Healthcare, like all social services, has a supply side and a demand side. A pair of new books, one devoted to each, provide valuable insights into the challenges that face would-be reformers of American healthcare policy. Together with a dash of political economy, they offer grounds for cautious optimism about the prospects for a lasting makeover of this troubled part of our social safety net.
The first book, We’ve Got You Covered, deals with the demand side. The authors are Liran Einav of Stanford and Amy Finkelstein of MIT, two researchers steeped in the economics of healthcare who are nonetheless outsiders to politics. They see their outsider status as giving them a usefully fresh perspective.
The second book, Why Not Better and Cheaper? covers the supply side. It is written by the brothers James Rebitzer and Robert Rebitzer. James is an economist and professor of management at Boston University. Robert is a senior advisor at Manatt Health and a Distinguished Career Institute Fellow at Stanford. Their narrative is informed not only by healthcare economics, but also by hands-on managerial experience.
The demand side: Toward universal basic healthcare
Einav and Finkelstein don’t go so far as call universal basic healthcare inevitable, but for two reasons, they insist that it is by no means impossible (p. 186). The first is well-known: By a wide margin, we already spend the money. Both total and government healthcare spending are higher here as a share of GDP than in any other OECD country. The second reason, while not exactly a secret, receives less attention. The authors argue that we already have, and have had since the nation’s founding, a moral commitment “to provide access to medical care to those who are ill and cannot provide it for themselves” (p. 276).
The central problem, as the authors see it, is a system design that fails to meet the moral commitment. The current system covers veterans, the elderly, children, pregnant women, the disabled, the working poor, and more. Covered services and afflictions include family planning, lead screenings, breast and cervical cancer screenings, substance abuse, sickle cell anemia, and others. All these, each with its own pool of federal funding, were added one by one with little thought to a master plan (p. 158).
Although the list of covered groups and services is long, it remains full of gaps, leaving us far short of universal coverage. Often, the gaps are tallied as a percentage of the population who are uninsured, well below 10 percent as of mid-2023. To Einav and Finkelstein, though, the uninsured rate is an incomplete measure. The true problem is one of medical insecurity, of which lack of insurance is just one form. The uninsured rate captures people with no coverage at all – often because of administrative barriers to obtaining Medicaid or other public programs (p. 13). However, even the formally insured face the risk of losing coverage, often when they need it most. Triggers can include loss can job loss, divorce, death of a spouse, or aging out of parental coverage. And even barriers to obtaining Medicaid or other public programs are another (p. 13). people with insurance are vulnerable to medical insecurity when they encounter gaps that lead to uncovered costs.
The result is that about one-quarter of nonelderly American households report trouble paying their medical bills. In more than half the cases, the person who incurred the bill was insured when treatment began, and often remained insured throughout (p. 25). When people receive treatment they need, but that is not fully covered by their insurance, they are left with crushing medical debt. Although an astonishing 90 percent of that debt is never repaid, it can still spell financial ruin for those who owe it (p. 27).
Einav and Finkelstein see these gaps as the result of an endless series of patches, layered haphazardly on top of a broken system (p. 25). Fixing holes in the roof or cracks in the foundation will never be enough. The only option, they conclude, is to tear down the current structure and rebuild it from the ground up (p. xv). Rather than copying any particular alternative, they favor a mix and match of what other countries have managed to get right (p. 182). Details aside, there are four principles that they see as essential.
First, coverage must be universal, with automatic enrollment and no premiums (Ch. 8). Only that can completely eliminate the risk that people will lose their coverage, or find they have none, just when they need it. I agree fully with their thinking on that point.
I am less persuaded by their second principle, which is that there should be no patient fees of any kind – no deductibles, copays, or coinsurance (Ch 9). The authors are rightly skeptical of the argument that having “skin in the game” helps people make better healthcare choices, citing research that shows that fees do induce people spend less, but not more wisely. Still, for reasons of political and fiscal realism, I lean toward a softer formulation that they slip in at one point, namely, that “large or unlimited amounts of patient cost sharing must be off the table” (p. 111, my italics). The cost-sharing formula of universal catastrophic coverage, which I have described elsewhere, offers one way of achieving that more moderate goal.
