A Freakonomics Proposal to Help the British National Health Service

In the first chapter of our new book, Think Like a Freak, we recount an ill-fated interaction that Dubner and I had with David Cameron shortly before he was elected Prime Minister of the U.K. (In a nutshell, we joked with Cameron about applying the same principles he espoused for health care to automobiles; it turns out you don’t joke with Prime Ministers!)

That story has riled up some people, including an economics blogger named Noah Smith, who rails on us and defends the NHS.

I should start by saying I have nothing in particular against the NHS, and I also would be the last one to ever defend the U.S. system.   Anyone who has ever heard me talk about Obamacare knows I am no fan of it, and I never have been.

But it doesn’t take a whole lot of smarts or a whole lot of blind faith in markets to recognize that when you don’t charge people for things (including health care), they will consume too much of it. I guarantee you that if Americans had to pay out of their own pockets the crazy prices that hospitals charge for services, a much smaller share of U.S. GDP would go to health care. And, of course, the same would be true in the U.K.

Smith ends his critique by writing:

But I don’t think Levitt has a model. What he has is a simple message (‘all markets are the same’), and a strong prior belief in that message.

Smith could not have known, based on what’s in Think Like a Freak, that we actually do have a model for the NHS. And, indeed, I proposed the model to Cameron’s team after he left the meeting.

If nothing else, the model is admirably simple.

On January 1 of each year, the British government would mail a check for 1,000 pounds to every British resident. They can do whatever they want with that money, but if they are being prudent, they might want to set it aside to cover out-of-pocket health care costs. In my system, individuals are now required to pay out-of-pocket for 100 percent of their health care costs up to 2,000 pounds, and 50 percent of the costs between 2,000 pounds and 8,000 pounds. The government pays for all expenses over 8,000 pounds in a year.

From a citizen’s perspective, the best-case scenario is that they use no health care, so they end up 1,000 pounds to the positive. Well over half of U.K. residents will end up spending less than 1,000 pounds on health care in a given year. The worst case for an individual is that he/she ends up consuming more than 8,000 pounds of health care, so that he/she ends up 4,000 pounds in the red (he/she spends 5,000 pounds on health care, but this is offset by the 1,000 gift at the beginning of the year).

If it turns out that consumers are sensitive to prices (i.e., that the most basic principle of economics holds, and demand curves slope downwards), total spending on health care will decrease. In simulations we’ve run at The Greatest Good, we estimate that total health care costs might decline by roughly 15 percent. That is a decrease in spending of nearly 20 billion pounds. This decrease comes because (a) competition will likely lead to increased efficiency; and (b) consumers will cut out the low-value healthcare services they are currently using only because the services come for free.

Everyone remains protected against catastrophic illness.

Like any government program, there are winners and losers. The majority of Brits will be better off in the scenario I laid out, but those who need to spend a lot on health care in a particular year will be worse off. That is because the system I propose provides only partial insurance – which retains incentives for consumers to make prudent choices. The healthcare system would then mimic the rest of life. When my TV breaks, I have to buy a new one. I’m worse off than the guy whose TV did not break. When my roof needs to be replaced, it’s expensive, and I’m worse off than if the roof didn’t need replacement. There’s nothing immoral about this; it is just the way the world usually works.

There are, no doubt, many improvements that could be made to this simple proposal. For instance, maybe the cash payment to the elderly at the beginning of the year should be larger than that to those who are younger. Maybe the cash payment is bigger to those who have chronic illnesses, etc.

I have no idea whether this sort of plan could be politically viable, but I have done some informal polling of the British electorate. Every time I take a cab in London, I ask my driver whether he would be in favor of my proposal. Probably the cabbies are just being polite, but roughly 75 percent of them say they would prefer my plan to the current system.

Perhaps, then, it is time for another audience with the Prime Minister …

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  1. Chris Mowatt says:

    We need innovative thinking to improve services and, as you rightly point out deal with the ever increasing demand. No doubt.

    The thing about the NHS is that it gives us all shared responsibility in each other’s health.

    Your system would punish the old, with complex comorbidities and the poor with the worse health that
    lower socioeconomic class attracts. How would you deal with that inherent unfairness?

