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Siadat, Banafsheh; Stolpe, Michael

Working Paper Reforming health care finance: What can Germany learn from other countries?

Kiel Economic Policy Papers, No. 5

Provided in Cooperation with: Kiel Institute for the World Economy (IfW)

Suggested Citation: Siadat, Banafsheh; Stolpe, Michael (2005) : Reforming health care finance: What can Germany learn from other countries?, Kiel Economic Policy Papers, No. 5, ISBN 3894562765, Kiel Institute for World Economics (IfW), Kiel

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5

Reforming Health Care Finance: What Can Germany Learn from Other Countries?

Banafsheh Siadat and Michael Stolpe

German health care financing is now at the cross- Drawing upon such cross-national learning, it ap- roads of fundamental reform. The two main pro- pears that the Flat Rate Insurance would produce posals that the new “grand” coalition government the more favorable impact on the labor market, must take as its starting point for compromise while preserving Germany’s long-standing tradition could hardly be more polarized. The proposal of solidarity. The Citizens’ Health Insurance pro- favored by the left, the Bürgerversicherung, a posal would not eliminate and perhaps not even Citizens’ Health Insurance that is compulsory for reduce the marginal burden on producer wages all, would introduce a new system of proportional very much, but would likely succeed in tapping a taxation, based not only on wages, but also on relatively large share of consumers’ aggregate other sources of personal income, whereas the willingness to pay, an important aspect of a dy- proposal favored by the right, the Kopfpauschale, namically efficient health care financing system would equalize per capita contributions for those under conditions of endogenous growth in medical enrolled in the statutory system by introducing a technology. poll tax or Flat Rate Insurance (also advocated as th The rise of modern medicine during the 20 cen- the Gesundheitsprämie— a “health premium”). tury has subtly changed the economic nature of The diverse experiences of other European coun- the statutory health insurance contract—from ac- tries provide interesting lessons on the likely con- tuarial fairness, when the main obligation of sick- sequences of either reform proposal. The intro- ness funds was to replace lost wage income dur- duction of the Citizens’ Health Insurance would ing times of sick leave, towards something like a move the German system towards general tax Ramsey tax scheme for the financing of a public financing of the kind that characterizes Beveridge good: the guaranteed universal access to modern systems, with a single payer funded from general health care and the implicit promise to accom- tax revenue, typically structured as a national health modate the growth of medical technology in the service. German policy makers can therefore learn future. from Spain’s recent shift from a Bismarckian The reform of Germany’s statutory system must system of social health insurance to a Beveridge be consistent with its short- and long-term pur- system and from the introduction of a scheme pose. In addition to demographic changes, the de- similar to the Citizens’ Health Insurance by France sign of a sustainable and efficient health care fi- in the 1990s. The introduction of the Flat Rate nancing system must take the changing role of Insurance would make the German system more medical technology into account. More research similar to the financing of health insurance in will hence be needed to better understand how Switzerland and the Netherlands, where flat rate technological innovation changes the opportuni- premiums are paid by all or parts of the popu- ties and constraints in which health insurance lation, respectively. markets operate.

Kiel Institute for World Economics · December 2005 Banafsheh Siadat, MA Department of Social Policy London School of Economics and Political Science Houghton Street London WC2 2AE England Fax ++44-020-7955 7415 E-mail: [email protected]

Dr. Michael Stolpe Kiel Institute for World Economics (IfW) Düsternbrooker Weg 120 24105 Kiel Germany Tel: ++49-431-8814-246; Fax ++49-431-8814-500 E-mail: [email protected] Website: http://www.ifw-kiel.de/staff/stolpe.htm

KIEL ECONOMIC POLICY PAPERS Kiel Institute for World Economic 24100 Kiel, Germany Tel: ++49-431-8814-1; Website: http://www.ifw-kiel.de

Managing editor: Prof. Dr. Harmen Lehment Tel: ++49-431-8814-232; E-mail: [email protected]

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ISSN 1860-7322 ISBN 3-89456-276-5

© Institut für Weltwirtschaft an der Universität Kiel 2005. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means (electronic, mechanical, photocopying, recording or otherwise) without the prior written permission of the Publisher. Printed in Germany

Contents

1 Introduction 3 1.1 Reform Objectives 5

2 Germany’s Current Health Care Financing System 7 2.1 The Public or Statutory Health Insurance Market 8 2.2 The Private Health Insurance Market 9 2.3 The Impetus for Reform 9

3 Other Countries’ Reform Experiences 12 3.1 Spain: “A Shift from Bismarck to Beveridge”—The Path of the Bürgerversicherung? 12 3.2 France: A Hybrid of Beveridge and Bismarck 13 3.3 Switzerland: A Blueprint for Redesigning the German Health Care System? The Path of the Kopfpauschale? 14 3.4 The Netherlands: A Hybrid of Private and Public Financing, with a Significant Role for Private Health Insurance 15

4 Health Care Financing Reform Proposals in Germany 17 4.1 The Bürgerversicherung or Citizens’ Health Insurance 17 4.2 The Kopfpauschale or Flat Rate Health Premiums 23

5 Discussion 28

6 Concluding Remarks 29

References 30

Paper prepared for the Kiel Economic Policy Paper series. We thank the participants of the Kiel Institute’s first European Doctoral Workshop on Health Economics, Social Medicine, and Health Policy, November 24, 2005, for their comments.