The third principle is that “basic coverage should be very basic” (Ch. 10). Compared with much existing insurance, it should have longer waiting times, less choice among providers, and less comfortable hospital accommodations. Access to covered services should be subject to strong gatekeeping by primary-care providers.
People who want single rooms, no-wait appointments, and free access to specialists of their choice could buy supplemental insurance, as they do in Australia. Importantly, those who chose private supplemental insurance would still receive the full value of the basic package. For example, if the basic package allowed $700 per day for a multi-bed hospital ward, and the same hospital charged $1,200 for a private room, the supplemental insurance would only have to pay the extra $500.
Einav and Finkelstein recommend that the basic package include primary and preventive care, as well as “all essential medical care for the critically ill” (p. 131). However, infertility treatment, dental care, vision care, physiotherapy, and various forms of long-term care could be excluded “while still fulfilling our social contract” (p. 135). That leaves a large gray area where decisions about the basic package would require a “formal, multistep process.” The process should be informed by quantitative measures of cost-effectiveness, but those measures should not be applied mechanically. Instead, they should be tempered by human judgment and ethical norms (p. 137).
The fourth and final element of Einav and Finkelstein’s plan is a comprehensive healthcare budget (Ch. 12). The authors strongly object to the approach of Medicare, an entitlement under which the government agrees to pay and lets doctors and patients decide how much to take. They resist setting a dollar amount for the budget, but they suggest that it could potentially be no more than what the federal government is already spending on all health programs combined (p. 145)
There are some gaps in Einav and Finkelstein’s narrative that I think would have benefitted from additional discussion. In particular, it would have been helpful to explain more clearly how budgeting, gatekeeping, and limits on the basic package would work together to control costs. Would the process be sequential, with Congress first setting a fiscal limit, and an independent commission then shaping a basic package, on medical priorities, to fit within it? Or would the two be blended, with strong political influence on which services were covered? If the latter, would it be possible to avoid the patchwork of covered and uncovered medical needs that Einav and Finkelstein see as a key flaw in the current system?
It would also have been good to discuss what would happen if spending ran up against the budget ceiling. Simply raising the ceiling each time that happened would make budgeting a sham. But if the spending limit were a hard one, what would happen when the money ran out? It might have been useful to discuss earlier attempts to control spending growth. For example, in 2010, such as the Independent Payment Advisory Committee (IPAB) created by Congress as part of the 2010 Affordable Care Act. IPAB immediately ran into headwinds from lobbyists representing big pharma, hospital groups, and physicians’ associations. Despite language that explicitly prohibited IPAB from rationing care, it was pilloried by politicians as a “death panel.” In 2018, before controls had come fully into effect, large majorities in both houses of Congress repealed the relevant section of the ACA. (See here for a brief history of IPAB.)
That brings us to our next topic. The prospects for holding healthcare spending to a realistic budget would be greatly eased by cost-cutting and efficiency-enhancing reforms to the supply side of the system. Although Einav and Finkelstein have little to say about supply, it is the central topic of the Rebitzers’ book. Let’s turn to what those authors have to say, and then consider a balanced approach that encompasses both demand and supply.
The supply side: Innovation and efficiency
Einav and Finkelstein are, of course, aware that the American healthcare system has serious supply-side problems. “Half of spending is wasted,” they write, “but we just don’t know which half” (p. 154). They point to “the development and adoption of new medical technologies” as “the main cause” of the huge bite that healthcare takes out of U.S. GDP (p. 148). They despairingly conclude that even a dozen or more of the most widely recommended supply-side fixes “would make scarcely a dent in the $4 trillion of annual health-care spending,” while reducing the quality of care (p. 157).
The Rebitzer brothers are more sanguine. While they acknowledge that supply-side reform will be hard, they see it as both possible and indispensable. Importantly, they have a better handle on which half of spending is wasted.
