Thursday, August 06, 2009

The health-care wedge - Obama's health takeover will make it worse

Arthur Laffer says the big problem in health care is the gap between what health consumers pay and the actual cost. He calls this the health-care wedge. Any proposed solution that doesn't make that gap smaller or get rid of it will perpetuate the problems. Obama's takeover will make it worse.
President Barack Obama is correct when he says that “soaring health-care costs make our current course unsustainable.” Many Americans agree: 55% of respondents to a recent CNN poll think the U.S. health-care system needs a great deal of reform. Yet 70% of Americans are satisfied with their current health-care arrangements, and for good reason—they work. Consumers are receiving quality medical care at little direct cost to themselves. This creates runaway costs that have to be addressed. But ill-advised reforms can make things much worse. An effective cure begins with an accurate diagnosis, which is sorely lacking in most policy circles. The proposals currently on offer fail to address the fundamental driver of health-care costs: the health-care wedge. The health-care wedge is an economic term that reflects the difference between what health-care costs the specific provider and what the patient actually pays. When health care is subsidized, no one should be surprised that people demand more of it and that the costs to produce it increase. Mr. Obama’s health-care plan does nothing to address the gap between the price paid and the price received. Instead, it’s like a negative tax: Costs rise and people demand more than they need. To pay for the subsidy that the administration and Congress propose, revenues have to come from somewhere. The Obama team has come to the conclusion that we should tax small businesses, large employers and the rich. That won’t work because the health-care recipients will lose their jobs as businesses can no longer afford their employees and the wealthy flee. The bottom line is that when the government spends money on health care, the patient does not. The patient is then separated from the transaction in the sense that costs are no longer his concern. And when the patient doesn’t care about costs, only those who want higher costs—like doctors and drug companies—care.

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