1 Introduction from the introduction of a scheme similar to the Citizens’ Health Insurance by France in the 1990s. The introduction of the Flat Rate Insur- After more than two decades of incremental ance would make the German system more simi- tinkering with cost containment, German health lar to the system in Switzerland and the Nether- care financing is now at the crossroads of funda- lands, where flat rate premiums are paid by all or mental reform. It is clear that the impetus for parts of the population, respectively. reform stems from a general effort to restore While such case studies alone cannot replace Germany’s dismal economic growth, and that a general equilibrium analysis of the impact of the two main proposals, claiming to reduce the health care finance reforms on the macroecon- health system’s impact on nonwage labor costs, omy, they can still give us an idea what effect is are primarily motivated by macroeconomic con- likely in relation to specific policy objectives. siderations. We shall argue that a comprehensive For example, the experiences of other European assessment of any proposal must be consistent countries may help us to identify the proposal with all of society’s objectives for health policy most likely to be successful in reducing the excess and seek to combine efficiency with equity. burden associated with increasing health care In light of these more general considerations, revenues or in eliminating inflationary pressure the two main proposals could hardly be more po- on nonwage labor costs, the latter often deemed larized. The proposal favored by the left, the a consequence of Germany’s current payroll-tax- Bürgerversicherung—henceforth Citizens’ Health based health care financing system. Insurance, introduces a new system of propor- Needless to say, labor market conditions tional taxation, not only based on wages, but cannot be the only consideration in health care also on other sources of personal income, where- finance. In the longer term, the primary concern as the proposal favored by the right, the Kopf- must be to endow the health sector with suffi- pauschale—henceforth Flat Rate Insurance, cient funds to accommodate a rising demand for equalizes per capita contributions by introducing medical care amid rising per capita incomes, flat rate health premium (also advocated as the population aging, and the proliferation of ever Gesundheitsprämie), essentially a poll tax for more potent (yet often costlier) medical inno- those covered by Germany’s statutory system. vations. For the U.S. case, Hall and Jones (2004) To make a contribution to the debate and draw estimate that, by the middle of the 21st century, attention to its empirical dimension, we will dis- the impact of rising per-capita income alone may cuss the two main reform proposals in light of raise the efficient share of health spending as a other countries’ experiences with comparable re- percentage of total expenditures to 33 percent form initiatives, particularly those motivated by because the marginal utility from health care similar policy objectives or based on similar de- tends to decline more slowly than the marginal signs. The essential features that characterize the utility from other types of consumption as per- Citizens’ Health Insurance and the Flat Rate In- capita income increases. surance schemes have long been present in other Amid this coming expansion, systems of OECD countries’ health care financing systems, health care finance must still be sustainable. It is although details do of course differ. therefore paramount to find an efficient way of Clearly, the introduction of the Citizens’ dealing with the endogeneity of medical tech- Health Insurance would move the German sys- nology. In theory, health insurance that pays out tem towards general tax financing of the kind that by reducing the consumer price of health care to characterizes Beveridge systems, with a single the level of marginal cost may serve as an effi- payer funded from general tax revenue, typically cient two-part pricing contract rewarding the in- structured as a national health service. German novator and eliminating lags in the dissemination policy makers can therefore learn from Spain’s of new medical technology to all insured in- recent shift from a Bismarckian system of social dividuals simultaneously (Lakdawalla and Sood health insurance to a Beveridge system and 2005). But in practice, endogenous change in 4 medical technology tends to undermine the in- gan to contemplate radical reform in 2003, when surability of individual health risks by introduc- the federal government in cooperation with the ing a source of nondiversifiable aggregate risk, as conservative CDU-CSU opposition launched Cutler and Zeckhauser (2004, 22) have pointed Agenda 2010, a comprehensive reform package out. The unprecedented growth of medical tech- with substantial implications for the health care nology since World War II appears to have sector. changed the ground rules of health insurance Special expert commissions, which included forever. leading representatives from the world of acade- Our discussion will build on these insights mia as well as other sectors of German society, and distinguish between short- and long-term convened to design new health care financing considerations. In the short term, health care models, and prompted much public debate. First, financing is guided by a set of pre-determined the Rürup Commission, created by the SPD- principles, similar in spirit to Germany’s tradi- Green governing coalition and led by Professor tional Ordnungspolitik, whereas in the long term, of Economics, Bert Rürup (University of Darm- sustainability requires far more flexibility, as the stadt), produced two competing proposals as system must respond to changes in dynamic con- commission members failed to overcome their straints and opportunities. The reality and per- fundamental disagreement. The proposals were ception of these may evolve further with on- the Citizens’ Health Insurance, introduced by going demographic and technological change. Professor of Economics Karl Lauterbach (Uni- A focus on long-term sustainability will also versity of Cologne), and the Flat Rate Insurance, help to clear the confusion about cause and effect a basic scheme of flat rate health premiums, that characterizes the current debate in Germany. introduced by Bert Rürup himself. Second, the For example, in the short-term, much of the Herzog Commission, established by the CDU- 1990s’ crisis in health care finance has indeed CSU opposition and named after the former been attributable to German unification and rising German President Roman Herzog, further devel- unemployment. But the public perception has oped the notion of flat rate health premiums into turned this upside down: rising health spending a proposal that involved earmarking a portion of bore much of the blame for rising unemployment health revenues to build up a collective capital and curbs on health expenditures were widely stock in anticipation of future aging-related seen as necessary, without any regard to long- expenditure increases. term costs and benefits. Even so, the inadequacy In the following analysis, we place the need of Germany’s traditional orientation toward for reform in its historical context, identify eco- piece-meal cost containment has long been felt nomically valid reasons for reform, derived from by all sides of the political spectrum. Yet, the a set of acceptable long-term objectives, and focus of the debate has never truly been on the contrast each of the main proposals with the reforms’ long-term implications for efficiency but relevant experiences of other countries. We find rather, almost exclusively, on the presumed distri- that neither the Citizens’ Health Insurance nor butional implications. the Flat Rate Insurance promise to fully meet Indeed, fear of upsetting the distribution im- those long-term objectives. However, by incor- plied by the status quo may actually be the main porating lessons from abroad, it appears that the explanation for the political establishment’s pro- Flat Rate Insurance would more strongly reduce tracted response to the simmering finance crisis. the undesirable labor market impact of the cur- Slow growth and rising unemployment have rent system while preserving solidarity, at the taxed the country’s wage-based pay-as-you-go price of sacrificing equity. health care financing scheme since the early We do not discuss whether the Flat Rate 1990s.1 But the political establishment only be- Insurance, clearly the more ambitious departure ______Anhalt) to 6.1 percent in western states (e.g., Baden- 1 In 2003, the unemployment rate had regional variations, Württemberg). In Berlin, the unemployment rate was 18.1 ranging from 20.7 percent in eastern states (e.g., Saxony- percent (Busse and Riesberg 2004, 5). 