Pricing Wedge Rides Right Up National Crack


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.