    Well-loved. Like or Dislike: Thumb up 46 Thumb down 22
    • Cody says:

      Hidden due to low comment rating. Click here to see.

      Disliked! Like or Dislike: Thumb up 41 Thumb down 48
      • Logic fallacies revelead says:

        Since when was the fact that life is unfair a reason to not trying make it more fair?

        Well-loved. Like or Dislike: Thumb up 81 Thumb down 16
      • Eric says:

        He actually mentioned increasing the cash gift according to many different factors. I suppose that you could also lower the threshold at which all expenses are paid based on income. He just expressed his plan in its most basic form first.

        Well-loved. Like or Dislike: Thumb up 21 Thumb down 2
    • James says:

      Under the current system, you punish those who work to maintain their health through exercise, diet, &c.

      Hot debate. What do you think? Thumb up 18 Thumb down 19
      • James says:

        This isn’t true at all. As a healthy Briton, I feel proud that I contribute towards the NHS and I feel proud that we have the NHS. I firmly believe that the NHS is the greatest healthcare service in the world. It’s my privilege to help my fellow citizens through sickness.

        Well-loved. Like or Dislike: Thumb up 47 Thumb down 16
  2. @3753Cruithne says:

    Surely it would be more sensible to allocate everyone £1k at the start of the year through the NHS, but not make it withdrawable until the year is completed. This would mitigate against the less prudent amongst the populace from frittering away their insurance on non-medical goods.

    Well-loved. Like or Dislike: Thumb up 60 Thumb down 2
    • Mike says:

      Better yet, you could force them to leave half of it in the account, and encourage them to leave more, so their insurance level grows against the day that they need more expensive medicine. Actually better still you just leave it as is. Fifteen percent savings isn’t all that much-you can probably realize similar gains with a less radical solution.

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      • Eric says:

        15% savings is not that much?

        Is it possible you work for the Federal Government? ;)

        In the US, a 15% savings on health care would be $420 billion a year.

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  3. Brian Gulino says:

    Smith’s critique is valid. Medical care is not like other economic goods. In California, where I live, we are looking at more incidences of whooping cough because parents choose to not vaccinate their kids. We have a “prisoner’s dilemma” choice. It may be in my interest not to vaccinate my child, but it is in my interest to have you vaccinate your child. Herd immunity will keep my child safe from whooping cough as long as everybody else’s children are vaccinated.

    Medicine abounds with these choices. We may forego paying for poor women’s birth control but we must pay to educate their unwanted children. Make drug addicts pay for their needles and pay for their AIDS treatment. And so it goes.

    So, when all these people make their own shortsighted and selfish choices we will be left with a large bill and with you wagging your finger at them:

    “Why did you waste the thousand pounds we gave you?”

    Well-loved. Like or Dislike: Thumb up 75 Thumb down 8
    • pawnman says:

      How in the world is it in your interest not to vaccinate your child?

      Thumb up 3 Thumb down 2
      • Brian Gulino says:

        Benefit: none if you have “herd immunity” (everybody else is vaccinated).
        Cost: cost of vaccination, time off from work taking kid to doctor, side effects, small, but real, risk of serious side effects.
        For poor people, missing work for any reason can be reason for dismissal. The more fortunate among us often fail to appreciate this.

        Well-loved. Like or Dislike: Thumb up 10 Thumb down 2
      • Oliver H says:

        @Brian Gulino

        It’s cognitive dissonance to count on herd immunity if you are choosing not to vaccinate because you are actively undermining herd immunity – i.e. reducing the probability of being able to profit from it.

        As for the alleged risks, these have nothing to do with vaccination and nothing to do with the poor. These are risks that are critical dependent on your local legislation and the proper way to deal with it is to lobby to change the legislation – it’s nothing that can be generalized.

        It’s not that it’s in your interest not to vaccinate your child anymore than you might hand it a gun and say that well, if it blows off its own head, you have one less mouth to feed. It IS in your interest to change the legislation to mandate employers to grant you time off for such things, possibly under the premise that you catch up with your hours.

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  4. Enter your name... says:

    > From a citizen’s perspective, the best-case scenario is that they use no health care

    No, from a citizen’s perspective, the best-case scenario is that they NEED no health care. Money in the bank does you no good when you’re dead.

