Does the economics of moral hazard need to be revisited? A comment on the paper by John Nyman.

In a recent paper, John Nyman (Nyman, 1999b) revisits an issue that has been central to much of the literature in health economics in recent years, namely the trade-off between the gains from insurance, on the one hand, and the efficiency losses from the moral hazard effect that arises as a result of the implicit subsidy to health services utilization under conventional insurance plans, on the other. Specifically, he argues that in the existing literature, the significance of the latter has been exaggerated, while conventional approaches tend to understate the importance of the former. The result, according to Nyman, has been a tendency in the health policy debate to put too much emphasis on insurance plan features such as consumer cost sharing and provisions to control utilization in managed-care plans. Although several of Nyman’s criticisms of conventional methodology are correct and valid, in this comment, I will attempt to show that they are largely irrelevant to the question that has been the focus of the literature on health insurance ever since the seminal paper by Zeckhauser (1970), namely that of the optimal degree of demand-side cost sharing. The reason is that, implicitly, Nyman’s paper addresses the issues of what would happen if conventional approaches would be applied to the problem of estimating the net gains from insurance against the alternative of no insurance at all. Most of the recent literature in this area, in contrast, has concerned a question at the margin: For a