care system. And furthermore, this particular problem was brought on by poor nutrition and a compromised immune system. If I had the means to support myself, I probably wouldn't be needing that regular health system quite so much. This society think's its okay to create people as burdens (by accepting averages of unemployment for instance) and then destroy them for being burdens.

The simple issue is that people are trying to squirm out of factoring in the public good into their own life plans. The poor aren't out for a "free ride", the people who have been given the gift of good fortune are. If they can get away with ignoring people like me (or better yet, get their jollies from being able to exercise cruelties that they would never get away with in regard to those they deem peers), they will.

Posted by: gadfly | Aug 23, 2005 11:02:23 AM


You went back to 1998 to find an article that called HSAs, ZOMBIE, come on. You say that HSAs were developed by little companies, like Golden Rule and, as you say, looney Rooney. Thank goodness you didn't mention the very first company. I remember late in 1996 setting on the 34th floor of 7-Eleven's tower in Dallas and the head guy said, "We have to wait until there is another company so we can compare at least two of you." Finally, Golden Rule came out with their product and I forwarded their Outline-Of-Coverage and we had the account in the blink of an eye. Why? Because we are so much better. Your articles don't talk about us because we don't give money, just knowledge. We have a saying, "Knowledge is more valuable than money."

I was contacted once because of this blog. Nice guy and I mentioned it here. You sould read this new press release that just came out:

You just have to start people in the right direction Matthew. You had a lot to do with the way that report was written and you didn't make a dime. More importantly, neither did I, figures.

I was impressed that you combined the MSA and the HSA in your article, you're ahead of everyone else. The big company with tax free HSAs is quiet as a church mouse as they continue to expand their lead. Last night I saw a picture of my daughter, she worked her way through college enrolling MSAs, standing in front of the Global headquarters in Europe. She is doing a side kick if front of the flags. She said, "I knew Pappa would like this one." Sad thing is we are changing our name again on Sept. 7th. I've known about it for awhile so when we wrote our first HSA commercial last year we said:

It's TIME for you're HSA at

Posted by: Ron Greiner | Aug 24, 2005 6:50:58 AM

I maintain that it's a clear sign the American health care system is totally FUBAR when a tax shelter can be passed off as health insurance.

HSAs are beyond terrible. However, Democrats need to come up with a response that goes beyond that. Right now, the Dems' strategy of "incrementalism" is pure defense because every other idea they've had has been demogagued as "socialism" (and what ain't socialism is "Hillarycare"). This defensiveness hasn't just left us advocating bad policy, it's left us practicing really bad politics. We're basically defending the status quo. That's a problem because the system needs fundamental reform, the Democrats know it, and everyone knows the Democrats know it. We look like we lack the courage of our convictions.

We need a new strategy. I think it lies in an alliance with large employers--not what the Clinton plan assumed, which was that large employers wouldn't stand in the way. An active partnership.

If we can make the argument that America can't afford to have such an inefficient and poor quality health system, and we get BUSINESS to say that a public system is cheaper and better than a private one, I think we win.

I think it begins with economic development projects that include health insurance--for example, having a city or state provide the option of free health insurance to every person living and every business's employee working in an area that's characterized as a development zone. We already give tax breaks to these businesses--this would be just another incentive for economic development. If you did this in the Bronx and 4,000 artists/recent college grads moved in, and 10 businesses opened up, then you'd have a powerful argument that public health insurance is a necessary component for a strong economic infrastructure.

Posted by: theorajones | Aug 24, 2005 6:56:23 AM

//aving a city or state provide the option of free health insurance to every person living and every business's employee working in an area//

This is what I don't understand. What do you mean free? You mean somebody else pays for it. The tax payer in this case.

At any rate I think your experiment is worth trying. Let's see what happens. Taxes increase to pay for the free health care. Will businesses and employees be attracted by the health care benefit or deterred by the increased tax.

I think you are right though. Once enough big businesses realize they can't pay the freight for the current system, they will be lobbying for changing the system.

Posted by: rdg | Aug 24, 2005 7:04:52 AM


You say Democrats need to come up with some ideas, boy that's an under-statement.

The best way to fight the HSA is never mention it. We can see how well that worked, ha ha. HSAs are now the law of the land.

