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Moral hazard and elder care

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Let’s talk for a minute about elder care and moral hazard. Don’t worry – this isn’t about the time you raided your grandmother’s candy jar and ruined your appetite, it’s about economic principles.

Quickly defined, moral hazard is related to risk and cost, namely an event in which one person or party takes more risks because that party knows someone else will bear the cost should things… not work out. The most famous recent example is the subprime mortgage crisis: banks made risky bets, those bets lost, the government bailed out the banks, taxpayers footed the bill.

Moral hazards can be secondhand as well. For instance, a doctor may be more willing to order esoteric tests if he or she knows the patient’s insurance will cover the cost, rather than the patient paying out-of-pocket. A recent paper used taxi rides in foreign cities to study secondhand moral hazards.

The Economist reports:

The authors, a trio of academics at the University of Innsbruck, sent researchers on 400 taxi rides, covering 11 different routes, in Athens, Greece. In all cases, the researchers indicated they were not familiar with the city. But in half the cases, the researchers indicated that their employers would be reimbursing them for the journey. The researchers in the latter group were 17% more likely to be overcharged for their trip and paid a fare that was, on average, 7% higher.

The most common form of overcharging was not, as might be expected, taking a longer route. [Those traveling on expense accounts] may not mind about a ride’s cost but they do care how long it takes. So they were subject to bogus surcharges (a fee for airport pickup, for example), or charged the night-time fare in the daytime.

A taxi fare is one thing, but considering moral hazard in conjunction with elder care and elder abuse is a little troubling. It’s often difficult to stay involved with a loved one’s daily life, especially if you no longer live in the same area. And that’s a fact that can hurt; more so if you discover someone has been taking financial advantage – even in an indirect way – of your parents or grandparents. It may be overcharging for a service, a telemarking scam or neglect by a paid caregiver. Often those engaging in this sort of fraud are convinced the victim won’t notice the harm caused.

Fortunately, there may be some legal repercussions for elder abuse on the horizon. Senator Chuck Grassley (R-IA) and Senator Susan Collins (R-ME) have both introduced bills to the U.S. Senate to prevent and penalize elder abuse. With luck, the bills will be brought to the floor and debated on merits soon

What can you do to prevent your loved ones from becoming victims in the meantime? A Waddell & Reed financial advisor may be able to help by giving a seminar on preventing identity theft or by discussing power of attorney and end-of-life planning issues.

Associated Tags: Succession Planning

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This information is provided for informational and educational purposes only  and may include references to concepts that have legal, accounting and tax implications. It is not to be construed as legal, accounting or tax advice, and is provided as general information to assist in understanding the issues discussed. Waddell & Reed does not provide tax advice. Waddell & Reed believes the information has been obtained from sources considered to be reliable, but does not guarantee the accuracy of the information provided. 

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