Are long-run incentive going to ruin healthcare reform in the US?

Insurance is a horribly complicated concept. While it provides benefits by preventing to a large extend the consequences of adverse shocks, it can also lead to sometimes severe moral hazard. Car insurance can lead to more dangerous driving. Health insurance can lead to more risky behavior. It is thus not obvious that introducing insurance is on the whole beneficial, especially if premiums cannot reflect risk.

Harold Cole, Soojin Kim and Dirk Krueger do such a welfare analysis for the upcoming US health insurance scheme. While there is a clear benefit in the short term, current conditions not having been perverted by the presence of insurance, the welfare outcome in the long-run needs to be determined once people have adjusted their behavior. They find that the negative impact of uniform insurance is severely amplified if other consequences of poor health choices are prevented from occurring, in their example prohibition of wage discrimination against workers with poor health. They find that this effect is so strong that cohorts become gradually of poorer health and overcome the positive impact of insurance stricto sensu. This means we need to incentivize good behavior, an example being sin taxes that have been the subject of several recent blog posts here.