What Freakonomics gets wrong about health care

In Think Like a Freak, the latest book from Freakonomics co-authors economist Steven Levitt and journalist Stephen Dubner, the authors tell a story about meeting David Cameron in London before he became the prime minister of Britain. They told him that the U.K.'s National Health Service — which they claim offers "free, unlimited, lifetime heath care" — isn't such a great idea.

They write:

Their key message is that "[f]undamentally with health care, until people have to pay for what they're buying it's not going to work. Purchasing health care is almost exactly like purchasing any other good in the economy. If we're going to pretend there's a market for it, let's just make a real market for it."

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Now putting aside the fact that the British health care system doesn't offer "free, unlimited, lifetime health care" — it, like any insurer, has to make decisions based on cost and efficacy of treatment — there are a whole host of arguments as to why purchasing health care isn't almost exactly like purchasing any other good in the economy.

As Nobel-winning economist Kenneth Arrow argued way back in 1963, health care is very different from other markets. Arrow thought uncertainty in the incidence of disease and in the efficacy of treatment can lead even competitive health care markets to inefficiently allocate resources. In other domains, a competitive market would result in lower prices and higher quality, but it turns out people can't easily shop around for the best price and best quality for a heart transplant like they can for a car.

Insurance is one way markets have typically dealt with uncertainties, like potential unexpected damage to homes, cars, and other property. And in the absence of a national health system, like the U.K.'s National Health Service, insurance takes its place in the medical market.

Now, obviously there are practical problems with this. Not everyone (or their employer) can afford insurance, so people are left uninsured, some of whom will become sick. This means that the uninsured can end up either dying of treatable illnesses, seeking treatment for chronic conditions in emergency rooms, and amassing large quantities of medical debt. And while medical charity makes up some of the shortfall, it still tends not to cover all the uninsured. This means government tends to end up in the market — even if it doesn't want to directly run a national health care system — through subsidizing insurance for the uninsured poor, like under Medicaid and the Affordable Care Act. The costs of having large numbers of people dropping out of the workforce either due to chronic illness or death is just too high to ignore.

But an insurance market is not what Dubner and Levitt seem to be advocating for. Under an insurance scheme, people don't pay for what they're buying. They pay a premium into a pool and the pool pays out for medical care (or damage to vehicles or property, etc). The insurance pool also makes rationing decisions regarding what kind of care is appropriate. Dubner and Levitt seem to want to have a system where people actually pay for what they're buying.

So essentially, Dubner and Levitt want to go back not just to the time before national health care systems, but to the time before health insurance. If you get sick, you'd better be prepared to pay for your care, every last penny. That, to Dubner and Levitt is what would be what is going to "work."

But as Noah Smith points out, the government run systems in other countries do already work. Countries with national health systems that spread the cost of insuring against unexpected health outcomes across everyone spend far less than the United States and achieve better health and quality of life outcomes. Do Dubner and Levitt pay any attention to that fact?

Now, maybe the idea of fully government-run healthcare is out of tune with core American values like self-reliance and individualism, which is why the U.S. has ended up with a system like the Affordable Care Act, based around a mixture of individual mandates, employer mandates, and subsidies. Maybe that will change in future, or maybe not.

But it's no surprise that Britain's Conservative Prime Minister walked out of the meeting with Dubner and Levitt. People in countries with socialist health care are pretty happy with it. That's because it works.