Behavioral Hazard and Public Policy

It is well recognized that people overuse low-value medical care due to moral hazard—because copays are lower than costs. Now Professor Schwartzstein has introduced the concept of “behavioral hazard” to explain the opposite: people underuse high-value care because they underweight the benefits of, for example, taking medications for chronic diseases like diabetes or hypertension. He has derived optimal copay formulas that incorporate both moral and behavioral hazard. When both are taken into account, health insurance can do more than provide financial protection: it can also improve health care efficiency. Professor Schwartzstein’s findings and methods can be applied to other forms of social insurance and public policy problems.