The RAND Health Insurance Experiment randomly assigned families to insurance plans with different cost-sharing levels (0%, 25%, 50%, 95%). The group with free care (0% cost-sharing) used 25-30% more services. Does this prove all additional utilization was wasteful?
AYes — any additional utilization induced by lower prices is by definition wasteful
BNo — while some of the additional care was of low clinical value, some was clinically beneficial, particularly preventive care and care for low-income individuals with chronic conditions. The RAND study found that free care improved health outcomes for the sickest and poorest participants
CYes — the RAND experiment proved that all healthcare above the cost-sharing level is unnecessary
DNo — the RAND experiment was too old to be relevant to modern healthcare
The RAND experiment's most nuanced finding was that cost-sharing reduced both low-value and high-value care approximately equally — patients did not selectively reduce only unnecessary care. The sickest, poorest participants experienced measurable health improvements under free care (better blood pressure control, better vision). This means moral hazard is not purely wasteful: some of the 'extra' care induced by insurance has genuine health value. Optimal insurance design must balance the deadweight loss of moral hazard against the health costs of deterring valuable care.
Question 2 True / False
A patient with full insurance coverage visits the emergency room for a mild cold. This is an example of moral hazard because the patient would likely not have gone if they had to pay the full cost of the ER visit.
TTrue
FFalse
Answer: True
This illustrates ex-post moral hazard (change in behavior after an insured event — illness — occurs). The patient has a cold that could be managed at home or with a cheap clinic visit, but because insurance covers the ER visit, the personal cost is low enough to make the ER attractive. At full price ($500+), the same patient would likely stay home or visit urgent care. The resource cost to society is the full ER cost; the value to the patient is the convenience of immediate care for a minor condition. The gap between cost and value represents the deadweight loss of moral hazard.
Question 3 Short Answer
Explain the distinction between ex-ante moral hazard and ex-post moral hazard in health insurance, and provide an example of each.
Think about your answer, then reveal below.
Model answer: Ex-ante moral hazard occurs before illness: insured individuals take fewer precautions because insurance reduces the financial cost of being sick (e.g., exercising less, eating poorly, or engaging in riskier behavior because the insurer will cover medical bills). Ex-post moral hazard occurs after illness: insured individuals consume more healthcare than they would at full price because the out-of-pocket cost is low (e.g., visiting a specialist for a minor issue, requesting expensive brand-name drugs). Ex-post moral hazard is quantitatively much more important in health economics and is the focus of most research and policy interventions.
The RAND experiment primarily measured ex-post moral hazard — the effect of cost-sharing on utilization conditional on being sick. Ex-ante moral hazard is harder to measure because health behaviors are influenced by many factors besides insurance. There is some evidence that generous disability insurance reduces workplace safety investments, but the magnitude of ex-ante moral hazard in health insurance is debated.