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The Grumpy Economist: Covid tests parable

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The saga (WSJ) [link now works] of “free” Covid testing is a great parable for many things wrong with the American health payments system. 

… On a recent Sunday my family got tested at a pop-up tent outside a gasoline station. The sign on the tent advertised “free Covid testing.”

…The cost is billed to my health insurance. A few days ago, I received a routine letter from my insurance company summarizing what it paid: $1,140 a month for my daughter’s weekly PCR test. That comes to about $285 per test, 20 times the cost of an at-home rapid test.

Policy makers at both the state and federal levels have opted to finance Covid testing through private health insurance. …Insurers must reimburse testing providers, even out-of-network ones, and the state places no restriction on the amount reimbursed.

“We’ll make the insurance companies pay for it,” rings the standard-issue progressive policy-maker. Except, as should be obvious to anyone who has ever heard the word “budget constraint,” 

…Insurance companies will inevitably pass the costs on to policyholders through either higher premiums or reduced benefits.

And no small amount of money: 

Let’s revisit the $1,140 per month for testing at my daughter’s preschool. On an annual basis, that would add up to $13,860—a sum that comes close to the $14,974 average yearly expenditure per student in California public schools.

What’s going on? The government doesn’t want to be seen as taxing and paying for things. So, it commands that insurance companies or hospitals provide services for free. Those, however, fact actual budget constraints, so the money comes from somewhere. It must come from overcharging others. Overcharges cannot stand competition, so the government allows massive overcharges on some to cross-subsidize others. 

This is far worse than taxing and spending, as massive bloat creeps in to the system. Look at any medical bill to see the crazy results. 

The hilarious thing is how small the numbers are, actually. Compared to the $5 trillion the government has spent so far on the crisis, free tests are a drop in the bucket. Fighting about who pays for vaccines is even more pointless. 

Taxing and spending isn’t great — but it can be a lot better than the alternative of forcing a transfer, and allowing an uncompetitive market to support the system

A far better approach would have been for the government to foot the bill for testing. .. Last fall the Los Angeles Unified School District provided an estimated nine million Covid tests for students and staff. The price tag was hig: $350 million. But that’s $39 a test, or about one-seventh of what my insurer is paying for my daughter.

Government spending, on budget, allocated, also has the advantage of forcing those in charge to think just a little bit about whether it’s worth it. Even at $39 per test, are two tests per week for every gradeschool child really the most cost efficient way for the U.S. to fight the pandemic? 

Tests are, of course, one of the most natural externalities. 

(An old essay on the larger point.) 

 

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