    Well-loved. Like or Dislike: Thumb up 45 Thumb down 5
  5. Baughman says:

    Of course you know this but simply didn’t include it in your post. I’ll point out the obvious side-effects of your system.

    As customers become more price-competitive, pricing of health services will become more transparent since consumers will demand this. As prices become more transparent, there will be competition between providers to keep costs low, as this is where the demand will go. The current system has none of the systems in place for a well-functioning market to exist.

    Levitt for president! (or Prime Minister?)

    Well-loved. Like or Dislike: Thumb up 23 Thumb down 13
    • giles says:

      In the UK we have NICE which negotiates prices for the NHS. If someone tells me that my daughter is going to die unless I pay £20K I am not convinced that I’ll do a better job.

      Well-loved. Like or Dislike: Thumb up 37 Thumb down 5
  6. Noah Smith says:

    I like this “model”. It’s simple and beautiful, like Zoolander.

    http://noahpinionblog.blogspot.com/2014/05/levitts-model.html

    Hot debate. What do you think? Thumb up 16 Thumb down 15
    • nosebag says:

      No, it’s not. It’s laughably naive.

      Well-loved. Like or Dislike: Thumb up 16 Thumb down 8
      • Rob says:

        How is it naive?

        It is almost exactly like the health care plan I purchase for myself…an HSA plan.

        Health Savings Accounts work this way. Catastrophic insurance combined with a savings account that can be used for paying for costs up to that point.

        It works great. The money goes into the savings acct pre-tax and any I dont use in a year rolls over to next year. Yes, a bit different than a check on Jan 1, but only in implementation, not in concept.

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      • Oliver H says:

        @Rob

        Yes, and your Health Savings Account pays the usual ridiculous prices for healthcare in the US.

        Works great? If you want to waste your money, perhaps.

        Thumb up 3 Thumb down 1
  7. Enter your name... says:

    Have you calculated the economic cost of people dying prematurely or becoming disabled because they don’t want to incur the expense of finding out whether they’re having a heart attack, or they’re pretty sure that it’s diabetes and they can’t afford to treat it?

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    • plusECON says:

      This is countered by the economic cost of people not willing to go to the doctor to find out if they’re having a heart attack or if they have diabetes because the hospital is overcrowded with people who have a slight cough and figure “why not take a break from work to see if I have pneumonia – it’s free!”

      Thumb up 2 Thumb down 5
      • mabuhay says:

        You have to strike a balance though. In the US, there is a large problem of uninsured patients forgoing preventative services because they are unable to pay for such services. As a result, they often end up in the hospital and as a result, the hospitals are mandated to cover the costs for their operations should they be unable to pay for it, which was one of the reasons why the Obama administration attempted to forced Medicaid expansion in all 50 states to offer more preventative services and stop the uninsured from causing hospitals much distress. The problem was bad enough that hospitals in Florida, one of the states that refused Medicaid expansion, lobbied the state legislature and and convinced a few Republicans to vote for Medicaid expansion.

        I do not know enough about the NHS to make judgments, although I have heard of stories of overutilization for services. If they government attempts to go the other way and make citizens pay up for services, it is important that they make a balanced approach.

        Thumb up 3 Thumb down 0
      • Oliver H says:

        “This is countered by the economic cost of people not willing to go to the doctor to find out if they’re having a heart attack or if they have diabetes because the hospital is overcrowded with people who have a slight cough and figure “why not take a break from work to see if I have pneumonia – it’s free!””

        Nope. That would be the economic cost of incompetent management driving people away from their workplace.

        Contrary to popular opinion among some economic ideologues, there’s plenty of people who like their job…

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  8. Daniel J. Luke says:

    How do you choose which hospital the ambulance takes you to for head trauma/heart attack/stroke (and therefore let market forces help the produce hospitals that give you appropriate service/price levels)?

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    • Penny Miller says:

      None of this takes into account the British personality and British culture. We do not flock to the doctor ‘ because it’s free’ -in fact we re quite reluctant to go and probably it would help if we went more and earlier. We re also aware it’s not ‘free’, but free at the point of need, and paid for out of taxes. We re grateful to have it and are horrified by the situation in the US.

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