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Editorial Monday 19 May 2014: Freaking out about Levitt and Dubner's hog-whimperingly silly health policy proposals

I bought, read and enjoyed the book 'Freakonomics' by Steven Levitt and Stephen Dubner. Pithily-written, fun and with some interesting analysis, it made a good read. I didn't get its successor 'Super-Freakonomics', because I suspected that its trailed thesis on using a stratoshield to solve global warming was nonsense.

Their latest oeuvre, 'Think Like A Freak', reveals how they tried to lecture PM David Cameron on the shortcomings of the NHS, summarised in this recent Guardian book review: The trouble with the NHS ... is that offering any product or service free at the point of consumption inevitably skews the incentives of both providers and consumers ... Levitt and Dubner told Cameron "what if every Briton were also entitled to a free, unlimited supply of transportation? That is, what if everyone were allowed to go down to the car dealership whenever they wanted and pick out any new model free of charge, and drive it home?".

That is a quite impressively daft analogy on its own, ignoring as it does the important fundamental that on the demand side, the vast majority of healthcare is what marketing people term a 'distressed purchase'.

A distressed purchase is one that the consumer needs because they are distressed (in this instance, being ill). It relates to an urgent need.

In healthcare, you are likely to be vastly less expert in what works and represents value than the provider, who tends to have you over a barrel anyway because you need (or think you need) their product.

Furthermore, your choice, if bad, can in a minority of cases cause permanent injury or death. It is generally accepted that 10% of healthcare encounters in developed countries involve a medical error causing patient harm.

It also ignores the fact that the vast majority of healthcare expenditure in the NHS relates to the first two years and last six months of life, and to any maternities undergone. Some old OHE data is here.

Moreover, the incentives for providers of healthcare free at the point of consumption would surely be to charge all they can? This doesn't happen in the NHS for most elective care, due to a national tariff, and for most other kinds of care it is also avoided due to an overall budgetary constraint.

Another obvious incentive would be for providers to cherry-pick the healthiest patients and deter the hardest. In cardiac surgery, the area where our data is best, this does not happen.

In Levitt-and-Dubner-land, providers would also want lengthy access queues to divert wealthier patients to private provision. This is not happening in  the NHS.

So far, so hog-whimperingly silly.

Matters get considerably funnier with this recent blog by Levitt, which offers a modest proposal to reform the NHS.

Levitt's model is that "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 healthcare costs.

"In my system, individuals are now required to pay out-of-pocket for 100 percent of their healthcare 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 healthcare, 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)".

Levitt suggests that this could cut healthcare spending by 15% "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".


It is not wholly clear how he thinks competition will lead to more efficiency; nor indeed how he defines efficiency - whether in the technical or allocative sense.

The NHS prioritises allocative efficiency of healthcare as a universal service. (Presumably, Levitt knows that the poorest people in any society have the worst health, and under the Inverse Care Law, also get the worst healthcare.)

Levitt's assertion that people access low-value healthcare because it's free is fascinating. In terms of the real problems affecting the NHS presently, one is that people are acessing high-value healthcare (A&E, or in Levitt's native terms, ER) due in part to access issues in primary care.

Primary care access issues may relate to the lack of user charging (which the evidence does not support); equally, they may relate to profoundly inflexible and myopic appointment booking systems adopted for producers' convenience and to the sector's non-adoption of evidence-based workforce substitution.

However, Levitt appears to ignore the opportunity costs of consumers' time in accessing low-value healthcare. This is curious, since Levitt and Dubner's whole approach conceptualises individuals as rational maximisers.

The attractions of consuming (and of waiting to consume) low-value healthcare may outweight the other potential choices, such as reading entertaining generalisations about healthcare systems of which the authors' understanding is limited.

Alternatively, they may not.

Alternatively, there may be no attractions (in the vast majority of cases) to individuals wasting their time to consume low-value healthcare.

Moving to consider the supply side, it is a curious error for an economist to set a price threshold of £8,000 as the level at which state funding replaces individuals, for several reasons.

One is that a provider wanting a highly-profitable business would simply accelerate charges and costs out of proportion to their value (maybe conducting lots of consultant-to-consultant referrals, and many largely useless diagnostic tests using shiny machines that go 'ping') to ensure that their total bill radically exceeded £8,000. They can thus maximise their earnings from both the individual payer and the state.

Another is that average savings in the UK are just over £14,000. Two or three bad healthcare years in succession would lead dangerously close to bankruptcy for such people. (Would it be churlish to point out that medical bankruptcies are a major issue in the USA? No? Oh good.)

Likewise, the UK's economy is strongly skewed to domestic consumption. Many of the least financially-educated and least well-off (who will certainly in time have the worst health) will be poorly incentivised to set Levitt's proposed £1,000 lump sum aside for medical savings.

Likewise, distributing the money would rely on some kind of national healthcare IT programme. Neither of our nations has so far proven adept at such endeavours.

There is also a risk with the fixed threshold idea: of providers' up-pricing to get near the £2000 100% co-pay mark. Why might they do this, when a rational maximiser would seek best value? Perhaps because a (sick) individual's capacity and capability to effectively scrutinise a provider's bills will generally - like their purchasing power - be more limited than that of a specialist national body. This dilemma has created the profession of medical billing advocates in the US. And low, fixed-price quotes for work seem unlike something a provider could offer, in case they find some highly-lucrative underlying pathology.

Fixed thresholds have form with cost-inflation in healthcare: the NHS's national death panel - sorry, cost-effectiveness regulator - NICE has an unofficial reimbursement cut-off threshold of £30,000 per quality-adjusted life year gained for new technologies. I wonder if Levitt would care to hazard a guess at the level which many new pharmaceuticals' prices are just below?

I think the proposal's fundamental misunderstanding is its failure to see that the NHS/Beveridge system is an explicit risk-pool across the entire population. Repeated opinion surveys find the NHS to be near or at the top of reasons stated why people feel proud to be British.

Britain has been one of Europe's most market-friendly societies for some decades now; yet despite well-known scandals in NHS and private sector care quality (as occur in every nation's health system), the strong sense persists that we value the universal nature of the NHS offer based on clinical need at the point of use and not ability to pay.

Equally, the evidence shows that we feel that there are certain things that markets provide less well, and that healthcare is one of them. In a time when the high priests of market ideology in the financial industries have had to be baled out by massive state intervention, a more thoughtful discourse on the limitations of markets as well as those of governments and states would be welcome.