Beating the endowment effect: denationalising healthcare, step by step

We all know what would happen if the state nationalised all pubs, integrated them into a “National Pub Service”, and decided that beer should be free at the point of use. Even ignoring adverse effects on efficiency etc, the state would have to introduce non-monetary means to prevent overexploitation of the sector’s resources. It would probably reduce the number of pubs, shorten their opening hours, and put fewer employees behind the bar. Expensive imported beer brands would disappear. Staff would probably be encouraged to put larger foam heads in each glass, and to refuse service to people who had had “too many”. Maybe the minimum age for drinking would be raised and complemented with a “maximum age”.

For these reasons, we would never create a National Pub Service. And in a recent article in the Times, Daniel Finkelstein argued that if we did not have a National Health Service, we would not create one now. But due to a psychological mechanism called the “endowment effect”, now that we have the NHS, we cling to it ferociously:

Once someone owns something, once it is theirs, they value it more. This is closely allied to another effect beloved of behavioural economists – loss aversion. People much prefer avoiding losses to making gains.

But if there was a widespread conviction in the British population that the NHS model had failed, would it really be impossible to dismantle it? Could an exit plan, even a radical one, not be drafted in such a way that the endowment effect would be neutralised?

How about a step-by-step exit plan that looked more or less like this:

1. The NHS ceases to be a provider of healthcare services and an owner of healthcare facilities, and becomes a reimbursement agency. In several small tranches, NHS facilities are sold to the independent sector. And while we’re at it, what would be wrong with nurses and midwives becoming shareholders of the hospital they work in? As legal entities in their own right, hospitals could be sued for malpractice or fraud. All providers would be free to set their own fees, and if these are higher than the NHS reimbursement rate, patients could choose to pay the excess.

2. People are allowed to opt out of the NHS and use their tax money to take out private insurance instead. Upon leaving, they receive a “compensation bond”, the value of which is related to their age and health status. Old and sick people would have to pay high insurance premiums in the private sector, but their bonds would enable them to offset that. Private insurers are required to smooth premiums over a lifetime by accumulating reserves while their clients are young. Old-age reserves are fully portable between insurers.

3. Market entry into health insurance and provision is eased. Trade unions are allowed to set up their own insurance schemes; charities and friendly societies are allowed to re-conquer lost terrain. The monopolistic licensing system for practitioners, drugs and medical devices is replaced by a system of competing private certification agencies. The market structure is deregulated. If McDonalds wants to open an in-house dispensary or a mini-surgery, they are free to do so, given that they are willing to assume the liabilities that come with it.  

4. The NHS no longer admits new entrants. However, if people incur health insurance costs that exceed, say, 15% of their annual income for a basic insurance package, then the state covers the excess. In this way, disabled and chronically sick people are just as lucrative customers to private insurers as health fiends and fitness trainers. 

My guess is that the endowment effect could be overcome. But whether such proposals could gain majority appeal, regardless of whether the starting point is the NHS or something else, is a different matter.

Kris, This is really interesting and well thought out, but what concerns me is how we might persuade politicians even to start on the process: just what incentives are there for politicians to seek such a radical transformation?

That seems like a very good plan, except:1. The NHS should rent out its existing land and buildings rather than sell them for a one-off lump sum, otherwise it’ll end up selling the stuff for less than market value (and it will have a nice source of future income that claws back some of the excess payments that they make to providers). And if the new organisations can rent rather than buy that reduces their commercial/interest rate risk.2. I don’t agree with ‘opting out’. That makes the tax system more regressive. Far better for the NHS as funding body to have a defined list of ‘essential’ treatments and the amount it is prepared to pay towards the cost of each.

Peter, here we’re back to the question who ultimately drives changes, politicians or intellectuals (in the Hayekian sense). I don’t think politicians have any incentives to implement changes in the outlined direction, unless pressurised into doing so by public opinion. And the public mood, I guess, won’t change until at least a large minority among opinion-makers start blaming the NHS’s failures on the NHS. Not on a particular directive, PCT managers, or poorly defined targets. Mark, I see why it could make sense for some healthcare providers to rent, not own, facilities. But why should they be owned by the government? Why shouldn’t private developers buy, equip and rent them out?

Kris, This is really interesting and well thought out, but what concerns me is how we might persuade politicians even to start on the process: just what incentives are there for politicians to seek such a radical transformation?

That seems like a very good plan, except:1. The NHS should rent out its existing land and buildings rather than sell them for a one-off lump sum, otherwise it’ll end up selling the stuff for less than market value (and it will have a nice source of future income that claws back some of the excess payments that they make to providers). And if the new organisations can rent rather than buy that reduces their commercial/interest rate risk.2. I don’t agree with ‘opting out’. That makes the tax system more regressive. Far better for the NHS as funding body to have a defined list of ‘essential’ treatments and the amount it is prepared to pay towards the cost of each.

Peter, here we’re back to the question who ultimately drives changes, politicians or intellectuals (in the Hayekian sense). I don’t think politicians have any incentives to implement changes in the outlined direction, unless pressurised into doing so by public opinion. And the public mood, I guess, won’t change until at least a large minority among opinion-makers start blaming the NHS’s failures on the NHS. Not on a particular directive, PCT managers, or poorly defined targets. Mark, I see why it could make sense for some healthcare providers to rent, not own, facilities. But why should they be owned by the government? Why shouldn’t private developers buy, equip and rent them out?

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