When Your Health Insurance Raises Someone Else's Premium

Moral hazard can occur when insurance changes behavior. Patients who pay less out of pocket for medical care tend to consume more of it, increasing insurers' costs. But those costs can spill over to other customers. Writing in the Journal of Risk and Insurance, Ellis et al (2026) find that moral hazard can raise premiums for other consumers, potentially driving them out of the insurance market altogether.

The researchers examine Affordable Care Act insurance exchanges, where lower-income consumers receive subsidies that reduce their deductibles and copayments. These subsidies encourage greater healthcare utilization, raising costs that insurers spread across their customers through higher premiums. Unsubsidized customers consequently pay more, even though their own behavior hasn't changed. Some respond by dropping coverage, potentially raising average costs further. The surprising lesson is that moral hazard creates an externality: one customer's response to generous insurance can make coverage more expensive for everyone else.