Einav And Finkelstein’s We’Ve Got You Covered

Health care plays a key role in every economy, through the weight of the health sector in GDP, but also by shaping the health and productivity of the workforce. In the US, this is compounded 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. Moreover, the fact that health insurance is tied to employment can limit labor mobility, and creates a major vulnerability for the employee, since losing your job means losing your health coverage as well.

That the US health insurance framework needs to change is widely recognized. In their brand new book published by Penguin Random House, We’Ve Got You Covered, Professors Liran Einav and Amy Finkelstein (Stanford and MIT respectively) offer a compelling, clear analysis of the problem and a bold proposal for fixing it. The US health insurance system, they argue, needs to be scrapped and rebuilt anew. No set of fixes to the current setup will do, especially since the existing problems have been exacerbated by a long series of ad hoc fixes, each one causing collateral damage and unintended consequences.

The book underscores the stunning absence of a health care budget, and the authors do a great job at highlighting how the current setup poses no limit to expenditures and encourages doctors and providers to run up larger bills. They also raise a very important point observing that we are not avoiding the trade off between health care and other socially important expenditures, we are not even debating the choice.

Perhaps the strongest point of the book is that it starts from a lucid statement of what the goal should be: namely to ensure that everyone has access to a basic level of health support. Not (or not just) because this is the authors’ view, but because what economists call “revealed preferences” show that this is what US society wants: whenever someone in need lacks access to basic care, society mobilizes, with inefficient ad hoc fixes.

This underscores a striking paradox: on the one hand, a significant number of Americans still lack 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, nearly everyone does have health insurance de facto, because hospitals are legally obligated to provide emergency care.

The authors propose a clear-cut solution: provide universal free access to basic health care. All three adjectives here are equally important: access should be completely free of cost to everyone; but it should be limited to bare-bone health care. This means no elective procedures, limited choice of doctors and health care facilities, longer wait times, and less comfortable health care environments. This is a crucial trade off rarely acknowledged by those advocating universal health care: if we want to offer something for free to everyone, it needs to be a very basic service. No country has the resources to provide the best of everything to everyone for free. Laying this out in a stark and uncompromising way is probably one of the book’s most valuable contributions to the debate.

This basic, free and universal coverage should be complemented by the option to buy additional insurance for access to more and better services, and the authors devote serious thought to how to reduce the risk that this will erode the financial and human resources available for basic care.

The other key risk is that universal and free access will lead to overconsumption of basic care; here one of the book’s most surprising arguments is that the authors go against the orthodox economic recommendation to have some cost sharing by patients in universal basic care. Their argument however is not fully convincing.

Einav and Finkelstein say that the cost savings have to be modest by definition, in order to avoid the risk that beneficiaries of basic care will be hit with large bills; but this does not take into account that, as the authors themselves note earlier in the book, studies show that copayments lead to a lower overall consumption of health services, and therefore lower overall health spending, without adverse impact on health outcomes. In other words, copayments do serve to reduce unnecessary medical spending.

The authors further argue that most medical spending is carried out by the rich, who can afford it, so there is no point in imposing difficulties on everybody else. But at the same time they claim that gatekeeping, where a primary physician decides whether or not a patient needs to see a specialist, is “a necessary evil” to contain costs. Why necessary if the costs are borne mostly by the rich and if overconsumption of medical services is not significant enough to worry about?

Another quibble is that while the authors detail how their proposal borrows from existing features of different health care systems around the world, they sometimes gloss over the shortcomings of these systems. For example, reading the book one comes away with the impression that the UK’s NHS might be a valuable role model, even though it’s been rated one of the worst among peer countries.

But these are just quibbles.

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