Health Care Reform Lingo—Moral Hazard, "Demand"
Seem (and Be) Smart about Health Reform Debate
Sep 20, 2009
Health care reform today is actually about health insurance reform. But it's not too hard to understand. Learn basic terms such as "moral hazard" and "induced demand."
Americans paying attention to the news know that what's at stake in the health care reform debate is a huge slice of US GDP (about 17%), and the fate, health-wise, of millions of uninsured Americans. Everyone's talking about it, at work, at home, at cocktail parties even. But it's hard to get past the political rhetoric to understand what the issues really are.
The following explains a few insider terms that might help citizens understand the debate over health care financing reform, and the need for cost containment of escalating national health costs. With the exception of the last term—the Harvard Mouse-- the terms below have to do with the question of how much demand there will be in the US for healthcare services.
Be smart, and sound even smarter at work, with friends, or at a cocktail party, by understanding the ideas these words describe. Chances are, nobody else will know the meaning of "Roemer's Law," "induced demand", "moral hazard" — or the "Harvard Mouse."
Roemer’s Law
- What it is: Along the lines of “if you build it, they will come,” Roemer’s law has been summarized as “a bed built is a bed filled.” It isn’t literally a law, of course. It is an observation describing the supply-and-demand for hospital and nursing home beds. It is named after Dr. Milton Roemer, a professor of public health at UCLA who died in 2001.
- How it’s relevant to health care reform: One might conclude from Roemer's law that the best way to cap health care costs would be to limit the number of beds built. However, Roemer’s own conclusion from this and other observations and a lifetime of research was to advocate for comprehensive health planning, more outpatient care, and, importantly, national health insurance covering the total population.
Induced Demand
- What it is: “Induced demand” in health economics refers to an increase in demand for a procedure or service due to consumer insensitivity to the cost of a given procedure, or providers' desire to profit by doing extra procedures. Induced demand for medical services arises from many different forces: positive consumer attitudes toward use of health services; provider behavior that favors aggressive treatment and the use of specialists; the availability of new medical technologies or pharmaceuticals, coverage of new procedures by insurance, and, in theory, mandates that require everyone be covered by health insurance.
- How it’s relevant to health care reform: Generally, induced demand is discussed as something to be avoided because it will increase costs. But think again. From the perspective of overall public health, inducing demand for such preventive services as flu shots, mammograms or colonoscopies might prove both beneficial to people’s health, and a cost saving mechanism in the long run if such measures keep people out of the hospital.
Moral Hazard
- What it is: A person might think that 'moral hazard" describes something that's hazardous to one's morals, such as temptation to cheat. Well, that's not even vaguely what it means. In the context of health insurance, the term describes a specific circumstance: the presumed additional risk and cost that arises out of different behavior that an insured individual will take, versus the behavior that an uninsured person will take. In other words, a person might seek medical care more often because he or she has insurance, whereas he or she would not seek medical care if the costs had to be paid out of pocket. According to William Safire, writing in the December 20 ,1998 New York Times, the term was "born in the insurance industry early in this century. It was extended by Kenneth J. Arrow, the Nobel laureate in economics, in a 1962 scholarly journal and popularized in his book, Essays in the Theory of Risk-Bearing (Markham Publishing Co., 1971).
- How it’s relevant to health care reform: Basically, moral hazard is one huge argument used by insurance companies to limit what they'll cover. In its online dictionary of terms, the magazine the Economist defines moral hazard as "one of two main sorts of market failure often associated with the provision of insurance..” Understanding the idea of moral hazard is one way to understand why the private insurance of health care in the US might be a flawed system, from the patient's point of view.
Harvard Mouse
- What it is: A genetically engineered mouse developed at Harvard and patented in April 1988, was the first animal ever to be patented. It was engineered to be unusually susceptible to cancer and was developed for use in the testing of carcinogens and cancer therapy.
- How it’s relevant to health care reform: It’s relevance to 21st century health care reform? Breakthroughs can, indeed, happen.
The copyright of the article Health Care Reform Lingo—Moral Hazard, "Demand" in Health Field is owned by Ellen Freudenheim. Permission to republish Health Care Reform Lingo—Moral Hazard, "Demand" in print or online must be granted by the author in writing.
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