5 from the status quo, would be acceptable in the genuine health care reform in the past seems to policy-making arena. While a grand coalition of have been the presence of ill-defined and in- the CDU-CSU and SPD parties holds power, congruous objectives. And this problem cannot radical change is unlikely. Instead, the governing be blamed on the shortsightedness of the poli- parties will probably only be able to agree on the tical process alone; it is ultimately rooted in the lowest common denominator. However, as econ- fundamental difficulty of defining short-term omists, we point out that Flat Rate Insurance policy targets derived from a society’s long-term does not necessarily make the health care financ- policy objectives. For example, it is important to ing system more efficient in the sense that premi- consider: (i) the amount society should spend on ums would be actuarially fairer than in the case current and future health care needs, (ii) the level of income-related premiums. Individual health of investment to be allocated toward the devel- risks may decline with income and with the level opment of new medical technology, and (iii) the of education, but the demand for health care tends distribution of the financial burden among those to rise with age. able to pay and those likely to benefit. A flat rate premium would not take that into Ideally, both long- and short-term targets account, nor would it reflect other determinants should be derived from an intertemporal maxi- of an individual’s expected health expenditure. mization of social welfare, the sum of all dis- Worst of all, a flat rate would fail to raise the counted present values of the future value of life optimal aggregate revenue to finance the adop- minus the cost of staying alive. With a view to tion of new medical technology, for which more the long-term, Nordhaus (2003) and Murphy and affluent groups tend to have a greater willing- Topel (2003) have begun to investigate the pol- ness to pay than lower-income groups. It would icy implications of general intertemporal optimi- be dynamically inefficient to allow financial con- zation models in which the state of medical tech- straints to impede the adoption of technologies nology is endogenous. Along with demographic for which the rich and the poor’s combined ag- change, the introduction of new medical technol- gregate willingness to pay exceeds the costs. ogies is a major, albeit inherently unpredictable, The remainder of this paper is structured as determinant of the supply and demand for medi- follows. First, we discuss a set of generally ac- cal services, which together determine the opti- ceptable reform objectives. Second, we give a mal level of health care finance in a given period brief overview of Germany’s current health care of time. financing system. Third, we provide an overview To focus on the problem of medical technol- of lessons learned in an international context ogy, Lakdawalla and Sood (2005) ignore inter- from countries that have conducted similar re- generational issues and show that a competitive forms of their health care financing systems re- health insurance market can provide efficient in- cently. Fourth, we discuss the two main reform centives for innovation in medical technology. proposals for Germany in light of the relevant They make this point in the context of a two- experiences of other European countries. Our period model of health insurance that enforces fifth section provides a more general discussion efficient rewards for inventors by mimicking a and section six concludes. two-part pricing contract in which the insurance premium is like an ex ante access fee in ex- change for an ex post fixed unit price for its 1.1 Reform Objectives utilization. For health insurance to be dynamically effi- A consistent set of reform objectives, which is cient, it must allow the patent holders to extract no trivial matter itself, serves as the yardstick for as much of the consumer surplus from medical any rational evaluation of the Citizens’ Health technology as possible. Because health insurers Insurance and the Flat Rate Insurance pro- essentially act as intermediaries between con- posals. It is worth discussing policy aims in sumers and the suppliers of technology, the mode some detail, since a major obstacle hindering of financing can have a significant impact on the 6 efficiency of the entire system, an insight that service, and horizontal equity, postulating that could not be obtained by purely static analyses two persons with the same income pay the same in which the state of medical technology is held level of tax. A progressive health care financing constant. Although Lakdawalla and Sood (2005) system implements vertical equity by placing a use a representative agent framework that ab- greater burden of taxation on high-income groups, stracts from distributional issues, it is clear that relative to low-income groups. To implement a dynamically efficient health care financing horizontal equity, people of the same income scheme must take the real world’s unequal dis- level must be required to pay the same amount tribution of income and wealth into account as for health care, as explained in Mossialos and determinants of individuals’ willingness to pay. Dixon (2002). In the short term, the health care financing The concept of efficiency is often deemed to system cannot adjust frictionlessly to every rele- conflict with equity, but it is in fact an important vant exogenous shock. Adjustment costs and precondition, especially in a dynamic context. the presence of incomplete contracts mean that Advocates of a market-oriented approach to health care financing must be based on simple health care finance view competition between principles, such as solidarity, equity, and the par- health insurance providers as the most powerful simonious use of resources. Indeed, these three tool to enhance productivity and generate “eco- are the official objectives underlying the present nomically efficient” outcomes, encompassing system of health care finance in Germany. Ger- both technical and allocative efficiency: many’s Social Code (Sozialgesetzbuch) implies (i) Technical Efficiency. Technical efficiency that health care finance should seek to preserve involves the maximization of output for a the solidarity and equity inherent in the health given level of inputs or, conversely, the care system alongside market-oriented (i.e., minimization of inputs for a given level of competitive) forces, while ensuring the system’s output. As Mossialos and Dixon (2002) point long-term financial solvency. In other words, out, although there is no clear evidence that health care reforms should strive for the appro- funding methods determine the level of tech- priate balance between state intervention and nical efficiency in the production of care with free market orientation. We believe that these a given state of technology, administrative principles can be reconciled with static and and transaction costs may be associated with dynamic efficiency considerations. revenue collection. Therefore, an important Solidarity (Solidarität) as outlined in the policy target lies in minimizing administrative Social Code specifies that medical care must be expenditures. In economic jargon, achieving provided solely according to individual needs technical efficiency implies moving onto the and the financing of care should not be pre- production possibilities frontier. Here, one dicated upon an individual’s ability to pay, must distinguish between the production of income, or social status. The system presently medical care and the production of health in- expresses this solidarity by offering universal surance services. The link between the two coverage and equal access to comprehensive 2 exists via the purchasing behavior of insurers, benefits for the entire population. which is often constrained by regulations. The concept of equity in health care financing The provision of health care may become involves distributional concerns, that is, primar- technically inefficient when regulation limits ily the incidence of taxation between high- and the choice of technology. low-income groups. The literature distinguishes (ii) Allocative Efficiency. Allocative efficiency is between vertical equity, denoting that the rich attained via the maximization of welfare pay more than the poor for a given level of given constrained resources. It can be re- ______presented as the selection of the best point on the production possibilities frontier by a 2 For more extensive discussions of the origin and signifi- cance of solidarity in German health policy, see Altenstetter suitable social welfare function and entails (1999) and Pfaff and Wassener (2000). allocations between health and other areas of 7

