NCPA - National Center for Policy Analysis


August 5, 2009

The difference between what health care costs the specific provider and what the patient actually pays is known as the "health care wedge."  When health care is subsidized, no one should be surprised that people demand more of it and that the costs to produce it increase.  President 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, says Arthur B. Laffer, chairman of Laffer Associates and co-author of "The End of Prosperity: How Higher Taxes Will Doom the Economy -- If We Let It Happen" (Threshold, 2008).

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, says Laffer.

The bottom line:

  • 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.

Health care reform should be based on policies that diminish the health care wedge rather than increase it.  President 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 Laffer:

  • 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 President Obama's reforms would literally be worse than doing nothing, says Laffer. 

Source: Arthur B. Laffer, "How to Fix the Health care 'Wedge'; There is an alternative to ObamaCare," Wall Street Journal, August 4, 2009.

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