Health Insurance and Ex Ante Moral Hazard : Evidence from Medicare

Anecdotal evidence suggests that the loss of health insurance results in changes in health behavior that reduces the risk or severity of illness. While ex ante moral hazard is nearly always mentioned as a potential consequence of health insurance, it is equally as often noted that ex ante moral hazard is unlikely to be a significant problem. There are theoretical reasons to believe that health insurance coverage may cause a reduction in prevention activities, but empirical studies have yet to provide evidence to support this prediction. However, in other insurance contexts that also involve adverse health events, evidence of ex ante moral hazard is more consistent. One explanation of the conflicting findings is that it has been more difficult to detect ex ante moral hazard in the health insurance context than in others because of the non-random nature of health insurance. One source of plausibly exogenous variation in health insurance coverage is obtaining public health insurance in the U.S. through Medicare at age 65. Exploiting this natural experiment, this study extends the analysis of the effect of health insurance on health behaviors by allowing for the possibility that health insurance has a direct (ex ante moral hazard) and indirect effect on health behaviors. The indirect effect works through changes in health promotion information and the probability of illness that may be a byproduct of insurance-induced greater contact with medical professionals. There is significant evidence that physician counseling is successful in changing health behaviors. Thus, obtaining insurance coverage at age 65 has two potentially offsetting effects on prevention. On the one hand, obtaining health insurance should reduce prevention because it lowers the cost of medical care (ex ante moral hazard). However, increased contact with physicians may alter information about the benefits of prevention and the probability of illness, which may increase prevention. This study identifies these two effects and in doing so identifies the pure ex ante moral hazard effect. In contrast to most previous analyses, obtaining health insurance does significantly reduce prevention and increase unhealthy behaviors among elderly persons. However, this finding is only apparent once models control for contact with medical professionals