public spending, as well as allocations within from the issue of moral hazard, which arises from the health care sector itself. Here again, we hidden actions by the insured. Moral hazard is must distinguish between the production of often cited as a justification of introducing co- medical care and the production of health payments for the insured so as to put a pecuniary insurance against the costs of medical care. constraint on the patient’s demand for medical In a best-case scenario, allocative efficiency care. At the same time, health insurers may use would also insure patients against the risk of differential co-payments as a means for risk medical care’s failure to restore their indi- selection, as those knowing that they have a vidual health. relatively low risk of catching a disease have an incentive to purchase health insurance contracts Essentially, allocative efficiency implies the with relatively high co-payments, but low pre- absence—or the full correction—of market fail- miums, and vice versa. Over time, the relevance ures, two of which are especially important in of asymmetric information in health care may the context of health care finance: adverse selec- change as new technology, such as genetic test- tion and risk selection. ing, alters the distribution of information in the Adverse selection, a market failure induced by health insurance market; this holds important asymmetric information, arises when consumers implications for health care financing policies. have more complete knowledge about their health status and propensity to use health ser- vices than the insurer.3 Thus, consumers select insurance plans that provide them with the best- 2 Germany’s Current Health anticipated payout. As a result, premiums for low-risk groups are relatively inexpensive vis- Care Financing System à-vis those for high-risk groups. The ensuing “equilibrium” in a competitive market for health Currently, the public or statutory health insur- insurance may be unstable in the sense that high ance system (SHI), based on wage-related social or “poor” risks are priced out of the insurance insurance contributions, serves as the primary market. source of health care financing, accounting for Risk selection, also known as cream-skimming, nearly 57 percent of total health expenditures is a strategy of the insurers to profit from the (2002) and providing coverage for approximate- exclusion of high risk groups through, for ex- ly 88 percent of the population in 2003 (Busse ample, underwriting rules that help to target pro- and Riesberg 2004, 57). Together with other ducts at low risk individuals. It occurs when in- statutory insurance schemes (e.g., retirement, ac- surers have better information about consumers’ cident) and taxes, public financing accounts for health status than consumers themselves. The 75.2 percent of total health expenditures overall insurer will then try to induce low-risk indivi- (2002).4 In contrast, private financing sources duals to self-select by making health insurance account for only 24.7 percent of health expen- unattractive for high-risk individuals. While ad- ditures, including private health insurance (PHI) verse selection occurs when insurers are passive, that alone accounts for 8.4 percent of total ex- risk selection reflects a conscious attempt by penditures (2002), while covering nearly 10 per- insurers to segment the market. Ultimately, this may conflict with solidarity and equity objec- ______tives. 4 Public sources of health care financing accounted for In a sense, adverse selection and risk selection 75.2 percent of total health expenditures in 2002 and can be broken down as follows: statutory health insurance are opposite sides of the same asymmetric infor- (56.9 percent), taxes (7.8 percent), statutory retirement in- mation story, which arises from hidden charac- surance (1.7 percent), statutory accident insurance (1.7 per- teristics of the insured and is therefore distinct cent), and statutory long-term care insurance (7 percent). Private sources of health care financing accounted for ______24.7 percent of total health expenditures in 2002, consisting of: out-of-pocket payments/NGOs (12.2 percent), private 3 See Hsiao (1995) for a nontechnical introduction to these insurance (8.4 percent), employer (4.1 percent). See Busse concepts and their application in the context of health care. and Riesberg (2004, 57–58). 8 cent of the population (2003); the remaining Between 1949 and 2004, social insurance con- 2 percent of the population receive coverage tributions were shared equally between em- through sector-specific schemes, as discussed ployees and employers. To illustrate, the average below (Busse and Riesberg 2004, 57). contribution rate of 14.2 percent (2004), encom- passed a 7.1 percent employee contribution (i.e., 7.1 percent of the insured’s pre-tax income be- 2.1 The Public or Statutory Health low the “contributory income” threshold up to Insurance Market the maximum level (€3,487.5 in 2004, €3,525 in 2005, and €3,562.50 in 2006), and a 7.1 percent SHI is operated via 292 competing sickness employer contribution paid in addition to wages funds (January 2004) responsible for the collec- (Busse and Riesberg 2004, 59). Recent legis- tion of social insurance contributions directly lation, however, stipulated changes in the pro- from employers and government agencies, pur- portion of employee-employer contributions to chasing benefits, and paying providers, as des- 54 percent and 46 percent respectively (effective cribed in more detail by Busse and Riesberg July 2005), with the additional 0.9 percent em- (2004). Funds operate on a pay-as-you-go prin- ployee contribution used to finance dentures, so ciple. Importantly, they establish their own that sickness funds were able to reduce contri- contribution rates (subject to approval by state bution rates by 0.9 percentage points (Busse and authorities), which have exhibited increases in Riesberg 2004, 202). recent years to account for the fact that sickness Recent trends illustrate that contribution re- funds cannot incur deficits or accumulate debts. venues are growing slower than GDP and health The public health insurance scheme is manda- expenditures, leading to sickness fund deficits, tory for employees with gross monthly income and thus obligating funds to increase contri- below €3,825 (January 2003), a substantial in- bution rates since funds cannot amass long-term crease from the former income eligibility thres- debts. Busse and Riesberg (2004) report that, hold of €3,375 in 2002. Contributions to SHI are fund deficits rose to €3 billion annually from based on “contributory income” from gainful 2001 to 2003, and funds subsequently raised employment, pensions, and unemployment bene- contribution rates from 13.5 percent of gross fits (with a maximum of €3,487.5 in 2004, earnings in 2001 to 14.3 percent in 2003. It is €3,525 in 2005, and €3,562.50 in 2006) and noteworthy that the contribution rate of a fund is levied independent of savings, possessions, or the same for all fund members with the same other income sources, such as capital, rent, inter- benefits package; that is, funds cannot calculate est. Contributory income is hence driven by such rates based on risk, region, or other potentially factors as wages and unemployment fluctuations, relevant criteria, as occurs in private insurance as well as by regulatory interventions defining schemes. the contribution limit. As an example, unem- In