Moral Hazard in Healthcare IT

(Originally published 3/21/2007 on

The term moral hazard is generally used within the insurance industry to describe the tendency of the insured to increase their risk tolerance once their risks are hedged by insurance. For example, a consumer with a homeowner’s insurance policy might decide against returning home to double-check that she had turned off the stove or locked the door before she left the house. Or a consumer with a comprehensive auto insurance policy might not worry so much about parking his car in a bad neighborhood at night. In general, reducing people’s exposure to risk seems to increase their tolerance for risk, and the corresponding increase in risky behavior is what constitutes the moral hazard.

The concept extends to other domains. Professor Kent Smetters of The Wharton School taught that US Department of Transportation rules requiring seat belts and airbags in new vehicles have led to increasingly-reckless driving as drivers have felt more secure. And while driver and passenger fatalities have diminished due to the direct effects of these safety devices in the years since these regulations took effect, fatalities of motorcyclists, bicyclists, and pedestrians have increased proportionately with drivers’ reckless behavior during the same time period. Smetters joked that the most effective automobile safety device may not be a seat belt or an airbag, but rather a large dagger mounted on the steering wheel and aimed directly at the driver’s heart, as it would give the driver and any pedestrian roughly equal odds of dying in a minor collision!

Recent events in hospitals illustrate how moral hazard applies to healthcare technology:

  • Three premature babies died at Clarian’s Methodist Hospital in Indiana last September after receiving adult doses of heparin instead of the less-potent Hep-Loc to clear their IV lines. A pharmacy tech apparently stocked the wrong medication in the NICU’s automated dispensing cabinet. The automated-dispensing technology created the moral hazard in this case: The nurses trusted the cabinet so much that they engaged in the risky behavior of not verifying the medication before administering it. Ironically, this technology that is touted to reduce errors and save lives created a moral hazard that has caused errors and cost lives.
  • A newborn was abducted from her mother’s room at Covenant Lakeside Hospital in Lubbock, TX earlier this month. The infant was apparently tagged with an RFID device that failed to prevent the abduction, unlike a similar device in this earlier case, but the media reports indicate that the device somehow alerted the hospital staff that the baby was being taken and allowed them to witness the abductor’s getaway vehicle. The baby was recovered safely several days later. The moral hazard in this case: Given that hospital staff and new mother were aware of the RFID system’s risk-reducing benefits, what new risks were they willing to take that they would not have otherwise taken? Did the reassurance of the RFID system make the mother more willing to allow her infant to be taken by an impostor with no hospital ID badge? Did the presence of the RFID system make the staff less willing to challenge the abductor, who was dressed in scrubs but lacked a badge? Did the technology in this case really contribute to the happy outcome, or did its moral hazard help the perpetrator commit the crime in the first place?
  • Healthcare IT project troubles have been documented at well-funded organizations like Cedars-Sinai, CHW, and others. The moral hazard of cash burning a hole in one’s pocket is not unique to healthcare organizations. Having a lot of cash on hand — a hedge against many forms of risk — seems to encourage taking on overly-risky investments that can lead to high-profile project failures.

    It is impossible to assert categorically that healthcare IT reduces the overall risk within a given institution. True, technology may provide a hedge against specific risks, but there will be a moral hazard in the way human beings respond to that reduced risk. And it is difficult to predict ex ante whether the moral hazard will outweigh the direct effect of the reduction in risk that is being sought in the first place.

    Such was the case with the infant abduction cited above. The hospital’s investment in RFID technology netted against the moral hazard created by the technology did not yield any benefit to the baby. In the end it was good old-fashioned police work — not technology — that tracked the infant down in Clovis, NM and led to her safe recovery. According to the article, hospital infant abduction is an exceedingly rare occurrance with fewer than 120 cases recorded in the past 20 years. It’s something that security guru Bruce Schneier would call a "movie-plot threat", a threat with infinitesimal probability that causes panic nonetheless because it appeals strongly to our emotions. The threat of hospital infant abduction is apparently compelling enough for the 900+ hospitals that had bought the VeriChip RFID infant security system as of 2005. I wonder how many VeriChip customers have also purchased marmoset insurance.

    Unfortunately, too many provider organizations treat healthcare IT as an insurance policy rather than an investment that is expected to add value to the organization. Too many healthcare IT vendors enable the problem by recognizing that it’s easier and much more lucrative to sell on fear, uncertainty, and doubt (FUD) than to quantify and demonstrate a return. And ironically enough, moral hazard creates additional risk whenever providers and vendors try to mitigate risk with technology, resulting in a viscious cycle that consumes vast amounts of capital without providing any real benefit.

    Wouldn’t we all be better off treating healthcare IT projects as investments rather than insurance and focusing on the value they can create within the marketplace?

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