Laffer on Health Care

Economist Art Laffer has recently released a study and published an op-ed in the Wall Street Journal evaluating the needs, prospects, and viability of health care reform proposals.

Laffer agrees with reformists that the cost inflation of health care is unsustainable. He contends, however, that the plans currently on the table neglect the true source of these costs — the “health-care wedge” between the actual costs of providing care and the costs incurred by a patient. Laffer writes:

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.

Laffer’s research suggests that $1 trillion in government health care subsidies will thus do nothing to control costs, and will even serve to accelerate cost inflation. He proposes reform based on modifying the structure of incentives by encouraging personal responsibility:

A patient-centered health-care reform begins with individual ownership of insurance policies and leverages Health Savings Accounts, a low-premium, high-deductible alternative to traditional insurance that includes a tax-advantaged savings account. It allows people to purchase insurance policies across state lines and reduces the number of mandated benefits insurers are required to cover. It reallocates the majority of Medicaid spending into a simple voucher for low-income individuals to purchase their own insurance. And it reduces the cost of medical procedures by reforming tort liability laws.

As I see it, the national health care debate is centered on three core values: cost, access, and quality. By focusing purely on expanding access to health care, we fail to honor our commitments to restraining cost and maintaining quality. It may be better, then, to look for proven tools that focus on cost reduction as a means to expanding access. This means not only considering the aforementioned proposals, but also pursuing continued deregulation of primary care, encouraging the health services sector to move away from fee-per-service incentive structures, and lowering the education and opportunity costs incurred by health care professionals.

Stay tuned for Laffer’s Missouri-specific health care report for the Show-Me Institute.