Americans have high expectations for healthcare, and sometimes high anxiety over health insurance. Stanford economist Liran Einav and Massachusetts Institute of Technology economist Amy Finkelstein frequently collaborate on research on insurance markets. Last issue, I reviewed their book Risky Business, written with Boston University economist Ray Fisman. Now, Einav and Finkelstein are back with We’ve Got You Covered, in which they try to answer a question posed by Finkelstein’s father-in-law, “What would you propose doing about health insurance coverage?”

One source of anxiety over health insurance is being uninsured. Einav and Finkelstein state that 30 million Americans were uninsured in 2019. A second source of anxiety is “insurance uncertainty,” which the authors characterize as the “risk of losing coverage.” Workers who get fired from their jobs or quit to find better ones lose coverage; divorce may cause a loss of coverage; Medicaid recipients may lose coverage when their earnings rise or when they recover from illness. Medical debt is a third source of anxiety; “In early 2020” the authors report, “there was $140 billion in unpaid medical bills held by collection agencies.”

Automatic coverage / In the authors’ language, problems with the health insurance system are “gaps” and typical solutions are “patches.” A patch begins with an individual who attracts considerable sympathy. Take Katie Beckett, born in 1978, who suffered from encephalitis (inflammation of the brain). After her parents’ insurance reached a limit of $1 million (presumably late 1970s dollars), Medicaid paid for her treatment so long as she remained hospitalized. But her parents wanted to care for her at home, which they believed would be better for Katie and would cut her care cost. However, her parents still needed public support for her care, but Medicaid didn’t allow it. President Ronald Reagan heard of Katie’s case and ordered changes in the Medicaid program that enabled Katie and children in similar situations to be treated at home and be covered by Medicaid. The change in legislation that followed is dubbed the “Katie Beckett waiver.” This exemplifies a pattern whereby “a particular problem surfaces, generates public outcry, and prompts (limited) policy action.”

The problem is, this creates “an endless series of patches.” The authors reject this piecemeal approach on grounds that patches “are all inherently flawed.” The flaw in the Katie Beckett waiver is that after a disabled child reaches 19 years of age, Medicaid ceases to pay for outpatient care. “History teaches us,” the authors observe, “that more patches won’t work.” They call instead for an overhaul of the health insurance system.

Einav and Finkelstein contend that there is an “unwritten social contract” pertaining to healthcare. To begin, the authors go back to the late 18th century. Early Americans faced the problem of paying for the care of itinerant sailors who became ill or injured. Alexander Hamilton proposed to tax sailors and use the revenue to pay for their care, and Congress implemented the program. More recent evidence of the “social contract” is the Emergency Medical Treatment and Active Labor Act (EMTALA). Passed in 1986, EMTALA mandates that hospitals receiving Medicare funding (which is nearly all of them) provide emergency room services to patients regardless of their ability to pay. Einav and Finkelstein reason that human nature cannot resist providing care to those who deserve it. Thus, they argue, the aim of a health insurance system is to provide “automatic, universal basic coverage.”

By “automatic,” the authors mean “without an enrollment step” and “as an entitlement.” In essence, Einav and Finkelstein would give all Americans a voucher to finance what the authors deem basic care, either by directly purchasing the care or by purchasing basic insurance coverage. Providers would not inquire as to what a patient’s income is; health care would be “free for patients” and therefore “taxpayer financed.” Politicians on both the right and left point to EMTALA to claim that health care is already universal. “There are a host of government commitments in place,” Einav and Finkelstein add, “to provide the uninsured with medical care when they cannot pay for it.”

They define “basic coverage” as “all essential medical care for the critically ill” and “primary and preventive care for patients who are not yet critically ill.” “Gatekeeping,” whereby “the insurer also plays an active role in determining what medical care a patient can get,” would be a component. By “basic” they also mean “longer wait times, less patient choice over their doctor and their medical care, and much less comfortable hospital accommodations.”

If the reader thinks that providing healthcare at no cost to the patient violates conventional economic wisdom, the reader is correct. Einav and Finkelstein tell the story of a debate from the early 1970s that established the conventional wisdom. Economist Mark Pauly held that the quantity demanded of healthcare varied inversely with the price. Economist Rashi Fein held that the quantity demanded of healthcare did not vary, or varied little, with the price. “We go to the doctor grudgingly,” in his view, “and only when we need to.” The RAND Corporation eventually tested whether there was a difference between the healthcare consumption of patients who paid for their care versus those who did not and determined that the former consumed less than the latter. Though RAND’s determination became “gospel” and Einav and Finkelstein “preached” it, they do not hold to the faith. “In working on this book,” they confess, “we realized that it’s time to turn our back on the conventional wisdom.” Their heresy is based on their observation that wherever governments stipulate cost sharing, they then create so many exceptions that cost sharing becomes meaningless.

What is basic coverage? / Determining what basic healthcare should cover is difficult. The authors share scenarios involving real people. For instance, a British television program probed the financial tradeoff between covering one person’s dialysis versus 50 people’s hip surgeries. Oregon officials decided to pay for the primary care of 4,000 children and pregnant women but not a bone marrow transplant for one 7‑year-old. Those are tough decisions indeed. Einav and Finkelstein state:

There are many aspects of medical care that can be excluded from basic coverage while still fulfilling our social contract: infertility treatment, dental care, vision care, physiotherapy, various forms of long-term care, and the list goes on and on.

