In an opinion piece in the Wall Street Journal on Wednesday, economist Arthur Laffer discussed the need for an evaluation of the root causes of spiraling health care costs, and consequently, the need to design policy initiatives  that address these particular causes. Several of the findings from his recent study, “The Prognosis for National Health Insurance” on the effects of, what he calls, the “health-care wedge,” echo Milton Friedman‘s concerns on the problems with the third-party payment system currently in place; an ineffective and inefficient system, which would be extended even further through increased government involvement in the health care sector.

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 wedge is a primary driver in rising health care costs, i.e., inflation in medical costs.

In terms of the results that are to be expected from the President’s proposal to reform health care, Laffer predicts: 

  • Overall, total federal government expenditures will be 5.6 percent higher than otherwise by 2019, adding $285.6 billion to the federal deficit in 2019.
  • An increase in national health care expenditures by an additional 8.9 percent by 2019.
  • An increase in medical price inflation by 5.2 percent above what it would have been otherwise by 2019.
  • A reduction in U.S. economic growth in 2019 compared to the baseline scenario by 4.9 percent for the nation as a whole.

In a nutshell, the “$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.” Does this sound like the kind of reform the American people want?

Laffer provides an alternative to Obama Care that employs sound economics, instead of emotionally loaded rhetoric,  to control costs, improve health outcomes, and improve the overall efficiency of the health-care system. He explains,

Rather than expanding the role of government in the health-care market, Congress should implement a patient-centered approach to health-care reform. [This] approach focuses on the patient-doctor relationship and empowers the patient and the doctor to make effective and economical choices.

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.

This sounds much more like health care reform the American people can endorse!