an attempt to foster efficiency, the law ployment decreases the pool of contributory in- allows for consumer choice across sickness come for the system at large, whereas a wage in- funds, introducing competition between funds on crease (particularly for high-income “voluntary” the basis of premium pricing. The resulting in- SHI enrollees already paying the maximum con- creased competition and fund consolidation that tribution) does not necessarily translate into in- emerged prompted measures to ensure the pre- creased SHI revenues. servation of solidarity. Specifically, a retrospec- As SHI contributions currently cover non- tive risk adjustment mechanism exists to adjust income-earning spouses and children without for income differences across funds due to the additional charge, it is attractive for individuals various demographic and health-status profiles with large families and/or high risks who would of enrollees (discussed below). In the absence of otherwise pay greater risk-rated premiums under such a risk equalization scheme, sickness funds private insurance schemes. with enrollees exhibiting lower expenditures per- capita are able to offer lower contribution rates 9 than those with higher standardized expenditures 2.3 The Impetus for Reform per-capita. Although there has been some talk of allow- 2.3.1 Rising Contribution Rates ing sickness funds to contract for the purchase of Despite the anticipated cost savings and effi- packages of care on a one-to-one basis with ciency gains resulting from sickness fund com- selected providers, sickness funds and providers petition, fund deficits have been an increasing are in fact legally prevented from integrating problem, resulting in the rapid growth of con- into HMO-style organizations such as those per- tribution rates; across funds, rates have exhibited vasive in the U.S. Thus, at present, Germany an upward convergence (Burger et al. 2003). retains a strong segregation between the financ- This prompts an examination of the under- ing and delivery of health care, preventing the lying factors driving the growth in fund deficits, onset of “managed care”—with the exception of and hence contribution rates. As noted by Busse rehabilitation services provided by Germany’s and Riesberg (2004), these factors include: (i) statutory accident and pension insurers. the decreasing proportion of wages in the total economy, (ii) the decrease in social insurance as a percentage of total wages, (iii) the increase in 2.2 The Private Health Insurance the number of pensioners, (iv) high unemploy- Market ment, and (v) the increase in the number of “mini” jobs (versus full-time employment).5 Private health insurance (PHI) supplies three Such factors, although largely induced by macro- types of policies for which Buchner and Wasem economic conditions, have prompted calls for re- (2003, 23) report the following population shares: form to disconnect health care financing from “Full” substitutive health insurance for approxi- Germany’s volatile labor market, protect the mately 7 percent of the population primarily vitality of Germany industry, and better adjust to covers high-income earners and self-employed demographic changes. individuals. Normal employees needed to earn Labor Market Dependency. As current social more than €3,900 in 2005 and need to earn more contribution calculations do not incorporate in- than €3,937.50 in 2006 in order to be allowed come other than “employment income” (i.e., to opt out of the statutory system. The regula- wages, salaries), funding for the health sector tions are less stringent for certain types of civil remains heavily reliant on the labor market, and servants. Substitutive insurance for civil servants thus vulnerable to fluctuations in employment. accounts for approximately 5 percent of the popu- In 2003, unemployment amounted to 10.5 per- lation for which the government pays between cent of the workforce, with regional variations 50–70 percent of medical expenditures, with re- revealing much higher rates in the former East. maining expenses covered via private insurance. Thus, the culmination of both Germany’s Finally, private supplementary health insurance growing unemployment rate and “temporary” or covers 10 percent of those insured in the public part-time employment rate translate into less scheme for additional “luxury” services (e.g., revenue flowing into the statutory health system. single rooms for inpatient care). Labor Market Impact. As current income- Competition occurs between sickness funds in based social insurance contributions effectively the public scheme and private companies over represent a tax on labor, they aggravate and those individuals who can opt-out of the public distort both production and labor supply de- scheme, namely, high-income earners. In other cisions (Felder 2002). Some authors even go so words, two systems are available for a subset of far to argue that the implied increase in nonwage the population: a pay-as-you-go system funded via labor costs can create a vicious cycle of stagna- income-related contributions and a capital-funded system financed through risk-rated premiums of ______private insurance companies. 5 Although “mini” jobs contribute to SHI funding, the con- tributions per enrollee are much smaller than with full-time gainful employment. See Busse and Riesberg (2004, 60). 10 tion and further aggravate unemployment (see, ment care), and 2 percent by sector-specific gov- for example, Kifmann 2003). Moreover, German ernment schemes (e.g., military, police, social industry is placed at a comparative disadvantage welfare, assistance for asylum seekers). The un- in the global business community because non- insured population is nominal, approximating wage labor costs (i.e., “contributions”) affect the 0.7 percent, consisting of the self-employed and price of labor. Even the government sees this as individuals who previously failed to make a cause of the increasing difficulty to attract private or public insurance contributions (Busse businesses to Germany (Schmidt 2005). and Riesberg 2004, 57). In addition, a safety net is established for in- 2.3.2 Demographic Change and Inter- dividuals with gross monthly earnings less than generational Equity €400 whereby only employers make contribu- tions at a rate of 11 percent across all funds. The health care demands of Germany’s aging With respect to artists and students, the federal populace have further contributed to the rise in government assumes half of their contribution health expenditures. As an illustration, the pro- payments. Finally, the Federal Agency for Em- portion of the German population under 15 years ployment assumes the financing role of the em- of age declined from 25 percent in 1970 to ployer for unemployed persons. 