Book Review: The economics of US health care policy

• Published date: 01 May 2020
• Date: 01 May 2020
• Author: Daniel Sledge
• DOI: 10.1177/0275074020915004
• Subject Matter: Book Reviews

Book Reviews 443

Phelps, C. E., & Parente, S. T. (2018). The economics of US health

care policy. New York, NY: Routledge. 236 pp. $59.95

ISBN 9780415784320.

Reviewed by: Daniel Sledge , The University of Texas at

Arlington, USA.

DOI: 10.1177/0275074020915004

Infamous for its high costs and failure to cover large swaths

of the population, the U.S. health insurance system has long

been viewed as an outlier among Organisation for Economic

Co-operation and Development (OECD) nations. Scholars

from a variety of disciplines, including political science, his-

tory, sociology, and economics, have sought to detail and

analyze the origins, gaps, and politics of this system.

One line of research has emphasized the role of liberal

ideology, shared ideas among elites about the appropriate

structure of health care delivery systems, and interest group

mobilization in foreclosing alternatives within the American

health insurance system. A second line of research, exempli-

fied by the work of scholars such as sociologist Paul Starr,

political scientist Jacob Hacker, and economist Melissa

Thomasson, has highlighted the critical role of incentives,

tax policy, and path dependence in shaping the foundations

of health insurance policy and the alternatives available to

contemporary policymakers.

Charles Phelps and Stephen Parente’s detailed and

thoughtful new book, “The Economics of US Health Care

Policy,” falls squarely into the second category.

Disaggregating the often-byzantine functioning of insurance

and health services in the United States, Phelps and Parente

highlight the critical role of employer-sponsored health

insurance and the federal tax code in shaping and distorting

American health policy. Moving beyond this, they offer a

clear set of policy proposals and outline the steps that policy-

makers might take to more effectively line up the health

insurance system’s incentives with its intended outcomes.

They put forward proposals for altering the functioning of

employee group health insurance markets, the Affordable

Care Act, Medicare, and Medicaid, and also discuss issues

such as chronic disease and the aging of the American popu-

lation. Ultimately, their primary focus is on how a perverse

set of incentives distorts the American health care system

and fuels the growth of costs.

Political scientists and economists will find Phelps and

Parente’s discussion of the role of the federal tax code in shap-

ing American health policy particularly notable. Scholars of

political science and economics have long recognized the

ways in which decisions made during World War II and 1950s

impact contemporary policies and politics. In particular, the

federal tax exclusion for employer contributions to health

insurance plans fostered a strong base of support for employer-

sponsored coverage and re-shaped the national debate over

insurance. Phelps and Parente add to this conversation by

fleshing out the implications of the tax code for others realms

of health insurance policy, laying out a vision of an alternative

world in which the tax subsidy for employer-sponsored insur-

ance is not in place, and briefly considering the political impli-

cations of their proposal for doing away with it.

Policymakers will appreciate Phelps and Parente’s con-

cise discussions of major components of the U.S. health care

system. They discuss employer-sponsored health insurance

and the tax subsidy that underpins the employer-sponsored

system, Medicare, and Medicaid. They also discuss the

impact of chronic disease on our health care system, and the

impact and consequences of the Affordable Care Act. These

discussions provide a useful point of reference for thinking

about health policy as well as a springboard for the specific

policy proposals that the book offers.

In its broad focus, intent, and insistence on the fundamen-

tal importance of re-orienting the incentives that have dis-

torted the cost and provision of medical services in the

United States, “Economics of US Health Care Policy” is

reminiscent of works such as Alain Enthoven’s 1980 “Health

Plan” and Paul Starr’s 1992 “Logic of Health-Care Reform.”

As in Enthoven and Starr’s work from 30 to 40 years ago,

Phelps and Parente point to the incentives that flow from the

tax code as the issue at the heart the contemporary health

insurance system’s failures.

Phelps and Parente make eliminating the tax subsidy for

employer-sponsored health insurance the centerpiece of

their policy proposals. This subsidy, they point out, distorts

the market for health insurance, drives the over-utilization

of medical services, and helps drive the ongoing growth of

the cost of medical care in the United States. It may also

lead to inefficiencies in the labor market, as employees may

feel unable to l eave jobs offering benefits. Eliminating the

tax subsidy, Phelps and Parente maintain, offers the best

available means of addressing core systemic problems

including inflation in health care costs, perverse incentives

for providers, and job lock.

Although perhaps outside of the scope of their book, a

more thorough discussion of the politics surrounding

employer-sponsored health insurance would go a long way

toward illuminating the full extent of the pathologies that

Phelps and Parente identify and propose addressing. As

research on path-dependent processes in social policy by

scholars such as Jacob Hacker and Paul Pierson has made

evident, dislodging a system that provides health insurance

to the majority of Americans would likely prove profoundly

difficult. Work by Christopher Howard and Suzanne Mettler,

meanwhile, has emphasized the extent to which tax expendi-

tures for insurance are often invisible as a form of policy to

the public.

While Phelps and Parente make a strong argument in favor

of a more market-oriented approach to health insurance, it is

not clear who the political supporters of such a plan might be.

In 1993–1994, President Bill Clinton pushed for an insurance

plan that, in line with the proposals of Enthoven and Starr,

sought to inject competition into health care markets and