Can nobody work out the incentives?

I hate to do the both sides are out to lunch meme, but this response to the Levitt/Dubner/Noah Smith health care plan missed the main point: 

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 cont-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.

Cheap preventative care isn't where this system is going to go wrong.  Nor is it in the poor equality properties of the law, as some young people might end up ahead on total revenue (while others get crushed).  behind the veil of ignorance it isn't clear how it will all work out.

Now let's look at this plan:

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. 

So you have two efficiency problems here.  One is that you now have a whole bunch of extra paperwork and IT to track where people are on the cost spectrum.  Do we mail people bills after we determine if they have not hit the cap?  What about people will marginal addresses and living situations.  You are replacing a cheap system with average outcomes with one that is immediately more complicated to administer. 

But where this will go terribly wrong is for those people who go over 8,000 pounds per year.  Did you notice that piece where the government pays for all expenses over 8,000 pounds.  How do we know that these costs are acceptable?  After all, every single hip replacement might exceed 8,000 pounds in expenses.  How do we know if we are getting ripped off? 

So you end up needing to do the same schedule of acceptable costs as any socialized medical system has.  This rather removes the benefit of the free market in setting prices, as you have a single payer for all expensive conditions.  Will hospitals not offer free parking to get people to have a procedure at their (more expensive) hospital?  Why would the patient say no?  Altruism?

Even worse, this makes outcomes worse for patients with chronic conditions, at least until they hit the 8,000 pound ceiling in any year (and note the billing issues here -- if people have to pay and be reimbursed there can be a liquidity issue).  Now these people pay 4,500 pounds with a 1,000 pound subsidy.  Hopefully nobody will have trouble paying the 3,500 pounds per year?  That is around $450 a month -- what if the worker gets $5 an hour? 

And this gets back to the most important issue -- these people completely misunderstand the whole idea of insurance.  We insure against risks that exceed our ability to pay.  Is 3,5000 pounds a sum that every British person could pay without hardship?  A cost of zero would make it possible for everyone to be able to afford health care, regardless of financial circumstance.

Now, what I want to make exceedingly clear is that the nation with the highest private sector portion of payments also has the highest public sector as well, as even libertarian Megan McArdle notes:

A lot of people seem to think that "per-capita government spending" means "spending per person covered by government insurance." That's understandable, but wrong. "Per-capita government spending" means "government spending on health care per U.S. citizen." In other words, we spend as much to cover a fraction of our population as other governments spend to cover everyone. So pointing out that Medicare beneficiaries cost more on average than younger people is true but irrelevant. We spend more covering old people, poor people and veterans than many other governments spend to cover all those people, plus the rest of the population.

 So if you are advising the English on health care reform, why would you suggest the politically unpopular move of putting more "skin in the game" when the country that does the most of this ends up paying more money (out of government revenues) to cover fewer people?  And England allows private health care, so the benefits of a more private system (over and above current options) isn't absolutely clear. 

Finally, there is the issue of prioritization.  Is the NHS really the biggest policy challenge that the UK faces?  Is it in the top 10?  Now it is possible that innovation is under-supported by this approach.  Of course, they could simply increase research grants, if this was thought to be the most important issue.

But wouldn't issues like persistent unemployment and industrial decline be better places to focus efforts?  And how would increasing the government's expenditure on health care (likely financed by higher taxes) work to improve these issues?  Or is it expending political capital on an experiment that might well not work out to reduce costs?