Steven Levitt on health care

On the April 13, 2011 Freakonomics podcast, Steven Levitt describes the two problems he doesn’t believe were addressed with health care reform.

The following is my dictation of Levitt’s comments, which start about 10 minutes into the podcast:

There were two things you needed to do to health care reform to materially improve the situation.

The first was to break the link between the provision of health care and employment.  That is just an archaic element of our health care system that really makes no sense, and yet because of tax subsidies, it’s the way that most get their health care.   There’s no good economic justification for it.  If anything, I think this health care reform bill strengthened that link.

Why doesn’t it make sense to have health care tied to employment?  I think that you actually want to turn the question around.  Why in the world would you want it tied to employment?  I think there’s no good reason.  For one thing, many people don’t work.

It leads to job lock, where it’s difficult to change jobs, and it leads to circumstances where we have to have these overlapping systems, which are inefficient.

He then asks a question I often ask:

Why is your auto insurance not tied to your employer?

Reason number two:

An even bigger problem with health care today, which was not addressed at all in the reform bill, is that people aren’t paying for the services that they’re getting.

It’s virtually the only part of the economy where I can go out and get any service I want — cancer treatment, open heart surgery — whatever it is and I pay $3 for it even if it costs $50 thousand or $100 thousand.

Then Levitt goes on to explain that health care is just like any other good in the economy and because

…we aren’t charging people for it what it costs to produce, people are inefficiently consuming it, they’re making the wrong choices and you can tolerate that if it were a small part of the economy, but since it’s 15% to 17% of economy we have to treat it like its any other good.

Now people hate to talk about this trade-off between health and life and money, but the fact is that if not today, then sometime in the not too distant future, we’re going to have to make trade-offs, such as my grandmother is in a vegetative state being kept alive by machines pumping her heart, and instead of the state paying for that, they’re going to say, look, you’re going to pay for some of this.  You can either take the $150,000 and we’ll keep your grandmother alive or you can put your kids through college, your choice.

And people are going to have to start making those tough choices.  It won’t be pretty.  It won’t be fun or happy.  Economics is the study of scarcity and in a world where health care becomes more and more costly, the scarcity is going to be more and more binding and we’re going to have to make those tough choices that are imbued with this moral element, but nevertheless it’s an economic choice when you get down to it.

I agree with Levitt.  I believe these two things will do more to improve the status of our health care and the world’s health care than anything else.

But, as I typed the last two paragraphs it occurred to me that perhaps those tough choices are what people hope to escape.  In a freer health care market, we fear for that moment when we have to make such an economic choice, knowing we have to live with it and others may question our motives.  Maybe its easier on our conscience to have someone else make that choice for us.  Or we’d rather make the choice without money being a factor.

However, something I think many of us overlook is that innovation and competition in a freer health care market could drive costs down and improve effectiveness to the point that money is about as much of a factor as it is in deciding whether to eat at Chili’s or Applebee’s (it’s not).  Innovation and competition have worked wonders for other goods and services.

The other part of the podcast on college education was worth it too.

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4 thoughts on “Steven Levitt on health care

  1. Seth:

    Think risk management matrix and third party payer effect.

    Now think: trash the risk management matrix and why you learned to love the third party effect.

    Dr. Strangelove is the government intrusion.

  2. The voter in the booth, or the sign-poster in his front yard, is rather more likely to say “Health care is a right not a privilege” than “Make health care more like Lasik.”

    Robin Hanson pointed out that it’s important that you signal you will care for your sick family members, so college or life support is a decision we hate to make. If there’s one system which doesn’t provide a service, you might feel bad about your loved one not getting it, but at least you don’t feel like you are abandoning her. If the service is available, but very expensive you have to own up to your hard choice. Or, more palatable than owning up to it, you can blame someone else for not giving the service away for free!

    I wonder if Dan Ariely will ever address this? Of course, our irrationalities in these matters, as in others, are magnified rather than ameliorated by politics. You don’t want to decide to pay, ergo third party payers. HMOs try to contain costs, they are condemned, ergo no cost containment, ergo the rewards to “innovation” in health care go to benefits * costs rather than to benefits / costs.

    If you think about it, the Canadians come a little closer to having the “best” of both worlds. They can expressively have their single-payer system, but can come to the USA for fee-for-service. If we had federalism in health care, we might have a similar system too. Texas, North Dakota, Nevada and Delaware might have very free systems, while the NE corridor and the west coast states could have their systems on the Cuban model. Thanks to our internal mobility, you could travel when you needed something serious done. Though, the more mobility between systems would be an option, ceding of the decision to not treat to the public system would be less satisfying. Though the less innovative public systems would at least be able to take advantage of innovations from the more dynamic lasik-producing systems.

    • Alex – Thanks for the comment. Singapore offers a federal and private system. From what I understand, it’s sort of like choosing between US Postal or FedEx. In a lot of cases, US Postal works for what you need. But in some cases, for various reasons, we opt for a private carrier. That keeps the elements of innovation and competition.

  3. Pingback: “Why I Support Obama”: Point 1 | Our Dinner Table

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