What is the concept of "moral hazard" in health insurance?

Moral hazard refers to the situation in which individuals may take on greater risks or engage in riskier behavior because they are insulated from the consequences by insurance coverage. In the context of health insurance, when people have coverage that pays for a significant portion of their health care costs, they may be less cautious about their health and willingness to engage in behaviors that could lead to more treatment or utilization of services.

This phenomenon occurs because the financial burden associated with seeking medical care is alleviated by insurance. For instance, someone with extensive health coverage might be more inclined to seek unnecessary medical procedures or to engage in unhealthy habits, as they do not bear the full costs of those choices. Thus, the concept underscores a potential downside of insurance systems where individuals may not weigh the implications of their health decisions as heavily as they would without coverage.

Understanding moral hazard is essential for policymakers and insurers as they design health insurance plans that attempt to balance risk-sharing while encouraging responsible health behaviors among insured individuals.