Vaccine hesitancy, which can prolong the pandemic, is a textbook example of a negative consumption externality, where an individual’s choice can harm or impose costs on others. Indoor smoking, drunk driving, or littering are other examples, and are usually dealt with using private and public policies to change behavior or internalize the costs to its source.
One policy option is to use the insurance mechanism, with risk assessment and risk pricing as its enforcing arms. To mitigate risk, avoid moral hazard, and better price their products, insurance companies often tie premiums to a client’s riskiness. This pricing strategy serves two goals: (1) reduce risky behavior, and (2) redistribute the premium- and cost-sharing burden from low-risk consumers to riskier consumers.
For example, a risky driver has a higher auto insurance premium than a safe driver, a smoker has a higher health insurance premium than a non-smoker, an individual with poor health indicators has a higher life insurance premium and a house located in a wildfire area has a higher homeowners insurance premium.
Similarly, health insurance premiums, deductibles, and co-pays can be set higher for those who are unvaccinated. The differential can be set, using surveys and initial data, in a way to achieve a high compliance rate. Obviously, with the right price — as in high enough premiums and co-pays — the desired behavior can be induced.
Health insurance policies, in general, do not use consumer information to price risk, because many illnesses are not the result of individual choice. Even illnesses that are partially linked to individual choice — such as some coronary and lung diseases — are usually exempt from risk-based pricing.
So far, insurance companies have been covering the coronavirus infections like any other illness related to external factors, assuming that disease-contraction determinants are not controlled by individuals.
But that needs to change.
When the COVID-19 vaccine is readily available for all, individual responsibilities for self-protection become paramount. While a small fraction of people who refuse vaccination have severe allergies to vaccines, the rest are vaccine-hesitant as a choice.
Using risk pricing to set insurance premiums and co-pays for these individuals makes good sense and is fair policy. It incentivizes individuals to vaccinate, while also providing a fairer insurance pricing system by charging those with self-selected higher risk a higher price, instead of shifting their medical costs to others through uniform insurance pricing.
Government can also change Medicare pricing in a similar fashion to reinforce such an incentivization policy.
Without such risk-based insurance pricing, vaccinated individuals will be subsidizing the medical costs of those who refuse vaccination.
Hashem Dezhbakhsh is Goodrich C. White Professor and chair of the economics department at Emory University.