NCPA - National Center for Policy Analysis


August 11, 2009

Government expansion in medical insurance, while claiming to reduce costs, has consistently increased the average cost of health care by reducing its marginal cost.  And while politicians respond to public complaints about increasing medical costs, they invariably do so by trying to disguise the costs with more subsidies and convince voters that any costs not covered by reductions in waste and fraud will be paid with higher taxes on the rich, says Dwight Lee, William J. O'Neil Chair in Global Markets and Freedom at Southern Methodist University's Cox School of Business.

The medical plan receiving the most attention in Congress is no exception:

  • A recent estimate by the Congressional Budget Office (CBO) is that the House bill would require government medical insurance subsidies of $773 billion from 2013 to 2019.
  • Such large subsidies will increase waste and fraud and will not be paid for entirely by the rich.
  • They will also increase the average cost of medical care by reducing the marginal costs paid for that care.

Another plan being considered could reduce medical costs and increase prosperity; that's the McCain plan for taxing the value of employer-provided medical insurance.  Obama is reportedly open to the idea, but unfortunately, his sudden interest in taxing employer-provided health insurance is motivated by the desire to finance the large increase in subsidies central to his medical plan.

However, if Obama really wants to lower costs in ways consistent with consumer choice, and also stimulate economic activity, he should recommend taxing health insurance and using the revenues to reduce marginal tax rates, says Lee.

This would result in two marginal changes that would generate improvement in economic productivity, says Lee:

  • Higher marginal costs for medical insurance would reduce the average cost.
  • Higher marginal returns to creating wealth would increase prosperity.

Source: Dwight R. Lee, "As In The Case Of Supply-Side Economics, Real Health Reform Happens At Margins," Investor's Business Daily, August 7, 2009.


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