June 17, 2024

Einav and Finkelstein have you covered

Health care plays a central role in all economies, through the weight of the health sector in GDP, but also by shaping the health and productivity of the workforce. In the United States, this is exacerbated by the fact that health insurance is often covered by the employer, making it an important part of labor costs in manufacturing and other sectors of the economy. In addition, the fact that health insurance is tied to employment can limit labor mobility, and creates great vulnerability for the employee, since your health coverage is also lost if you lose your job.

The need to change the US health insurance framework is widely recognized. In his brand new book published by Penguin Random House, We’ve Got You Covered, Professors Liran Einav and Amy Finkelstein (Stanford and MIT respectively) provide a strong, clear analysis of the problem and a bold proposal to solve it. They argue that the US health insurance system needs to be torn down and rebuilt anew. There will be no fix to the current arrangement, especially since the current problems have been exacerbated by a long series of ad hoc fixes, each causing collateral damage and unintended consequences.

The book highlights the amazing lack of health care budget, and the authors do a great job of highlighting how the current arrangement does not limit spending and encourages doctors and providers to get bigger bills. They also raise a very important point noting that we are not avoiding the trade-off between health care and other socially important expenditures, that we are not even debating the choice.

Perhaps the book’s strongest point is that it begins with a clear statement of what the goal should be: ensuring that everyone has access to a basic level of health support. Not (or not only) because this is the view of the authors, but because what economists call “exposed preferences” show that this is what US society needs: whenever someone in need does not have access to basic care, society imposes, with inefficient ad hoc arrangements.

This presents a striking paradox: on the one hand, a significant number of Americans remain without health insurance and many are constantly at risk of losing the insurance they have, either by losing their job or by crossing the income threshold that allows them to qualify for Medicaid. On the other hand, almost everyone has health insurance indeedbecause hospitals have a legal obligation to provide emergency care.

The authors propose a clear solution: provide universal free access to basic health care. All three adjectives here are equally important: full access should be free of cost for all; but should be limited to bare-bones healthcare. This means no elective procedures, a limited choice of doctors and healthcare facilities, longer waiting times, and less comfortable healthcare environments. This is a crucial trade-off that those who support universal health care often fail to acknowledge: if we want to offer something free to all, it must be a very basic service. No country has the resources to provide the best of everything to everyone for free. Setting this out in a starkly uncompromising way is probably one of the book’s most valuable contributions to the debate.

That basic, cheap and universal coverage should be complemented with the option to buy additional insurance for access to more and better services, and the authors seriously consider how to reduce the risk that this will erode the financial and human resources available for primary care.

The other main risk is that universal and cheap access will lead to overuse of basic care; This is one of the most surprising arguments in the book that the authors go against the orthodox economic proposal that patients should share costs under universal basic care. However, their argument is not convincing.

Einav and Finkelstein say that the cost savings must be modest by definition, to avoid the risk of large bills for primary care beneficiaries; but this does not take into account, as the authors themselves note earlier in the book, that studies show that co-payments lead to lower overall consumption of health services, and therefore lower overall health expenditure, without adverse effects on health outcomes. In other words, co-payments reduce unnecessary medical spending.

The authors also argue that most of the medical spending is done by the wealthy, who can afford it, so there is no need to make it difficult for everyone else. But at the same time they claim that the gate is a “necessary evil”, where a primary doctor decides whether or not a patient needs to see a specialist, in order to keep costs down. Why is it necessary if the rich pay the costs mainly and the overuse of medical services is not significant enough to worry about?

Another issue is that while the authors detail how their proposal borrows from existing elements of various health care systems around the world, they sometimes describe the shortcomings of these systems. For example, reading the book one comes away with the impression that the UK’s NHS could be a valuable model, although rated one of the worst countries.

But these are just quibbles.

We’ve Got You Covered is an excellent book that provides a clear and honest analysis of the trade-offs involved in reforming the US health care insurance framework; it is a must read for anyone interested in this urgent debate.

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