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 …