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 …

Chris Mowatt

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?


Since when was life fair?

Logic fallacies revelead

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


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.

Brian Gulino

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?"


Enter your name...

> 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.


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?)

Noah Smith

I like this "model". It's simple and beautiful, like Zoolander.


Enter your name...

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?

Daniel J. Luke

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)?


Chris, I think you are missing the point. This "shared responsibility" results in increased costs.
When Obamacare kicked in, many poor people got "free" healthcare they didn't have before, but many people in the middle saw their costs rise drastically to pay for others free care. How is this shared?

How does it punish the old? How is it unfair? If you don't have to pay for it you have no incentive not to waste it. When you have to pay for it maybe you will be a little more careful and take better care of yourself. You wouldn't go to the dr every time you sneezed. What is truly unfair is making someone else pay for your mistakes.


Americans without insurance pay out of pocket for medical care. These people pay the highest prices per service by far.

Levitt says, "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".

Its sounds like, despite contrary evidence, Levitt's has blind faith in the idea that markets always work.


I have to disagree with your assumption that health is over-consumed in the UK I.e that people are too healthy I think the problem with the health service in the UK is to do with supply not demand


In the United States, some chunk of people would spend the thousand pounds on a new tv or beer or whatever. Then when they need medical care, they would go to the ER, where they are guaranteed treatment, and then not pay. How is this different from the current American system?

Or would you allow the ER to require payment in advance before treatment?

Max Harris

The reason Cameron walked away is that reforming the NHS is an incredibly politically sensitive subject in the UK. One of Labour's most effective vote-winners is the claim that the Conservatives will 'destroy the NHS'. Your cabby survey definitely isn't capturing an accurate view of the electorate's position on this issue.

Even listening to some US intellectuals advocate a market-based healthcare system could create a negative news story for Cameron. So I wouldn't take his reaction personally.


I'm not sure I agree with the premise that you base everything on.
The UK healthcare (private and NHS) costs about 1/3 (you can look up the figures) per head of the USA and for that we get better overall health outcomes. Some of the differences can be due to profits ripped out of the system and inflated prices, but it would also appear that people in the UK are reasonably judicious in their use of the system.
Whilst this is purely anecdotal, in my experience the vast majority of people only use it when they need to and for normal preventative actions.
I would guess that is because most of us know people who have really needed it and we do understand that it is a precious national resource not to be squandered.
I wonder if there is a different sociological outlook on this between the UK and USA?


This is an excellent idea, provided that you want poor people to forgo health care in favor of, you know, eating. Maybe wealthy consumers good health will trickle down to the poor!

Just Some Guy

How about a system like this (I read this somewhere, or some version of it, but can't remember where):

I think this plan can please those who believe that everyone should pay for their own health care and those that want to make sure the poor and elderly are looked after. Of course this would need to be rolled out along with existing health care programs, so that those who have not been able to participate over their lives are not impacted negatively.

-A tax break is given to all. The money is to be deposited into an interest bearing account that is to be used solely for health care costs. If a person can not put a specified amount of money into the account each year the government will provide assistance.

-This account is to accumulate over the life of each person, gaining interest the entire time. Any money that is not used when the person passes will be allocated to family members.



Two questions
What is the evidence that a market offers lower prices than a single payer model monopsony?
Your model is likely to discourage people from going to the Doctor for little things. But will it save money. Fewer consultations for chest pain can easily be out weighed by a few heart attacks


One problem is that people will tend to underconsume essential care because they are not alwayss able to differentiate which demand is necessary and which is unnecessary. This is going to be greater for preventive services.