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Hopefully This Plan Originated in its Proper Form on a Cocktail Napkin


Noah Smith notes that Levitt and Dubner have, in addition to a bunch of abject nonsense that caused even David Cameron to see he had better uses for his time, a plan to reform health care by Thinking Like a Freak (TM Freakonomics Book-Like Production Industries LLC.) It is as follows:

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).

As Smith says, this plan refutes their earlier argument (“Isn’t that like having the government pay for your car, but only if you buy a Maserati?”). But, oddly, Smith says “if you asked me, off the top of my head, to come up with the optimal health care system, I would come up with something a bit like this.” Is this a good reform model?

Not at all. It is, first of all, addressing a problem that doesn’t really exist; by international standards the British system is very efficient. And like most conservertarian economic speculation, it’s worse than indifferent to questions of equity. (Incidentally, one of my favorite examples of this is the beloved conservertarian assumption that prices effectively sell goods to the people who most want them. Yes, clearly the owners of season tickets to the leather seats behind home plate at Yankee Stadium are the people in the New York area who love baseball the most.) The L/D plan would, in its majestic equality, allow the affluent person with a well-stuffed savings account and the low wager-earner drowning in debt alike to set aside $1,000 for health care expenses and to take the risk of incurring 4 grand of debt through events they have little or no control over. Indeed, their always-smarmy tone (“if they are being prudent”) suggests that the point of the plan is not so much health care provision as setting up a cheap moral lesson in thrift, a lesson that not coincidentally will be much easier for people similarly situated to Levitt than for the ordinary working person in 2014 to pass.

But let’s assume arguendo that we should ignore questions of equity, and also assume that the only relevant question is trying to determine how to collectively spend health care dollars in the most efficient manner. Even on its own terms, the plan doesn’t make sense. The L/D wouldn’t disincentivize health care spending per se; it would massively disincentivize seeking cheap preventive care. If you get regular check-ups, it costs you money; if you save money by skipping checkups and get an illness that could have prevented, the costs are largely paid collectively. In other words, the L/D plan discourages the most cost-effective forms of care while doing little to discourage the least cost-effective. Even on its on terms, I don’t see how this plan makes any sense.

Which isn’t surprising, since L/D have no actual expertise in health care policy. I’ll leave the final word to our commenter Royko: “I don’t know why, but there seems to be this strain of economic thinking that says: ‘If good, detailed, sophisticated economics can give us some limited insights into specific scenarios, then bad, lazy, off-the-cuff economics should be able tell us everything we need to know about any human activity.'”

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