Recommended reading for Steven Levitt

Steven Levitt and his trusty Freakonomics sidekick were invited by David Cameron to advise on health policy, as they recount in their latest book. Apparently the PM walked out on them. Levitt has kindly given us some more details on his proposal for British healthcare. It consisted of the following:

  • Every British resident is given £1000 per year
  • People must pay out of pocket up to £2000
  • For annual expenditure between £2000 and £8000, the co-payment is 50%
  • The government pays for everything in excess of £8000 in a year

Various people have already commented, so go to them for some insights. Here I just want to help Steve by offering him some suggestions for weekend reading. He makes a number of claims in his blog post that make him look like a novice; most notably in comparing ill health to a broken TV. Hopefully, by doing the reading that I suggest here, he can avoid having smart people walk out on him in future.

“…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”

So Steve’s proposal is framed as a solution to moral hazard. If you think this is a problem for the NHS, you’ll have to show me the evidence. We already have mechanisms in place to deal with it – some people pay for prescriptions, doctors don’t receive fee-for-service – but Steve’s proposal wouldn’t prevent it anyway. Bizarrely he appears to have forgotten about private insurance, under which moral hazard could very much exist. Furthermore, under his system, insurers would only have to pay up to a maximum of £5000. Even if individuals did consume as much healthcare as humanly possible their premiums would not need to go up. There would be no adverse selection. Moral hazard could persist and the government would shoulder the cost.

“Consumers will cut out the low-value healthcare services they are currently using only because the services come for free”

They won’t. Co-payments stop people using care that they actually need because we aren’t able to distinguish between low value and high value healthcare.

“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”

How did prices come into this!? Steve’s tone suggests he hasn’t considered the possibility that this ‘most basic principle’ doesn’t hold, but never mind. I assume Steve knows about the RAND health insurance experiment and its famous -0.2 figure for the price elasticity of demand. Anyway, his claim simply doesn’t follow. Capping expenditures in this way can cause poor adherence resulting in greater healthcare costs through hospitalisation.

“Competition will likely lead to increased efficiency”

This claim, which it appears is built into his team’s simulations of the likely outcomes of the proposal, is a biggy. Based on the evidence we certainly cannot say it is ‘likely’. It’s clear that Steve hasn’t fully considered the evidence in regard to the NHS, which is far from being clear-cut. Steve is vague, but I assume here that he means competition in the provision of healthcare, and that the NHS would cease supplying care. Or maybe he just didn’t realise how the NHS works. Given his previous comment, it’s clear he means competition on price. Even the most pro-competition academic health economists in the UK don’t support price competition because the evidence suggests it negatively affects quality.

“The majority of Brits will be better off in the scenario I laid out”

Here Steve appears to completely miss the purpose of the NHS. It’s hard to imagine the majority of Brits being ‘better off’ following the dismantling of the NHS – not least because we think it’s great. However, given what we know, Steve’s system will necessarily result in an increase in health inequality because the poorer are sicker. This increase in health inequality would result in welfare losses because the (British) public really value equality in health, even more than doctors.

A reading list

What Steve doesn’t seem to realise – or, probably, he does – is that his system is akin to just making the tax system less progressive and at the same time rationing less expensive healthcare based on ability to pay. It isn’t clear to me how any good can come from this. So here’s some weekend reading for Steve, which might help him refine his ‘model’. I’ve limited the list to just 10 items relating to the points above (to give Steve a chance), so feel free to suggest any others in the comments below.

  1. Adams, AS et al (2001) The case for a Medicare drug coverage benefit: a critical review of the empirical evidence. Annual Review of Public Health 22: 49-61
  2. Aron-Dine, A et al (2013) The RAND Health Insurance Experiment, three decades later. Journal of Economic Perspectives 27(1):197-222
  3. Arrow, K (1963) Uncertainty and the welfare economics of medical care. American Economic Review 53(5): 941-973
  4. Culyer, AJ & Wagstaff, A (1993) Equity and equality in health and health care. Journal of Health Economics 12(4): 431-457
  5. Dolan, P et al (2005) QALY maximisation and people’s preferences: a methodological review of the literature. Health Economics 14(2): 197-208
  6. Lohr, KN et al (1986) Use of medical care in the Rand Health Insurance Experiment. Diagnosis- and service-specific analyses in a randomized controlled trial. Medical Care 24(9): S1-87
  7. Nyman, J (1999). The economics of moral hazard revisited. Journal of Health Economics 18(6): 811-824
  8. Propper, C et al (2008) Competition and quality: evidence from the NHS internal market 1991-9. The Economic Journal 119(525): 138-170
  9. van Doorslaer, E et al (1997) Income-related inequalities in health: some international comparisons. Journal of Health Economics 16(1): 93-112
  10. Zweifel, P & Manning, WG (2000) Moral hazard and consumer incentives in health care. Handbook of health economics 1: 409-459
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