You have screamin' Howard Dean in a leadership role and he is a single-payer supporter. Boy did he go down in flames in Iowa.

These Zombie talking points are way too complicated for any politician to understand and repeat. The voters will just roll their eyes and say that is sooo boring.

Where we can say that a single-payer system is unconstitutional as determined by the supreme court of Canada. Besides, last time Democrats were in charge of the White House and both Houses of Congress they tried to Socialize the American Health Care sector and were promptly driven out of office. Do you really think Democrats should keep kicking that dead dog?

Posted by: Ron Greiner | Aug 24, 2005 7:26:26 AM

If conservatives use moral hazard as the rationale upon which they stand opposed to universal coverage (the argument goes something like this: if we give insurance to everyone, in essence making health care free -- relative to what it costs without insurance -- those who don't have insurance will begin consuming health care services irresponsibly, without any restaint) they might be missing the same point almost everyone is missing. Insurance might just be beside the point. If Hadler is right, both the insured and uninsured turn to medical services for cures medicine has shown little ability to deliver. In fact, there is (if I read Hadler correctly) more evidence to suggest that the macro-economic context within which American business operates (with its mergers and off shoring and bottom line fixation and staffing reductions in the name of efficiency, etc.) is creating an agonizing environment of disaffection for American workers. And it is this dissaffection that is the root cause of the lion share of morbidity in our country.

So, while Gladwell's piece is an interesting take on the uninsured, I wonder when some of the loudest voices commenting on these issues will begin to tire of beating the same old drum.

Posted by: Jeff | Aug 24, 2005 9:15:32 AM

//You have screamin' Howard Dean in a leadership role and he is a single-payer supporter. Boy did he go down in flames in Iowa.//

Ron, not to have to correct you too much, again....but Dean's health plan was NOT single payer, it wasnt even universal insurance. And the scream was AFTER he went down in flames in was in his speech after the cacuses closed. But let's not let facts get in the way of your fun!

Posted by: Matthew Holt | Aug 24, 2005 10:20:01 AM


You are confused on conservatives, it figures. President Bush says, "Get low cost HSA health insurance and combine that with a tax free HSA and you have yourself affordable healthcare." Sure it sounds a little Texan, but that's to be expected.

It's all about the Ownership Society and letting citizens accunulate wealth in tax free savings accounts for retirement. We all know that money that is never taxed will last longer in retirement, that's a proven fact. Besides, citizens with large HSA balances at retirement, say $250,000, will be better prepared for 21st Century Medicare. I thought you knew that Jeff, get real.

IRAs and 401ks are old taxed accounts. The tax free HSA has tax free deposits, growth and withdrawals. Think of it this way Jeff. HSAs are tax cuts, Texas Style. The best tax cut is no taxes. Of course when citizens have $250,000 balances at the age of 65, just imagine how much they will have at 75 years of age!!! Better yet, project how much they have at 85 years of age with compounding interest at 5%. Shoot, many people will have to add another comma to their balances.

This is the vision of the Ownership Society, Jeff. I though I would fill you in because your concepts about Conservatives leaves something to be desired.

Of course dental insurance is not health insurance, please. I thought everybody knew that too. But not this fruit cake writing in the New Yorker. He said that when people don't have health insurance they have bad teeth. Man, what a loser. But that is about as good as the zany Liberal left can muster, it's pathetic. First of all, when people have dental insurance it is a completely different policy than their health insurance. A majority of Americans don't have dental insurance if that's what he is talking about. It's hard to tell because he bounces from concept to concept, it's all just a bunch of propaganda. Can't you see that Jeff?

Gadwell's take is not interesting Jeff, it sucks.

Posted by: Ron Greiner | Aug 24, 2005 10:31:06 AM


//Ron, not to have to correct you too much, again....but Dean's health plan was NOT single payer, it wasnt even universal insurance. And the scream was AFTER he went down in flames in was in his speech after the cacuses closed. But let's not let facts get in the way of your fun!//

Howard Dean wanted to expand the dangerous Chidren's Health Insurance Program (S-CHIP) to cover all people to the age of 25. We all know that if someone was diagnosed before the 25 year old manditory termination date, they are up the creek without a paddle and uninsurable. The guy is thoughtless. No wonder the Iowa voters shot him down and sent him packin'. The scream was just an added bonus. There is no doubt that Dean wanted the Government to be the payer of health care.

