Legal Commentary

The health care finance wedge

By Tom Kirkendall

Writing in the Wall Street Journal, Arthur Laffer lucidly identifies one of the key obstructions to controlling costs in America's health care finance system:

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. [.  .  .]

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.

I have an interesting perspective on the health-care wedge. For 20 years from 1980-2000, I was involved in negotiating group health care insurance policies for my law firm.

Over the past decade in my solo practice, I have essentially self-insured by paying health-care costs out of pocket while taking out a family health-care policy with a large deductible to protect against catastrophic injury or illness.

During the earlier period when I was negotiating group policies for my firm, I had a good understanding of the cost of premiums for those policies, but I had no clue about the true cost of medical services and products.

However, since becoming self-insured, I have a very good understanding of the cost of most medical services and products.

Funny how that works, isn't it?

Full post as published by Houston's Clear Thinkers on August 06, 2009 (boomark / email).