Moral Hazard — Episode 2: Blast from the past

Now that the term is daily front page fodder, why not a look back at what finally enabled me to understand exactly what it means?

Here's my January 11, 2006 post on the subject.

World's Best Example of 'Moral Hazard'

It appears on the front page of today's New York Times.

The paper's been running a multi–part series examining the plight of diabetics in New York City: Ian Urbina wrote today's story (part three), headlined "In The Treatment of Diabetes, Success Often Does Not Pay."

The graphic (top) accompanying the article illustrates the moral hazard: the worse the patient outcome, the more money the doctor takes home.

And the difference isn't trivial: a diabetes center loses an average of $455 each time a patient comes in for a checkup, but when complications occur and a diabetic's foot must be amputated a hospital stands to make between $1,499 and $11,360.

Moral hazard is a term often used in business and economics but its precise meaning had eluded me until now.

I've tried really hard to get a handle on it, even reading a novel (excellent, by the way) entitled "Moral Hazard" (below) by Kate Jennings — who spent enough time embedded in the world of investment banking and Wall Street as a speechwriter to know whereof she scribes — but it too left me befuddled.

Alas, a state in which I spend most of my (what I believe to be — but one can never be too sure, can one? I'm thinking of the wonderful Spanish epigram, "Toda la vida es sueño, y los sueños sueños son*) waking hours.

But I digress.

In other words, a moral hazard is a situation in which someone benefits from someone else's misfortune and in which there is an financial incentive — enormous in the case of diabetics and their caregivers in New York — to make the bad situation worse.

*Life is a dream, and dreaming a dream as well.

Better in Spanish, isn't it?

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Good book.