Also Matthew, I didn't try and sell you health insurance, that would be illegal for me so let's quit spinning things. You asked how you could get HSA health insurance with a $2,600 deductible that pays 100% and I told you at ehealthinsurance they list one plan that does. I'm not appointed for CA but I do believe they make people in your area take an AIDs test. That's just more paperwork for me so I totally blow of CA because I hate all the paperwork on these tax free enrollments even without adding AIDs testing to my burden.

Posted by: Ron Greiner | Aug 24, 2005 10:55:54 AM

That article on Aetna from a year ago was brilliantm Matthew. Just wanted to interject that.

Posted by: spike | Aug 24, 2005 11:16:53 AM

That article on Aetna from a year ago was brilliant, Matthew. Just wanted to interject that.

Posted by: spike | Aug 24, 2005 11:26:56 AM

theorajones, California has a single-payer proposal. I think that they're big enough to make it work. More information can be found at their website.

I encourage all the Californians to get involved.

Posted by: Abby | Aug 24, 2005 11:32:05 AM


Your single player plan:// "3)Prohibits any health care service plan or health insurance
policy, except for CHIS, from being sold in California for
services provided by CHIS. //

This is unconstitutional as decided by the supreme court in Canada. Don't you worry about taking away the right of citizens to purchase insurance will be declared UNCONSTITUTIONAL by the SCOTUS. It's just that pesky U.S. Constitution again. I will admit that the Democrats are on board, but they can't win an election anymore.

These Democrats never learn.

Posted by: Ron Greiner | Aug 24, 2005 11:50:06 AM

I just read an old article about corporate culture which dissected the irony of the company leadership grumbling against "socialism" when traditional corporate culture is a form of privatized socialism. In otherwords, socialism is all right if it's limited to a particular community.

Apparently people are ok with universal benefits as long as everyone in the community gets them (i.e., not just compensation for poverty), and as long as there is a Them on the outside that don't get those benefits. That way the insiders can feel that the benefits somehow make them significant, giving their lives meaning as members of a privileged community as distinct from the amorphous mass of humankind.

I don't think corporations are generally as paternal as the one described in this article, but the psychology made sense to me. Maybe the only way to get universal insurance in the U.S. is to stop trying to appeal to the noble part of humanity and instead say "then we'll all have something those folks over the border don't have! Hurrah for the American way!"

Posted by: gadfly | Aug 24, 2005 12:20:41 PM

An economist responds to the article:
He points out where Gladwell confuses the law of demand and the concept of moral hazard.

Posted by: rdg | Aug 29, 2005 6:24:06 AM

About $1500 of the cost of a GM vehicle represents employee health care according to the CEO of GM. The comparable figure for a Japanese vehicle is $425. Universal Healthcare is a global competition issue; the United States competes against economies that provide healthcare as infrastructure. Industries that provide health insurance to their workers must eventually see that their costs will actually go down if we bring 45 million relatively healthy individuals into the pool of insureds.

Posted by: Mike | Aug 31, 2005 6:56:10 AM

Devolution is awwfull until n unless peoples don't starts to take interest in this matter.How can one can be so hasty about health,PATHETHIC..!!!

Posted by: carmen | Feb 6, 2006 1:08:56 AM

Our poor can't afford quality health care because they lack health insurance and they lack health insurance and dental insurance because they lack money. They can't land good jobs because their looks and clothes and general appearance is not good enough for corporate America. So the vicious cycle continues. Is anybody listening? Apparently not!

Posted by: Sheena | Dec 16, 2007 4:59:44 AM

Nice site!
Myself, I, more and more sympathetic to the people want to
go and take them to Please, please link

Posted by: runrun ukiuki | Sep 10, 2008 3:37:50 PM

It's very ideal that all people should be treated equally, but unluckily that's not the case with reality. Reality bites, as they say. We just simply have to make our lives better, by working harder and praying louder.

Posted by: Dental Plan Provider | Jun 10, 2010 2:13:50 PM

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