Individuals or households are sometimes classified as underinsured if their out-of-pocket spending on medical care relative to income exceeds a certain threshold. However, because of "moral hazard"—the theory that people behave differently when they are insulated from risk—this measurement method may underestimate the number of people with an inadequate level of health insurance coverage.
What the Study Found
Research has determined that the more generous a person's health insurance coverage is, the more health care services he or she will use—a phenomenon attributed to moral hazard. In this Commonwealth Fund–supported study, researchers looked at medical spending and income level for households with employer-sponsored insurance coverage through small firms and large firms. After adjusting for moral hazard, the researchers found that the underinsured rate of small-firm households was approximately 20 percent higher, and the difference in underinsured rates between large-firm and small-firm households widened substantially. "The explanation for this puzzling result," say the authors, "is that small-firm households reduce their utilization and expenditure in response to the relatively high cost-sharing they face through a 'reverse' moral hazard effect." Having less-generous insurance leads many small-firm households to reduce their total medical care spending, and therefore, they are not counted as underinsured using the threshold measure.
Adjusting for moral hazard can make a substantial difference in the number of households identified as underinsured and in the relative rates of underinsurance across groups.