Health Care Reform Musings

Categories: Politics & Economics

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Arthur Laffer has posted an opinion piece to the Wall Street Journal in which he points out several flaws with the present efforts towards health care reform. He (rightly, I think) asserts that the present suggestions, if passed, will only cause greater problems in an already flawed system.

The argument? Laffer argues that the real problem with the system as it stands is the so-called health care “wedge”—that is, “the difference between what health-care costs the specific provider and what the patient actually pays.” That is, the actual cost of providing health care is substantially lower than the price the patient/insurance company pays. But, as Laffer points out, in a third-party payment system in which next to no one actually directly pays for the service rendered, there is no natural control on demand, leading to skyrocketing prices on the supply side, which can then charge what it pleases. Subsidizing health care does what it does in virtually every other case: it causes higher prices. In Laffer’s words,

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.

This results in astronomically higher prices as there is no natural check on the suppliers, who have a vested interest in higher costs. (What Laffer does not then address is that without natural checks, governmental/legal controls on prices eventually become necessary as prices get out of hand. The government then dictates what the suppliers are allowed to charge. At this point there is no market—only direct government control of both the supply and demand, with the taxpayer paying for the government to control his/her health care options on both sides.

Unsurprisingly, Laffer’s argument is remarkably reminiscent of Milton Friedman’s comments on the flaws of our health care system in an interview with Imprimis:

LA [Interviewer]: Is there an area here in the United States in which we have not been as aggressive as we should in promoting property rights and free markets?
MF: Yes, in the field of medical care. We have a socialist-communist system of distributing medical care. Instead of letting people hire their own physicians and pay them, no one pays his or her own medical bills. Instead, there’s a third party payment system. It is a communist system and it has a communist result. Despite this, we’ve had numerous miracles in medical science. From the discovery of penicillin, to new surgical techniques, to MRIs and CAT scans, the last 30 or 40 years have been a period of miraculous change in medical science. On the other hand, we’ve seen costs skyrocket. Nobody is happy: physicians don’t like it, patients don’t like it. Why? Because none of them are responsible for themselves. You no longer have a situation in which a patient chooses a physician, receives a service, gets charged, and pays for it. There is no direct relation between the patient and the physician. The physician is an employee of an insurance company or an employee of the government. Today, a third party pays the bills. As a result, no one who visits the doctor asks what the charge is going to be—somebody else is going to take care of that. The end result is third party payment and, worst of all, third party treatment.
LA: Following the recent expansion in prescription drug benefits and Medicare, what hope is there for a return to the free market in medical care?
MF: It does seem that markets are on the defensive, but there is hope. The expansion of drug benefits was accompanied by the introduction of health savings accounts—HSAs. That’s the one hopeful sign in the medical area, because it’s a step in the direction of making people responsible for themselves and for their own care. No one spends somebody else’s money as carefully as he spends his own.

Laffer sums it up well:

Because Mr. Obama has incorrectly diagnosed the problems with our health-care system, any reform based on his priorities would worsen the current inefficiencies. Americans would pay even more for lower quality and less access to care. This doesn’t sound like reform we can believe in.

I don’t think anyone really questions that the system can be improved (and needs reform), but the first question that must be answered before any procedure is the nature of the disease. It would not be a good idea to fight the flu with intensive chemotherapy and amputation of a limb.

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