Conventional health insurance theory suggests that all care received by an insured individual that would not have been purchased if she were uninsured, holding all else constant, is (inefficient) moral hazard. Some may wonder what might be wrong with this view. John Nyman answers that question in chapter 2 of his book. There he describes five anomalies associated with conventional health insurance theory, and that are more convincingly addressed by his theory. They are:
- Much of what is termed “moral hazard care” lengthens life or improves health, sometimes at low cost. Is this frivolous care?
- Conventional theory does not recognize an income effect of an insurance payoff, ignoring the fact that some may forgo care without insurance because they lack sufficient funds at the time of need, not because they do not think the price is not worth the benefit.
- The conventional theory posits that consumers prefer a certain loss to an uncertain one. This contradicts empirically verified findings from behavior economics (prospect theory).
- The conventional theory equates diminishing marginal utility of income with risk aversion when, in fact, the two are not identical concepts.
- Conventional theory suggests much higher cost sharing than is observed.