Is 'moral hazard' inefficient? The policy implications of a new theory

Abstract

"Moral hazard" refers to the additional health care that is purchased when persons become insured. Under conventional theory, health economists regard these additional health care purchases as inefficient because they represent care that is worth less to consumers than it costs to produce. A new theory, however, suggests that much of moral hazard is actually efficient. When the care that was deemed to be welfare-decreasing is reclassified as welfare-increasing, health insurance becomes much more valuable to consumers than health economists have hitherto thought it was. As a result, there is a new argument for national health insurance: efficiency.