Moral Hazard in Health Insurance

Insurance plan design

Out-of-pocket cost-sharing 40%

near-zero cost-sharinghigh-deductible

Live readouts

Price patient faces per visit

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Total consumption

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Overconsumption share

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Beneficial care consumed

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Marginal / low-value care

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Patient protection — out-of-pocket exposure if a $40,000 medical event hits

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How it works

Insurance pools risk so no one person faces the full shock of a catastrophic bill — but it also means the price a patient personally feels at the register is only their out-of-pocket share of the true cost, not the true cost itself. Each simulated patient has a private value for a marginal care decision (an extra visit, test, or upgraded treatment); they consume it whenever that value clears the price they face.

Patients split into two groups. Genuinely beneficial care (roughly a third of decisions) has high value — patients keep buying it down to a fairly low price, and near-zero cost-sharing means almost none of this needed care goes unmet. Marginal / low-value care (the rest) has value clustered much lower — under high cost-sharing almost none of it clears the price, but as cost-sharing falls toward zero it floods in, because the price signal that would normally ration it away has nearly vanished.

price = full_cost × oop_share
consume if value ≥ price
protection = oop_share × catastrophic_cost

Out-of-pocket cost-sharing — the fraction of the true cost the patient pays at the point of care (a blend of deductible + coinsurance). Lower = more generous coverage.
Total consumption — how many of the population's care decisions clear the price and get consumed.
Overconsumption share — the fraction of consumed care that is marginal/low-value rather than genuinely beneficial; this grows disproportionately as coverage gets more generous.
Patient protection — the maximum a patient would personally owe if a major medical event occurred; it falls as coverage gets more generous, which is the whole point of insurance.

Real-world relevance: this tension — more generous coverage protects better against catastrophic cost but invites more marginal spending — is why insurers design deductibles, coinsurance and copays instead of covering everything at 100%.

Price: –

Beneficial care consumed Marginal / low-value consumed Care skipped at this price

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Consumption vs. out-of-pocket cost-sharingblue = beneficial · amber = marginal