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Proof those 'Freakonomics' guys don't know much about healthcare

BritainVehiclesDavid Cameron
Do the Freakonomics guys know anything about health insurance?
The Freakonomics authors show the limits of pop economics

Noah Smith at noahpinion reports on how those bestselling "Freakonomics" authors/entrepreneurs Steven D. Levitt (an economist) and Stephen J. Dubner (a wordsmith) revealed the limits of their brand of pop economics with an anecdote they tell about an encounter with British Prime Minister David Cameron. (Their meeting took place before he became PM.)

The issue was Britain's National Health Service, which provides free healthcare to the entire population of the U.K. As described in an interview with Yahoo Finance, the pair tried to convince Cameron that the National Health Service "was laudable but didn’t make practical sense."

"'We tried to make our point with a thought experiment,' they write in their new book, 'Think Like a Freak.'"

"We suggested to Mr. Cameron that he consider a similar policy in a different arena. What if, for instance... 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?"

"'Rather than seeing the humor and realizing that health care is just like any other part of the economy, Cameron abruptly ended the meeting, demonstrating one of the risks of 'thinking like a freak,' Dubner says.

"'Cameron has been open to [some] inventive thinking but if you start to look at things in a different way you'll get some strange looks,' he says. 'Tread with caution.'"

Levitt and Dubner ascribe Cameron's abrupt termination of the meeting to his unwillingness to entertain an uncomfortable truth. Others may admire Cameron's restraint in not having Levitt and Dubner arrested on the spot for felonious smugness. Noah Smith quite properly expresses amazement that Levitt the economist could imagine that the healthcare market does, or should, resemble the car market:

"Does Levitt have a model that shows that things like adverse selection, moral hazard, principal-agent problems, etc. are unimportant in health care? Does he have empirical evidence that people behave as rationally when their health and life are on the line as when buying a car? Does he even have evidence that the British health system, specifically, underperforms?"

In fact, it does not underperform, at least in comparison with the U.S. health system. Britain's spending per capita on healthcare is about 41% of the U.S. (2010 figures), for outcomes that are comparable to American outcomes and in many respects superior.

Levitt and Dubner move from their misconception of the British system to a misconception of the Affordable Care Act. In their interview with Yahoo, they're right in stating that the linkage between health insurance and employment is a terrible flaw in the U.S. system. But they claim that "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."

That's manifestly wrong. Healthcare is nothing like "any other good." Unlike car buying, it's often a matter of life and death. Purchasing decisions are commonly made under desperate and urgent conditions, with few options to choose from and an extreme imbalance of information between buyer (the patient) and seller (the doctor or the hospital). A patient "purchasing" cardiac or cancer treatment will often decide to make the purchase without knowing the price, and figure out how to pay for it later.

A car is also a different good from health insurance. Any car one can buy from a legitimate dealer will meet a minimal level of utility--it will get the buyer from one place to another. Many of the additional dollars one pays for more expensive cars go for bells and whistles--leather seats, navigation displays, roominess, long-term reliability. But prior to the ACA, even a health insurance plan that wouldn't meet the minimal standard of keeping its owner out of bankruptcy in the event of a medical expense might cost some buyers thousands of dollars more than others simply because of differences in their medical histories. Some people were prevented from buying at all, for the same reason.

What we may have here is peak Freakonomics. Levitt and Dubner have squeezed this rock about as hard as they can, and they've pretty much wrung it dry. What's disturbing about their approach to healthcare is the hint that some of the rest of what they've written (four books including the new one) may also be balderdash.

Copyright © 2014, Los Angeles Times
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