15 percent in 2003, while the proportion of the Solidarity is further enshrined in the public population over 64 years of age increased from system via a set of comprehensive benefits, 15 percent to 18 percent (Busse and Riesberg stipulated in the Social Code. Irrespective of 2004, 6). Although the proportion of individuals individual wealth, contributory income, or dura- over 80 years of age remained relatively constant tion of insurance coverage, the insured and their in the last decade, projections reveal an im- dependents are entitled to the same benefits minent upward trend. These demographic factors package. As denoted in Chapter 3 of the Social have culminated in the burden of health care Code Book V, the benefits package includes: financing distributed unequally across genera- disease prevention, health promotion at the tions, so that relatively fewer younger indi- workplace, disease screening, disease treatment viduals pay for the needs of a growing elderly (e.g., inpatient care, ambulatory care, dental populace. care, pharmaceuticals, care provided by allied health professionals, medical devices, nursing 2.3.3 Reform Objectives home care, some rehabilitative care, and socio- In defining Germany’s health care reform objec- therapy), emergency and rescue care, patient tives, it is important to assess to what extent the transportation under certain health conditions, current system already satisfies the grand policy and other benefits such as patient information.6 goals of solidarity, equity, and efficiency. In order to preserve equity in health care, The current German health care financing Germany must ensure that the system is financed system retains solidarity by providing equal ac- progressively, with high-income groups bearing cess to medical care regardless of income or a proportionally greater share of health expen- social status. Moreover, the system provides uni- ditures. At present, however, the incidence of versal coverage (with few exceptions) and com- health care financing is borne regressively. As prehensive benefits for the entire population. noted earlier, the SHI is currently financed via Thus, medical care is provided according to wage-tax premiums, a proportional tax with a need, and health care financing is contingent ceiling for the taxable amount, thus creating a upon ability to pay, as contributions reflect a mildly regressive system. percentage of gross earnings. Market Orientation and Efficiency. (i) Allo- Universal care allows for coverage of 88 per- cative Efficiency: As the current system of statu- cent of the population by the public scheme, tory health insurance involves contributions ear- 10 percent by private insurance companies (in- ______cluding 4 percent civil servants with free govern- 6 See Busse and Riesberg (2004, 67) for further details. 11 marked specifically for the health system, health little room for efficiency gains in the current care need not compete with other public agenda management of SHI. items for financing, thus creating opportunities (iii) Market Failures—Adverse Selection: As for allocative efficiency. These potential effi- consumer choice of funds has facilitated com- ciency “gains” can emerge relative to a system petition, and hence prompted funds to operate of financing in which health care is vulnerable to more efficiently, it has in turn created incentives annual budget appropriations from the state, for adverse selection by consumers. The option such as the system of general revenue financing for high-income earners to acquire PHI leads outlined below in the case of Spain and France. high-income “good” risks to opt into the private (ii) Technical Efficiency: In terms of technical system in which their premiums are lower under efficiency, that is, the maximization of output for the risk-rating scheme. Conversely, this encour- a given level of inputs, the current German ages the movement of high-income “poor” risks system fares relatively poorly, as it is unable to into the public system, driving up SHI expen- benefit from administrative savings or econ- ditures and, consequently, health insurance con- omies of scale that would obtain under a more tributions, as Kifmann (2003) and Wambach and centrally administered system. Unlike the case Wigger (2003), among others, have pointed out. of France (discussed below), management and In addition, incentives for adverse selection operational responsibilities are devolved to the by consumers exist within the public system of sickness funds, producing a system whereby the competing sickness funds, as healthier, younger approximately 300 funds individually collect individuals move into cheaper funds. Thus, in- contributions, purchase care, and pay providers. creased consumer choice may serve to augment Of course, administrative expenses and trans- (rather than equalize) differences in the risk action costs vary by sickness fund, with the larger structures of funds, thereby creating incentives funds (holding a 78.4 percent market share in for adverse selection in the SHI’s competitive 2004) able to benefit from large-scale operations health insurance market. and achieve efficiency gains in administration.7 (iv) Market Failures—Risk Selection: By the In 2002, administrative costs ranged from an same token, insurance providers also have incen- average of 3.02 percent of all contributions paid tives to select “good” risks (i.e., to engage in by members of the so-called Betriebskranken- “cream skimming”) and thereby attract healthier kassen or “company funds” to 5.75 percent for (and often wealthier) individuals, as this lowers the remaining SHI funds (Burger et al. 2003). It their expenditures.8 Risk selection has been tem- is noteworthy that funds have an incentive to pered, however, by the Risikostrukturausgleich control administrative expenses, as overhead is, (RSC), a mechanism designed to equalize differ- in fact, excluded from the risk structure com- ences in the expenditures across funds due to the pensation scheme (RSC) for funds, as discussed varying demographic and risk profiles of their below. enrollees. Thus, individual funds have an incentive to To date, despite implementation of the RSC, operate efficiently and control administrative ex- the risk adjustment mechanism across funds re- penses in an effort to reduce current deficits (and mains imperfect, primarily as the public system hence contribution rates) for their enrollees. currently lacks (i) health-based risk adjustment However, the fragmented administration of the factors (scheduled for implementation in 2007) public system at large, characterized by multiple and (ii) risk sharing. competing sickness funds with strong manage- While Germany’s current risk adjustment ment and operational responsibilities, leaves scheme relies primarily on demographic variables (e.g., age, sex, disability), it requires a more ______8 Perhaps as a result of risk selection, there has been an 7 In 2004, “company funds” held 78.4 percent of the sick- increase in transfer-sums within the RSC from 7.9 percent ness fund market share, according to Busse and Riesberg of RSC-relevant expenditures in 1995 to 10.9 percent in (2004, 35–36). 2003 (Riesberg 2004). 