Paul Krugman and Health Care

President Bush might propose changing the tax code to discourage companies from providing employees with very extravagant health insurance. Paul Krugman hates this and $writes:

"No economic analysis I’m aware of says that when Peter chooses a good health plan, he raises Paul’s premiums."

Here is my economic analysis: Because of tax incentives, many, many Peters get health insurance through work that covers almost all of the cost of their health care. As a result, when these Peters consume health services they don't worry about prices. Consequently, health providers have little incentive to keep down their costs. Therefore, people paying for the insurance for Paul assume that Paul will get this health care from inefficiently expensive providers. As a result, Paul's insurance premiums are high.

The amount of money I pay for products at Wal-Mart is lower in part because other shoppers at Wal-Mart care about prices. If the tax code caused Wal-Mart shoppers to become unconcerned about prices, then Wal-Mart would put less effort into keeping down costs and the amount I would pay for goods at Wal-Mart would increase.

See also here, here, and here.