Moral Hazard Encourages Consumers To Choose More Expensive Treatment Options Interview with:

Nitin Mehta PhD Associate Professor in Marketing Rotman School

Dr. Mehta

Nitin Mehta PhD
Associate Professor in Marketing
Rotman School What is the background for this study?

Response: The focus of this paper is an investigation of the increase in health care costs associated with chronic disease in the context of consumers enrolled in employer sponsored insurance plans. Chronic illnesses – including conditions such as heart disease, cancer, hypertension, rheumatoid arthritis, respiratory diseases, diabetes, and kidney disease – account for nearly 75 percent of health care expenditures in the U.S. Treatments vary widely in terms of cost and impact: expensive “frontier” treatments provide the best outcome for only the seriously ill, while cheaper, established treatments prove effective for most other patients. As an example, the annual cost to an insurer for “biologics” – novel genetically modified protein drugs – is upwards of $20,000, while the more established drug – methotrexate – costs only $1,000 a year.

We investigate whether a part of the increase in healthcare costs stems from consumers opting for the more expensive treatments even when the lesser expensive treatments may have worked well. To do so, we examined data from a health insurer in the United States on the insurance plan and treatment options for 3,000 chronically ill patients over a three year period. What are the main findings?

Response: We find that about 14 percent of the chronically ill customers in our sample who only had moderate illness chose a more comprehensive plan and ended up using expensive treatments, even if the incremental health benefit over a less expensive treatment was not major. This segment would thus be the ideal target for an intervention to cut costs. The reason why they chose the more expensive treatments is because they were enrolled in the more comprehensive plan in which they do not bear the cost of the treatment. This is commonly referred to as the moral hazard issue. And the reason why they chose the more comprehensive plan is because they are very uncertain about the severity of their illness and how they would respond to alternative treatments. We thus find that the best intervention to cut costs is to provide additional information to these consumers (through personalized medicine, regular checkups) which would then lead to them choosing lesser comprehensive plans would in turn result in them choosing the less expensive treatments. What should clinicians and patients take away from your report?

Response: A part of the increase in health care costs is due inefficiencies that stem from the moral hazard problem faced by employer based insurance firms. Moral hazard arises when consumers suffering from chronic disease with moderate levels of severity select comprehensive insurance plans and opt for the unnecessarily more expensive treatments to manage their illnesses because they do not bear most of the cost. The way to decrease this moral hazard problem is to equip customers with more information about their illness and the treatments via personalized medicine. This shows that personalized medicine is not only the direct value of personalized medicine is not only for improving medical treatments, but it can also substantially reduce costs to the insurer and insured just by guiding appropriate insurance and treatment choices. What recommendations do you have for future research as a result of this study?

Response: In this paper, we have investigated only one source of inefficiency that leads to an increase in overall healthcare costs. Future research should look at other sources of inefficiency that lead to an increase in the overall healthcare costs. For example, one source of inefficiency stems from customers not getting regular checkups which can lead to late diagnosis of chronic disease and thereby a substantial increase in costs. Thank you for your contribution to the community.

A Dynamic Model of Health Insurance Choices and Healthcare Consumption Decisions
Nitin Mehta, Jian Ni, Kannan Srinivasan, and Baohong Sun
Marketing Science 201736:3 , 338-360

Note: Content is Not intended as medical advice. Please consult your health care provider regarding your specific medical condition and questions.