Economics

Pricing Wedge Rides Right Up National Crack

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An excellent Art Laffer op-ed explains how concealing total health care costs from patients drives up prices:

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.

To pay for the subsidy that the administration and Congress propose, revenues have to come from somewhere. The Obama team has come to the conclusion that we should tax small businesses, large employers and the rich. That won't work because the health-care recipients will lose their jobs as businesses can no longer afford their employees and the wealthy flee.

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 should come out of the closet: I'm a hidden-costs buff, and I don't care who knows it. You may be haunted by the grassy knoll, the mechanics of burning jet fuel in building demolition, even the president's birth certificate. I just want to know what was the all-in cost of each of my kids' deliveries (including the last one—remember, Cedars Goddamn Sinai?—the one that I and my no-English neighbor actually delivered, but that you still billed my insurance company for in full?).

Hidden costs, by the way, are a great topic to deploy when you want to get civil servants talking, because they alone have ventured outside the cave, learned the true shape of the world, and come to know how much we all owe to the limitless self-sacrifice of civil servants. Like John Saxon, they're all convinced we should be paying multiples of whatever it is we pay now for public services.

But deep down, they don't actually want us to. The Los Angeles version of the Hundred Years War pits the L.A. Department of Water and Power against its customers. The struggle is especially pointed because the DWP—which as far as I can tell is under strict orders to deliver nothing better than Brezhnev-era brown-water service – cultivates an image as the thinking-man's utility, and its current general manager H. David Nahai looks like he should be playing a suave but creepy professor in The Oxford Murders. When he's not covering the department in glory or plotting in secret to jack up rates, Nahai is concocting schemes to keep everybody except himself from using too much water.

I once spent a very dull afternoon getting Nahai to agree that the DWP could reduce usage by raising rates, and that the DWP is hamstrung by its inability to raise and lower rates at will. But he balked when I suggested the solution was to spin the department off from the city and let it deal with its customers directly. And from his perspective that makes sense: If you're not a government monopoly, people might decide they'd rather do business with somebody else. In this case, reducing the pricing wedge might improve your balance sheet (zzzz!), but widening the wedge increases your power (sssexxxy!). So, for example, the DWP can now brag that usage dropped slightly in June because the department forced people to conserve, rather than because L.A. has become a waste land of vacant apartments and empty storefronts that's looking more like the set of Omega Man every day.

Which is a roundabout way of saying I think Laffer misses or pretends to miss the real aim of subsidizing health care. The point isn't to reduce costs but to increase dependence.

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  1. I just want to know what was the all-in cost of each of my kids’ deliveries

    Holy shit, Tim is straight?

  2. Tim delivered a baby? Is there nothing this man cannot do?

  3. The point isn’t to reduce costs but to increase dependence

    You’re not the only one to come to that conclusion.

  4. Is there nothing this man cannot do?

    Apparently I can’t drive fast enough to get a fully dilated woman to the hospital in time.

  5. John Saxon and Burt Young in the same movie? Must be Blood Beach.

  6. L.A. has become a waste land of vacant apartments and empty storefronts that’s looking more like the set of Omega Man every day. But the air is green and there’s no sign of civilisation whatsoever. And the people are all phoneys. No one reads. Everything has cilantro on it–

    He just won’t stop with the social commentary.

  7. Each of my daughters cost a grand total of $5.00 in out-of-pocket medical expenses from the OB/GYN visit where my wife was diagnosed as being pregnant until we left the hospital with them. I constantly remind them of the fact that our morning at Starbucks costs me considerably more than they did.

  8. The point isn’t to reduce costs but to increase dependence.

    This seems to be a disingenuous snark, imho.

    Just saying.

    As long as political debates couched in terms questioning the motives of the other side, the problem at hand will remain unsolved.

  9. Healthcare costs will decline when patients ask for prices before making doctor appointments.

  10. As long as political debates couched in terms questioning the motives of the other side, the problem at hand will remain unsolved.

    I don’t have to question Democrats’ motives. I know they want to take my money, shrink the economy, encourage family and neighbors to report me for fishy behavior, prohibit me from using my body as I see fit, and reward people other than me because they don’t look like I do. They state this openly and in earnest.

  11. I don’t have health insurance. I pay for my own, and my family’s, medical expenses with cash. I love it. I have the best doctor, and I don’t mind paying. Oh, and if you think I am rich, last year I made about 30K. I oppose government medical management.

  12. Laffer is a fucking idiot.

    Did he adjust his model when capital gains rates fell to 15%? From the 80’s rate of 70%?

    Hell no.

    Obama proposed a 0% capital gains rate this week?

    Where is Laffer? Shilling for the Aborto-Pukes?

    Fuck him.

    Let him serve his hell out like Jack Kemp – guilty but yearning for redemption.

    btw- I like Jack Kemp _ and Obama gave him the Medal of Freedom this week

  13. As long as political debates couched in terms questioning the motives of the other side, the problem at hand will remain unsolved.

    Part of the challenge is that there is no objective description of this “problem at hand”. It is an extremely complex situation, one that will not be improved with simple soundbites and an unread ream of legislation. Their motives are fair game.

