Moral hazard is a trite topic among insurers and economists, but the concept is not commonly known in the medical profession. The concept of moral hazard suggests that the simple act of obtaining insurance inexorably leads to increased insurance claims. Restaurant kitchen fires are rare until insurance is offered; burglary claims increase after burglary insurance is sold.
Some unknown proportion of the increase in incidence of burglaries, fires, and traffic accidents is undoubtedly due to fraud. Cheating on the size of losses claimed for reimbursement is called build-up. In the whiplash industry, build-up is synonymous with symptom magnification, and staged fraud or opportunism is probably quite prevalent. Such activities clearly involve moral standards. Insurance investigators and public law enforcement agencies try to uncover the frauds. For most people, the threat of criminal prosecutions and penalties are not worth the risk of endangering the comforts of their lives—unless such risks are very low. In the case of symptom magnification, the financial risk is negligible; at worst it leads to the label of hypochondriasis, but even then benefits may or may not be slightly reduced. It is definitely a low-risk cash cow.
Most of the increases in claims due to the insurance coverage are caused by rational but subtle changes in behavior that have nothing overtly to do with morality. In the case of insurance against burglary, for example, the insurance coverage makes it less profitable to spend money on prevention, like keeping watchdogs, installing and operating electronic security systems, extra lighting, fences, and heavy locks. Insurance also induces the construction of houses in remote areas where burglars are able to operate with a low risk of being caught. In addition, the insurance security encourages the display of valuables that are often targeted by burglars. As a result, the average cost of claims rises. People with collision insurance tend to drive more recklessly and get into more accidents than people without the coverage.
Increased whiplash-related claims are analogous to increased work-related injury claims. People engage in more risky activities, they use fewer safety precautions, and they end up with more injury-causing accidents. However, in the case of whiplash, a special force is at work not found in the case of physical damage claims. It is relatively easy to fake or build up injury-like symptoms to the point of dysfunction and the appearance of disability. In many cases, patients will truly believe that they suffer from these grievous problems. Most of the time, health professionals trust their patients and accept their claims of whiplash injury without much hesitation. This type of behavior by health professionals is also rational because of the asymmetric results of their actions. On the one hand, being lenient makes them popular with their patients and brings higher income. The increased cost to the insurance system resulting from such leniency is of no concern to them since neither they nor their patients bear any direct fiscal responsibility; it’s other people’s money.
As a result of the changes in behavior of doctors (which is induced by the patients’ access to insurance coverage), the expansion of claims due to moral hazard behavior tends to be larger than it is in the case of property damage. It is also clear that doctors themselves are important contributors to moral hazard in this field. Also, in the current health insurance scheme, there is no impetus to reduce moral hazard—it can run free and unchecked.
How do private insurance companies limit moral hazard? The first method, already mentioned, is the use of fraud investigation and prosecution, some of which involves surveillance of accident victims suspected of cheating. However, the scope and effectiveness of such investigation and surveillance is limited by public resentment over the invasion of privacy. The use of procedures to reduce fraud is also used, to some limited degree, in the case of whiplash injuries. It has undoubtedly reduced the incidence of such fraud, but by the very nature of the problem, reliable data are impossible to obtain.
A second method private insurance companies use to reduce moral hazard involves incentives to reduce accidents or their severity. Thus, companies pay reduced premiums after they install electronic fire or theft alarms or sprinkler systems to prevent the spread of fire. In the realm of work-related injuries, the Workers’ Compensation Board lowers incidence by inducing companies—through fines of those who are noncompliant—to adopt safety devices and procedures.
A third and most important method for reducing moral hazard used by private insurance companies involves the use of policies that increase the share of the cost of a claim born by the insured. Most widely used are deductibles and coinsurance. The former requires that the insured cover a certain fixed amount of any loss or damage and is used widely in the case of property damage. Coinsurance requires the insured to pay a specified proportion of any damage claim, often on a graduated scale depending on the size of the loss. This method is used widely by the private providers of health and dental insurance. There are usually limits on coinsurance and truly catastrophic losses are covered entirely by the basic premium. On the other hand, in the case of some claims, insurance companies limit the maximum of loss they cover.[2,3]
The public providers of insurance against whiplash injury might profitably consider the increased use of deductibles and coinsurance, since the monetary value of an injury claim can sometimes vastly exceed the amount of money a person could generate if he or she were not injured. The opportunity to make claims and obtain injury settlements of this magnitude tends to increase the size of the moral hazard phenomenon and represents a especially severe challenge for control. One such method of control, highly contentious with the legal profession, involves the specification of maximum claims covered. This method is also part of no-fault insurance systems used for automobiles in many parts of the world.
A fourth method insurance companies use to limit moral hazard involves charging different premium rates to different classes of people depending on the extent to which they are prone to have claims. Thus, young healthy non-smokers pay lower health insurance premiums, teenagers pay higher car insurance premiums, and repeat claimants are charged higher rates. As a result of this policy, some high-risk drivers, for example, cannot afford to obtain insurance and do not drive their cars. As a result, society has fewer accidents and lower insurance rates. This is a somewhat unpopular policy action on the part of government-controlled insurance companies, but there is little doubt of its effectiveness. It may be worth considering whether an analogous strategy can be used to identify different groups of people with different risk profiles and charge them according to the extent to which they contribute to claims.
To help deal with what is often considered excessively large number of whiplash claims, we suggest combining the following methods used in private insurance:
• Increase policing and surveillance to reduce the risk of fraudulent behavior.
• Enforce and create more general public measures to reduce whiplash, like the use of seatbelts in cars.
• Get the public to share more of the costs of health insurance through the increased use of deductibles and coinsurance.
• Introduce different premium rates depending on groups’ experience ratings.
• Assure the greater use of measures to prevent accidents in the workplace.
• Introduce upper caps on damage awards, especially those due to pain and suffering; much as has been done in the case of no-fault automobile insurance in many jurisdictions.
• Develop a public awareness program on what whiplash is (and what it is not), and reduce the general social acceptance of solicitous hypochondriacal neurotic illness/injury behavior.
• Cease public funding of ineffective forms of therapy that tend to feed neurotic illness behavior.
• Reduce or eliminate the rewards to those who financially feed off the excesses of whiplash behavior—this would include some practices in the health and legal field, the insurance industries themselves, as well as the courts.
• Treat the true whiplash cases like an injury—any injury—not as a biopsychosocial-legal disorder.
The use of such methods cannot and should not take the place of genuine medical treatment and the compassionate service of health professionals. It can, however, offer relief without damage to the general public interest.
1. Grubel H. Risk, uncertainty, and moral hazard. J Risk Insurance 1971;37:99-106.
2. McArthur W, Ramsay C, Walker M (eds). Healthy Incentives: Canadian Health Reform in an International Context. Vancouver, BC: Fraser Institute, 1996:111-141.
3. Goodman J, Musgrave G. Patient Power—Solving America’s Health Care Crisis. Dallas, TX: National Center for Policy Analysis, 1992:178-190.
4. Grubel H, Maki D, Sax S. Real and insurance-induced unemployment in Canada. Can J Economics 1975;8:174-191.
Murray Allen, MD, and Herbert Grubel, PhD
Dr Allen is a senior fellow in Health Policy at the Fraser Institute and medical consultant and researcher on matters related to whiplash. Dr Grubel is a professor of economics (emeritus) at Simon Fraser University and senior fellow at the Fraser Institute in Vancouver, BC.
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