They decline to say how they would decide what basic coverage would cover. But they tell us how other people decide. British economist Alan Maynard told the above-mentioned television audience that he would decide between dialysis and hip surgery by calculating benefit–cost ratios and performing the procedure that has the higher ratio. Oregonians calculated benefit–cost ratios for over a thousand procedures. Their calculations produced “counterintuitive” outcomes, however. “Tooth capping,” Einav and Finkelstein explain, “was estimated to be more cost effective than surgery for an emergency appendectomy or an ectopic pregnancy.” If, for illustration, the cost of tooth capping is $1,000 and the benefits are $10,000, and the cost of an appendectomy is $100,000 and the benefits are $900,000, benefit–cost analysis leads to such “unacceptable results.” Thus, Oregonians moved beyond benefit–cost analysis. They “used their judgment” instead “to create broad categories of health care that they ranked in order of importance.” Their process for prioritizing procedures recognizes benefits, costs, and “moral philosophy.”

Einav and Finkelstein tell the story of the Balanced Budget Act of 1997 as it pertained to Medicare expenditures. Congress intended to limit the increase in Medicare expenditures, but when the legislation called for reducing payments to doctors to achieve that goal, lawmakers failed to follow through, year after year. The authors declare, “We won’t accept this.” That is a welcome reaction to Congress’s fiscal irresponsibility. The authors go on to demand a budget for basic coverage. Their rationale is that a budget induces citizens and politicians to face tradeoffs between healthcare and other goods, helps prioritize procedures under basic coverage, and limits spending. They address the concern that taxes will rise to pay for basic coverage. “It may come as a surprise,” they tell us, “that taxpayer-financed health-care spending in the US is already large enough to pay for universal basic coverage.”

Beyond basic coverage / One remaining feature of Einav and Finkelstein’s plan deserves to be explained: the option to buy supplemental coverage. While vouchers would cover people’s basic coverage, they could buy supplemental coverage that provides additional treatments, procedures, and amenities.

The authors provide an example. Suppose basic coverage pays for a drug that needs to be injected and costs $800 per month. Patients who would rather have the same drug that may be taken orally at a cost of $2,000 per month may get $800 from the government and pay an additional $1,200. This feature, the authors say, is like the way Medicare Advantage works.

There are challenges for this idea, however. One is the “selection problem”: private insurance companies will try to attract less costly patients and avoid more costly patients, leaving the latter to the government-financed care. The authors propose to deal with that by adjusting the government payments based on the beneficiary’s health status and restricting the beneficiary’s option to move back and forth between government and private systems.

The authors are not utopian. For instance, they share economist Victor Fuchs’ early contribution to healthcare economics. Fuchs wondered why Utahans lived longer than Nevadans despite having so much in common. He decided that lifestyle choices accounted for the difference. Utahans typically abstain from alcohol and tobacco while Nevadans do not. The authors share a recent scholarly contribution as well. Harvard economist Raj Chetty and coauthors sought to explain nationwide differences in longevity. In the words of Einav and Finkelstein:

The higher-life-expectancy places didn’t enjoy a greater quantity or quality of medical care, or higher rates of insurance coverage. Rather, higher-life-expectancy places had populations that smoked less, exercised more, and were less likely to be obese.

Einav and Finkelstein use those findings to warn that no one should expect their plan to make everyone equally healthy. Nor should anyone expect their plan to reduce expenditures on healthcare because they admit that “we don’t (yet) have the silver bullet for dramatically lowering health-care spending while fulfilling the dictate to ‘do no harm’ to the patient.”

Conclusion / Although the authors are not utopian, the frequency with which they use the word “design” shows their confidence. But markets like healthcare put such designs to the test, revealing important flaws. A few potential flaws came to mind as I read the book.

For instance, the authors claim that taxes need not be raised to finance their plan for basic coverage. They are not necessarily wrong, but something seems amiss when they write:

To be clear, total spending on health care in the US as a share of national income is much larger than it is in any other country—17 percent in the US in 2019, compared with 12 percent in the next highest-spending country that year, and to 9 percent on average across high-income countries. That higher US spending, however, primarily reflects higher private spending. Not higher public spending.

The World Health Organization’s Global Health Expenditure Database, which they cite, does indeed show that all U.S. spending on healthcare amounted to 17 percent of national income in 2019. But my reading of the data is that U.S. taxpayers paid 14 percent of national income and private individuals contributed 3 percent. That does not refute the authors’ argument that taxes are sufficiently high enough to finance their plan for basic coverage (9 percent of total income), but it does conflict with the authors’ point about U.S. public vs. private healthcare spending. If spending a lot on healthcare reflects government largess and not consumer choice, perhaps the authors should not dismiss concerns that healthcare expenditures are “unsustainable.” Even if taxes need not rise, reallocating taxes to carry out the authors’ plan might prove to be difficult.

Free-market supporters will have additional concerns about the book. They will bristle at Einav and Finkelstein’s jab that an economist with “libertarian roots” such as James Buchanan typically has “no public policy solution” for healthcare. They will be skeptical of the authors’ confidence that their plan will not produce more unintended consequences than they can imagine. But free-market fans should not be deterred from reading the book. We’ve Got You Covered is a good book on healthcare economics and how two leading economists with interventionist roots would redesign health insurance.