  14. Apparently I can’t drive fast enough to get a fully dilated woman to the hospital in time.

    Don’t worry about. I can’t drive at all when my eyes are fully dilated after I’ve been to the optometrist.

  15. shrike-

    Moynihan is jealous of Jack Kemp. I bet Clinton is too.

  16. shrike – why would he need to adjust his model?

  17. I delivered puppies once.

    A few years ago I taught at a small private high school that didn’t provide health insurance.

    Long story short, I figured out that paying out of pocket is cheaper than insurance provided that one is young and has no strong statistical probability for serious illness. (Or foolish hobbies or habits.)

    I have a wife and two children, and it’s still cheaper though I don’t know about actually having the child without health care. Both deliveries were covered.

  18. Brandybuck-

    That also happens to you after you have read drivel drom Dan Evans and other statist suck-ups who condemn tax protesters. What you don’t seem to get is that the people you refer to as “tax deniers” are not taking your money and demanding your identiification or subsidizing Israel or threatening to incarcerate you if you don’t allow them to confiscate half of your income.

  19. Why should Laffer adjust his model?

    Because in a contracting economy rate cuts exacerbate the idiotic Cheney “Debt is good” model.

    If the GOP ever became fiscally tight instead of full-time Christo-fags we would have a serviceable alternative party….

  20. If the GOP ever became fiscally tight instead of full-time Christo-fags we would have a serviceable alternative party….

    Fucking charity givers. They’re destroying the economy! Altruism is a deth knell, like Rand (PBUH) says.

  21. Long story short, I figured out that paying out of pocket is cheaper than insurance provided that one is young and has no strong statistical probability for serious illness. (Or foolish hobbies or habits.)

    It has to be. Because of the regulations on insurance pricing, your premiums are being used to subsidize people with higher risk. Not to mention Medicare patients.

  22. Well, technically, Rand thought it was OK to give to charity if it gives you personal pleasure. She reserved the right to snicker at you for being a sucker, though.

  23. Best Buy had Omega Man as a $4.99 special. Naturally, the fuckers were out of stock.

  24. Reported to Linda. The brown shirts should be there tomorrow.

    Shame on you.

  25. As long as political debates couched in terms questioning the motives of the other side, the problem at hand will remain unsolved.

    Questioning? What’s to question? Their motives are obvious.

    -jcr

  26. Obama proposed a 0% capital gains rate this week?

    Are you serious? Got a link on that?

    -jcr

  27. I never thought I’d laugh at a hidden costs post.

    Nice job Cavanaugh.

  28. http://www.businessweek.com/magazine/content/09_33/b4143034820260.htm?campaign_id=mag_Aug6&link_position=link43

    As the health reform fight shifts this month from a vacationing Washington to congressional districts and local airwaves around the country, much more of the battle than most people realize is already over. The likely victors are insurance giants such as UnitedHealth Group (UNH), Aetna (AET), and WellPoint (WLP). The carriers have succeeded in redefining the terms of the reform debate to such a degree that no matter what specifics emerge in the voluminous bill Congress may send to President Obama this fall, the insurance industry will emerge more profitable. Health reform could come with a $1 trillion price tag over the next decade, and it may complicate matters for some large employers. But insurance CEOs ought to be smiling. …

  29. The best part of the Business Week article cited above is this comment:

    “The solution IS to drive the health insurance industry out of business and employ its “best and brightest” to help administer a non-profit national health plan. Health security should be defined as one of the responsibilities of government, just as military security is now one of the “services” that we as citizens take for granted; it should not be merely for seniors and the poor (Medicare and Medicaid). It is time that those of us who support national health care become loud and militant on this. No more compromises.”

    Liberals, still beating the Great Society drums after 50 years. Gotta love ’em.

  30. Why did I think Tim was a 25-year-old skinny comic book nerd?

  31. The point isn’t to reduce costs but to increase dependence.

    This seems to be a disingenuous snark, imho.

    Why? Its pretty clear that no reform plan on the table will reduce costs. Its perfectly clear that every reform plan on the table will increase dependence on government.

  32. Brilliant post, Tim. Figure out a way to expand it by 1000 words and then make it an article in the magazine. The conclusion is just that good.

  33. “The point isn’t to reduce costs but to increase dependence.”

    Whether the proponents consciously understand this to be the point or not, it is the point.

    When one promotes a course of action that can be reasonably shown to be counter to his avowed purpose, people naturally wonder if that is because he are stupid (more kindly, ignorant) or venal (wishing to cause suffering or hoping to achieve a hidden aim regardless of the effects on others). Reaching either conclusion does not flatter the object of consideration, but what other possibilities are there? Which is less offensive, that someone is kind-hearted but weak-minded, or that someone is mentally sharp but morally questionable?

  34. xxx he are stupid –> he IS stupid.

    But “he are stupid” certainly gets the point across, didn’t it??? 😉

    (Of course, the first draft of that posting referred to “you” rather than “he”. Cut-n-paste hastiness strikes again.)

  35. Bill Parcells put it in fewer words: You are what your record says you are.

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