Free For All?

"Health is the single most important topic in public finance today and this is the single most important book written about health – that’s why I chose it. The book is by Joseph Newhouse, who led the group that designed the RAND Health Insurance Experiment. In the 1970s people tried to figure out how much of the cost of healthcare consumers should bear and how much insurance should pay. They were trying to answer the questions: “How big should the deductible be on an insurance policy? And when we raise an insured’s deductible will it really affect how much healthcare people use? Could higher deductibles make people sicker because they won’t go to the doctor?” Support Five Books Five Books interviews are expensive to produce. If you're enjoying this interview, please support us by donating a small amount . Joe Newhouse and his colleagues put together this incredible social experiment, funded by what was then called the Department of Health Education and Welfare. They essentially established an insurance company and randomly assigned individuals to plans with a variety of cost-sharing provisions, to determine how health was affected when people paid more for healthcare. This was the premier use of a social experiment of this magnitude and quality. The results were profound because, not only did the study show that people are price sensitive in their health decisions and if you charge more for healthcare they’ll use less but it also showed that, at least back then, higher deductibles didn’t matter much for health. People in the study used less healthcare but weren’t less healthy. So it emphasised that we’re excessively using healthcare, as shown by the fact that when people cut back, their health wasn’t worse. Those are probably the single best-known findings in all health economics. It is just an incredibly influential study. It is really old but it’s still the gold standard. There have been studies since that have tried to follow up, but not that many because RAND is so dominant. Subsequent studies, including a number of mine, have generally found similar conclusions, but no study has ever been as good as this one. Yeah. Good, solid scientific methods can really influence our understanding of our economy and the impact of government policy. There’s still a lot of cognitive dissonance around the study but I think it has dramatically impacted our understanding of health. People all over the political spectrum talk about how we need to have patients pay some portion of the cost of their healthcare – that’s largely because of RAND. That’s why the Affordable Care Act includes a “Cadillac tax”, to stop excessive use of healthcare. That’s just one example. But basically the public policy debate was hugely influenced by the evidence in RAND. There haven’t been that many. There’s another famous one called the Negative Income Tax Experiment – it’s also very old [from 1968 to 1979]. In that experiment they changed people’s tax rate and saw how hard they worked. That one has been influential. The equivalent of the RAND healthcare experiment would cost tens of millions of dollars today. There were two things about RAND that made it so influential. The first was it was truly a randomised trial – the kind that’s done in medicine – so it’s very convincing. Second, they got detailed data on individuals – not just how subjects felt but their actual blood pressure and other objective measures of health. I was fortunate enough to be part of the closest thing we’ve seen to RAND – a study we just did in the state of Oregon, with my colleague Amy Finkelstein at MIT and Katherine Baicker and Joe Newhouse at Harvard. A bunch of other people in Oregon ran the experiment for us. They only had enough money to fund health insurance for 10,000 people but 100,000 applied so they ran a lottery and the winners got health insurance and the losers didn’t. So while in RAND they carefully randomised the subjects, in the Oregon study the lottery did the randomisation for us. RAND was about what happens when you pay more or less. The Oregon study is about what happens when you’re insured vs uninsured. We just spent a huge amount of money studying the data. The first finding, which just came out and got a lot of attention, is that people who won the lottery and got the health insurance were hugely better off. Their utilisation went up but, more importantly, their health went up, their wellbeing improved and their odds of financial distress were reduced. This was a neat initial finding and now we’re gathering data from people in household surveys on objective measures of health like their blood pressure and blood glucose and things like that. This is, in my mind, the biggest study since RAND. They are very, very similar. You can think of the Affordable Care Act as a more ambitious version of the Massachusetts reform. Both reforms have the same core principles: Non-discrimination in insurance markets, health insurance mandates and subsidies so insurance is affordable. In Massachusetts, we stopped there. The national bill – the Affordable Care Act – has two additional features. One is it’s paid for and two, it takes on cost controls. Romney’s reform was paid for with funding from the federal treasury. The Affordable Care Act is paid for through offsets in the federal budget. And the Affordable Care Act tackles the increase in costs in a serious way, which the Massachusetts bill didn’t do. So you can think of the Affordable Care Act as the Massachusetts bill-plus. I associate it with Stuart Butler from the Heritage Foundation and Mark Pauly, an academic at Wharton. I first heard about it as the conservative alternative to the Clinton healthcare reform of the early 1990s. At the time, most economists thought an individual mandate made more sense than the employer mandate proposed by the Clinton administration. Over time the idea became more popular and then Massachusetts adopted it as the right way to go. I use the comic book format to explain what’s wrong with our healthcare system, how we solved this in Massachusetts and how the Affordable Care Act will do so at the national level. The book aims to dispel myths about the Affordable Care Act and explain clearly what the bill does and doesn’t do. Public finance is a hugely important topic and I think most students would find it very interesting. The single most important question that we need to answer is how government behaviour, not merely taxation, affects capital formation. I think we still don’t really have a good handle on what government can do to best promote capital formation and what it does that most dissuades capital formation. The biggest issue in dollar terms is just how to control healthcare costs. The Affordable Care Act makes a start but more must be done. Get the weekly Five Books newsletter I like to say there are only two problems we have to worry about in America – healthcare spending and global warming because either one puts us underwater. How we control healthcare costs is probably the number one problem public finance economists and everyone in the world has to grapple with, because if we don’t control healthcare costs we’ll be bankrupt. Capital formation would be number two, and then if I had to pick a third – well, those two are difficult enough. I’ll just stick with two."