Laffer Has A Better Idea For Health Care Reform

If you want to see one view of the financial side of health care reform as being pushed by the Democrats, Arthur Laffer has a breakdown of the costs and why the reform measure won't save a dime. Instead it will cost the American public trillions of dollars and won't provide the health care promised.

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.

That's been a problem with health insurance from day one. Once it started covering even routine care it drove the price of providing that care through the roof. Even an office visit for a cold, sore throat, or the flu cost many times the actual price of providing the service because of the added paperwork needed for the insurance company and patients started making more frequent visits to their doctors because it wasn't like they believed they were really paying for it. From that point on costs rose many times faster than the rate of inflation. An example from one commenter to Laffer's op-ed piece:

In 1968 an Admiral 23 inch Color TV cost $349 and the Average Hourly Wage in the US was $3.02. A Good TV cost 115 hours of work. In 2009 a Sony 26 inch LCD TV cost $449 and the Average Hourly Wage in the US is $18.41. A Good TV (A vastly superior TV) cost 24 Hours of Work.

A private patient hospital room was typically $72.00/day in 1968 or 23 hours work (average worker). A private patient hospital room today (Per diem expenses) is typically $5,180/day (MEPS) or 281 hours of work.

Has the quality of care increased during that time frame? For the most part, yes. But has the quality increased by a factor of 12 in that time? No way. While the technology available today is far superior to that of 1968, for the most part it costs less than it did back then. And while some of today's technology didn't exist 40-some years ago, it does make care and diagnostics far quicker and less expensive on an actual cost-per-patient basis. Monitoring equipment keeps tabs on a patient without the need to have a nurse or doctor to check the patient, saving the costs of manpower. But once other costs are figured in, those primarily being paperwork for the insurance companies, carrying costs over for the uninsured or under-insured, and CYA approaches to diagnostics by physicians to procure evidence in case they are sued by a patient, it's no surprise health care costs have risen many times the rate of inflation.

While Obama and the Democrats are right that health care must be reformed, their means of doing so will merely make things worse. Instead they should look at what Laffer has suggested and ask their constituents what they think about it. I think they'd be surprised at the response they get.