Worse than Doing Nothing

During this health care debate, it’s become clear that a very large number of Americans are unimpressed with President Obama’s plans for reform. Despite what he and his spokesmen say, it’s hard to believe that we can make things better by involving more government and more money. In fact, I believe that proper reform is actually in the opposite direction. The value is not in hiding away the cost of health care, but actually in removing the middlemen.

Arthur Laffer made this point better than I could in this Wall Street Journal column. Economics is based on the dynamic tension between consumers and producers. The producers want to be able to charge more for the product. Consumers want to pay less. It’s this tension that drives free markets to produce better products at lower, but sustainable, prices over the long term. If you detach either end of this equation, the tension is broken and it begins to break down.

Although we’ve all come to love it, medical insurance itself is part of the problem. We pay a flat fee every month and we’re able to consume as many services as we can get approved for. By removing the patient’s concern about cost, we allow the producer (the doctors and hospitals) to charge more with no immediate effect. Maybe our premiums will go up next year, but that’s too far removed from the action that drove them. If I had to pay for each doctor’s visit, each diagnostic test, and each prescription at full price, I’d become a much pickier consumer. I’d look for better deals. Those providers would have to compete for my money. Services get better and prices go down.

Now, add another level of indirection when the government funds the medical insurance. This means some folks getting free insurance (no cost at all!) with no concern for the cost of the services they consume. When the prices go up in this scenario, the government foots the bill. There isn’t even an increase in premium prices for the patient. How does government solve this problem? By setting prices. They declare they will only pay so much for services. So, the service providers either refuse to accept patients on the government plans or they make up for the lost income by pushing the costs over to those still paying for their own insurance. Which continues to increase those premiums! And, if there are no other kinds of patients (in a single payer system like Canada or the UK), then the fix is to simply ration the care.

Distancing the payer from the service provider causes breakdowns in the benefits of free market economics. The solution here is to bring them closer. Mr. Laffer calls this the wedge. The wedge is the difference between what services cost and what the patient actually pays. The bigger the wedge, the worse the problem. The key is to shrink or remove the wedge.

Thus, health-care reform should be based on policies that diminish the health-care wedge rather than increase it. Mr. Obama’s reform principles—a public health-insurance option, mandated minimum coverage, mandated coverage of pre-existing conditions, and required purchase of health insurance—only increase the size of the wedge and thus health-care costs.

According to research I performed for the Texas Public Policy Foundation, a $1 trillion increase in federal government health subsidies will accelerate health-care inflation, lead to continued growth in health-care expenditures, and diminish our economic growth even further. Despite these costs, some 30 million people will remain uninsured.

Implementing Mr. Obama’s reforms would literally be worse than doing nothing.

Put more emphasis on Health Savings Accounts to give taxpayers a tax-advantaged way to pay for these services, but make them pay for them themselves. Put the costs in front of the consumer and he will begin to shop. When people feel ownership and control of the costs, they will manage the money better than any government agency ever would.

3 thoughts on “Worse than Doing Nothing

  1. Hey Wyatt, one of the weirdest things about our medical insurance situation in the US is how it’s tied to one’s employer.

    You’ve recently made some personal-life changes 🙂 that imply that you’ve given special attention to this piece of the puzzle.

    I’d love to hear your thought process w.r.t. health insurance during your recent transition; not dollar amounts, but if you’ve got percentages handy and are OK sharing them, I’d find that really interesting; in any case it’s dropping from the 30,000-foot view down to what Wyatt Webb did and how it affected him and his family.

    –Bob

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