12 refined RSC adjustment system to account for tain costs in the 1980s resulted in a backlash health status. As noted by Busse and Riesberg characterized by general and sector-specific (2004, 65), The Act to Reform the Risk Struc- strikes that forced the government to raise public ture Compensation Scheme (2001) called for health care expenditures. further adjustment of the RSC (effective 2007) In an effort to support solidarity, expand the to account for differences in the morbidity struc- financing base, and address the aforementioned ture of funds, prevent cream-skimming, and pro- concerns, the socialist government (1982–1986) vide incentives to offer special treatment for embarked on reforms to increase coverage and chronically ill patients, so that a new “morbidity- revenues. In response, the State enacted The oriented” RSC creates a distinct “high risk” pool General Health Act (1986) confirming the uni- covering only the highest cost treatments, as versal right to health care (as delineated in the well as distinct RSC categories for individuals 1978 Constitution), and outlined a marked shift participating in Disease Management Programs in health care financing, as Rico et al. (2000) (DMP). notes. Essentially, the legislation marked Spain’s However, despite recent refinements to the formal transition from social insurance to a retrospective risk adjustment model, Germany national health system that involved a slow, continues to lack the kind of risk sharing that is gradual movement from social security payroll pervasive in the health systems of Belgium, the contributions to direct state funding, essentially Netherlands, and Israel (Van de Ven et. al. “a shift from Bismarck to Beveridge,” as 2003). In these countries, risk sharing is a retro- Rodrígez et al. (2000) have called it. spective adjustment scheme in which sickness As an example, from the mid-1970s social funds are reimbursed ex post by a solidarity fund security contributions covered two-thirds of total for some of the “generally acceptable” costs of health care expenditures, while the State budget their enrollees. This reduces funds’ incentives for accounted for the remaining third. By 1989, the risk selection ex ante. The lack of risk sharing in numbers had nearly reversed to 30 percent social Germany means that patient co-payments are the insurance financing and 70 percent state budget only mechanism to limit the impact of manage- financing. Thereafter, social contributions dimin- rial variations in individual risks on sickness ished continuously until they virtually disap- funds, so that some incentive to select “good” peared in 1999, supplanted almost entirely by risks persists. general taxation revenues (European Observatory 2005). Today, general taxation finances nearly 100 percent of health care expenditures. Taxes 3 Other Countries’ Reform are primarily centrally raised and then allocated Experiences on a per-capita basis to the Autonomous Com- munities (Rico et al. 2000, 37). Nevertheless, 3.1 Spain: “A Shift from Bismarck there are also complementary financing sources, notably out-of-pocket payments and private in- to Beveridge”—The Path of the 9 surance (European Observatory 2005). Bürgerversicherung? The Private Insurance Sector. It is noteworthy that the public health insurance system is com- The Current Health Care Financing Scheme. pulsory, so that individuals generally cannot opt- Prior to the establishment of the 1982 socialist out of the system (with the few exceptions noted government, Spain’s health care system suffered below). Thus, private insurance is purely volun- from weak organization and coordination of tary, that is, individuals have the option of pur- care, inadequate financing structures, and lack of chasing additional private insurance. In 1997, universal coverage. Government efforts to con- private health insurance amounted to 21.3 per- ______cent of total health expenditures (Rodrígez et al. 9 This section draws on Rodríguez et al. (2000) and on 2000, 111). Approximately 12 percent of the Rico et al. (2000) for factual information. 13 population has private voluntary insurance, thus have grown in recent years and contribution having double coverage. This is particularly ap- rates have subsequently increased to compensate parent in regions such as Catalonia, large metro- for greater health spending. To address concerns politan centers, and among high income and over growing health expenditures, the State en- professional groups. Interestingly enough, as the acted the Juppé Reform (1996), bringing about a size of the private insurance market has increased fundamental change in health care financing by among industrialized nations in recent years, the shifting the public system’s financial base from size of Spain’s private insurance market has re- contributions based on earned income and wages mained stable over the past ten years—a sign, to those based on total income (comparable to a perhaps, that individuals are unwilling to incur general income tax).12 To illustrate, from 1946 to additional out-of-pocket expenses other than 1996 social insurance contributions were based those currently required by the public scheme. primarily on earned income and wages; how- Private insurance is both (i) supplementary, ever, in the years following the Juppé Reform, covering dentistry, prosthesis, and the 40 percent income-related contributions declined from 6.8 co-payment for prescriptions required by the percent to 0.75 percent of gross earnings for em- public system and (ii) substitutive, providing ployees (Sandier et al. 2004, 36). services available for free from the public sector, Today, the public health system is financed via such as over-the-counter drugs, physician fees, contributions based on earnings and total income and private insurance premiums for the popu- (i.e., General Social Contributions or CSG). As lation at large.10 defined by the Social Security Funding Act Civil servants and their dependents are, how- (2001), the CSG rate varies according to income ever, exempt from the compulsory public scheme. source, with a 5.25 percent assessment levied on These individuals can choose between the na- earned income, capital, and gambling earnings, tional health service (NHS) or obtain private and a 3.95 percent assessment levied on benefits health coverage, but payment is indirect via such as pensions and allowances. Consequently, special mutual funds. For those electing NHS health revenues are increasingly disconnected coverage (approximately 50 percent), the mutual from earnings and thus, less vulnerable to the funds contribute a per-capita sum directly to the wage or employment fluctuations that currently NHS. Those who select private insurance, make plague the German model. However, although payments directly to the private insurers them- this has widened the revenue base, it has pur- selves. portedly not increased revenue. Generally, funding for public health care re- mains largely financed via employer contribu- 3.2 France: A Hybrid of Beveridge and tions, employee contributions, and CSG revenue, Bismarck11 totaling 87.8 percent of total health insurance re- venue. State subsidies and earmarked taxes (e.g., The Current Health Care Financing Scheme. cigarettes, cars, alcohol consumption) finance Cost containment has remained a long-standing the remainder. objective in France’s health care financing re- Notably, changes in the revenue base of statu- form efforts, superceding (at least historically) tory health insurance (i.e., universal coverage, market-orientation or efficiency concerns. In line transition to contributions based increasingly on with the German experience, French health care total income) illustrate greater State involvement expenditures as a percentage of national income at the expense of sickness funds. ______10 Over-the-counter drugs comprise 16.7 percent of total 12 In 1998, France ranked 11th in the level of per capita private expenditures, physician fees 14.1 percent, and health expenditures and 4th for health care expenditures as a private insurance premiums 8.2 percent for the population percentage of GDP among OECD countries. Increasing at large (Rodriguez et. al. 2000, 111). health care expenditures have been attributed to volume 11 This section draws on Sandier et al. (2004) for factual growth and price increases. Expenditure increases vary, of information. course, by health sector (Sandier et al. 2004, 36). 14

