Moral Hazard in Health Insurance: What the RAND Experiment Revealed

It is February 1971. You are sitting in a wood-paneled office two floors below the Oval Office, and the President's domestic policy team has just handed you a briefing that will define your career. Richard Nixon, facing a Democratic Congress and a re-election campaign in eighteen months, is under pressure to act on healthcare. Senator Ted Kennedy is touring the country calling for a single-payer system where every American receives medical care at no cost at the point of service. The polling is brutal: 61% of Americans tell Gallup they support some form of national health insurance.

Your job is to give the White House a recommendation by Friday.

The case for free care is not hard to make. Forty million Americans have no health insurance at all. Low-income families are skipping doctor visits for conditions that, left untreated, become catastrophic and far more expensive. A child in rural South Carolina with an untreated ear infection becomes a teenager with permanent hearing loss. A factory worker in Dayton who cannot afford a $15 office visit dies of a heart attack that a physician would have caught. The human cost is visible, documented, and politically explosive. Kennedy's argument is simple: if you remove the price barrier, people get the care they need, they stay healthier, and the country is better off.

But your budget director is standing at the other end of the table with an equally sharp argument. If the government makes healthcare completely free, what stops people from consuming far more of it than they actually need? A sore throat becomes a reason to visit the doctor. A mild backache becomes a reason for an MRI. Hospitals, knowing patients are not paying, have no incentive to keep costs down. The Congressional Budget Office has already warned that a universal free-care system could cost the federal government more than $60 billion annually, a figure that would blow apart the budget Nixon is trying to defend.

You face a genuine dilemma, not a rhetorical one. Both arguments are grounded in real human behavior. The question is which effect dominates: the benefit of removing barriers to necessary care, or the cost of subsidizing unnecessary care.

You need evidence. And in 1971, almost none exists.