On page 1 of their book, the Rebitzers agree with Einav and Finkelstein that “new, more valuable treatments have undoubtedly played a central role in the rising cost per patient of hospital care over the past 50 years” (p. 1). But rather than throw up their hands, they get right into their title theme: Why not better and cheaper, like the kind of innovation we see in cell phones or household lighting? Their answer:
The health sector generates the wrong kinds of innovation. It is too easy to profit from low-value innovations and too difficult to profit from innovations that reduce care costs. The result is a healthcare economy that is profusely innovative yet remarkably ineffective in delivering increased value at a lower cost. The consequences of this skew in innovation accumulate over time and make society poorer and less healthy than it ought to be (p. 1).
The remainder of their book focuses on three main issues (p. 5):
- Financial incentives that weaken the demand for value-enhancing and cost-reducing innovations.
- Professional and social norms that provide insufficient non-financial motivation for such innovation and, at times, actively inhibit it.
- Limited competition that allows dominant firms to overlook potentially value-enhancing innovations and thwarts more efficient new entrants.
Even when value-enhancing but cost-reducing innovations are discovered, they often go missing (Ch. 3). They give examples of reforms to payment systems, shared-savings contracting, and improvements to information systems that seem to work where they have been tried, but haven’t caught on widely. They also tell a few success stories, like the emergence of palliative care as a specialty that both improves patient outcomes and cuts costs (Ch. 5).
The Rebitzers go beyond the financial incentives and market imperfections that dominate discussions of healthcare economics. They explain at length why professional norms and values often inhibit cost-saving innovation rather than helping to spread it. They describe a payment ecosystem in which doctors serve conflicting roles as agents for their patients and for the insurance companies that pay the bills.
Their book contains many suggestions for encouraging the right kinds of innovation. A few examples: Subscription contracts to capture the option-value of new antibiotics, an area where the current patent system fails. Advanced market commitments, under which sponsors estimate the social value of a treatment and commit to paying that value to developers once it is shown to be safe and effective, as was done in Operation Warp Speed. Mechanisms for jump-starting shared savings arrangements to better align the incentives of doctors as agents with those of payers as principals. Reducing market concentration and discouraging anticompetitive practices would make all of these easier (Ch 7).
Supply and demand together: The political economy of balanced healthcare reform
The first of the books reviewed here offers a detailed plan for overhaul of the demand side of the healthcare system, while the second does the same for the supply side. But neither has much to say about how the two interact.
In fact, Einav and Finkelstein suggest that it is safe to ignore the interactions. Although they would be happy to make tweaks on the supply side, when possible, they advocate going all-out with demand-side reform first. “We don’t in fact have to tackle the two issues at the same time,” they write. “Universal coverage can — and should — be separated from health-care delivery reform (p. 158).
I disagree. In complex systems like health care, reforms all too often produce unintended consequences. The risks of unbalanced healthcare reform are a case in point.
Three of my Niskanen Center colleagues, Steven Teles, Samuel Hammond, and Dan Takash, probed those risks in a paper provocatively titled “Cost Disease Socialism.” It might more descriptively have been called “The Political Economy of Unbalanced Social Policy.” Whatever the title, the paper homes in on a very real problem.
That problem arises when the government subsidizes the demand for social services while the supply remains artificially constrained. When incumbent providers face little threat of competition from innovative rivals or new entrants, they are often able to capture the increase in demand in ways that benefit themselves rather than their customers.
The Rebitzers detail many such supply constraints in the case of health care. Certificate of Need laws for new facilities are a case in point. Their original purpose was to combat wasteful duplication of facilities, but they have become a tool that incumbent providers use to block entry of new competitors. As Mercatus Center fellow Thomas Stratmann once put it, they are “akin to McDonalds needing permission from Burger King to open a restaurant.” Other supply constraints include a dysfunctional residency system that acts as a bottleneck in the pipeline for training new physicians, scope of practice laws that limit tasks that nurse practitioners and physician assistants can perform (p. 183), and a patent system that is biased against cost-reducing innovation.
According to Teles et al., the central challenge of reform is “to break this vicious circle by attacking head-on the producer interests that benefit from the dysfunctional regulatory status quo.” The Rebitzers agree:
The market power enjoyed by many incumbents in the health sector does more than keep U.S. healthcare prices high. When combined with high switchover disruptions and barriers to new market entrants, market power can stifle innovation. Under these conditions, established firms can ignore value-enhancing and cost-reducing innovations without fear of disruption (p. 183).
The “incumbents” and “producer interests” these authors are talking about include corporations like big pharma and the private equity companies that increasingly dominate hospital emergency rooms and specialty departments. Perhaps “cost disease socialism” might better be called “cost disease capitalism,” at least when it comes to health sector. However, even not-for-profit hospitals are, in many ways, are no less profit-driven than their investor-owned competitors. Seven of the 10 most profitable hospitals in the country are nonprofits.
But it would be wrong to blame a lust for profits alone for the high cost of healthcare. The rents that arise from subsidies and are captured by service providers do not always take the form of higher profits. Especially in the nonprofit sector, top decision-makers may instead capture benefits of revenue growth more in the form of pay and professional prestige. As one healthcare executive told me, “The CEO gets fired for bad press and rewarded for reputational burnishment.” Even in the for-profit sector, the pass-throughs can trigger zero-sum competition among institutions for the trendiest technology, the glitziest campuses, and the best doctors.
A study of Medicare Advantage by Marika Cabral for the Stanford Institute for Economic Policy Research estimated that more than half the benefit of subsidies went to providers, not the patients ostensibly being helped. That seems consistent with what we know from international comparisons. Notoriously, the biggest difference between healthcare spending the United States and other wealthy countries is not the rate of services provided, but rather, their prices. There is a plausible explanation: Weaker U.S. controls over rent-seeking behaviors mean that a higher share of demand-side subsidies is passed through to providers in the form of higher prices, costs, and profits.
To be sure, the pass-through of rents is never 100 percent. By “rents,” economists simply mean benefits that exceed the share of the cost that is borne by their recipients. Some of the rents from a system of universal basic coverage such as Einav and Finkelstein advocate would accrue to people who are currently uninsured. A further share would accrue to those who are already insured, but would face lower out-of-pocket costs for basic services they are already receiving. As discussed above, people who opted for supplemental insurance to cover services outside the basic package would enjoy partial subsidies, so they would get a slice of the rents, too. Even so, plenty would end up in the pockets of providers.
The ultimate division of the benefits would depend on how reforms affected both sides of the market. That is why a balanced program is essential – one that includes both demand-side measures, along the lines of Einav and Finkelstein, and supply-side reforms, like those spelled out by the Rebitzer brothers.
Could reform be accomplished at a single stroke, tearing down the existing system and rebuilding it from the ground up? That would not necessarily be advisable. An incremental approach offers advantages both in political feasibility and in potential avoidance of unintended consequences. The philosopher Gerald Gaus offers these guidelines for carrying out step-by-step reform:
- Explore the “adjacent possible,” meaning improvements that are feasible in the policy neighborhood we actually live in.
- “Hinder the hindrances,” that is, remove the obstacles that make people reluctant to take up promising options and effectively adjust their behavior.
- Change the rules of the game in order to break out of strategic dilemmas where common interests conflict with private interests.
The Rebitzer brothers are much more attuned to such an approach than are Einav and Finkelstein. They offer a nuanced picture of the adjacent possible. They clearly map out the factors, both on the level of economic incentives and of values, that hinder changes in behavior. They have practical suggestions for breaking out of strategic dilemmas, such as the shared-agency problems that inhibit reform of the medical payments system.
But, in saying this, I don’t mean entirely to dismiss Einav and Finkelstein’s “tear it down” vision. Descriptions of what we should do, rather than what some may think we currently can do, also have an honorable pedigree in policy analysis. Einav and Finkelstein point to Milton Friedman, who, they say, “argued that the role for economists in public policy is to develop the best ideas, and keep them alive and ripe in the public imagination until the day when ‘the politically impossible becomes the politically inevitable’” (p. xxii.) To ensure that incremental reforms are not haphazard, but rather, are a series of steps toward a coherent goal, the reformer needs a clear definition of the desired end state of the system.
On the whole, then, both of these books offer valuable takes on healthcare reform. As a pair, they add up to more than the sum of their parts. Throw in a pinch of political economy, and the prospects for healthcare reform look even brighter.