The Private Complementary Insurance Scheme cation, beginning to apply U.S.-style managed (VHI). Due to the growing discrepancy between care techniques to France’s traditional state-run consumers’ out-of-pocket payments and reim- system. bursement by the statutory health insurance scheme, individuals have increasingly purchased complementary private insurance (VHI), amount- 3.3 Switzerland: A Blueprint for ing to 86 percent of the population in 2000 (com- Redesigning the German Health pared to 33 percent in 1960 and 50 percent in Care System? The Path of the 1970), according to Sandier et al. (2004, 44). Kopfpauschale?14 Among OECD countries, France ranks only be- hind the U.S. and the Netherlands in the per- Historically, as defined by the Federal Sickness centage of health care financed by private insur- and Accident Insurance Act (KUVG), Swiss ance.13 Private insurance reimburses co-pay- health insurance premiums were risk-rated, cul- ments required by the public scheme and, as minating in individuals deemed as “high risk” well, provides medical goods and services poor- (e.g., elderly, chronically ill) lacking insurance ly covered in the public system (e.g., dental, coverage. Additionally, rising health expendi- optical). tures in the early 1990s prompted reform under Most complementary VHI is purchased via the new Federal Sickness Insurance Act (KVG), employment where the employer contracts with effective January 1, 1996, as described in Beck private insurance providers (i.e., mutual insur- et al. (2003). The legislation was designed with ance associations, private for-profit insurance the intent of promoting competition between in- companies, provident institutions) on behalf of surance providers and containing costs while its employees. Premiums are risk-rated. preserving solidarity. Switzerland’s aims to In sum, complementary VHI covers 86 per- couple market-oriented reforms while retaining cent of the population and accounts for 12 per- universal access to care have led many German cent of total health expenditures. If reimburse- observers to think that the Swiss system can ment under the public scheme should decrease serve as a “blueprint” for redesigning the German due to chronic deficits, the number of indivi- health care system. See, for example, Felder duals opting for private insurance, and corre- (2002). spondingly VHI premiums (which have steadily The Current Health Care Financing Scheme. risen in recent years), are likely to increase, as The KVG introduced premium competition (on Buchmueller and Couffinhal (2004) have argued. the basis of community-rated premiums) be- Ultimately, France’s continuing health care tween insurance companies in combination with financing debacle has led to policies designed to a retrospective risk adjustment scheme to reduce balance cost containment objectives while up- “cream skimming.” Insurance companies were holding those of equity and solidarity. The cur- obligated to accept all individuals applying for rent crisis heeds recent calls for “state-led compulsory health insurance. In addition, risk managed care” (August 2004), as espoused by adjustment further ensured that companies did Minister of Health Philippe Douste-Blazy, not differentiate between high and low risks, quoted in Rodwin and Le Pen (2004). The re- thereby preserving solidarity. forms are designed to incorporate such factors as Today, community-rated premiums remain in computerized medical records, practice guide- place, meaning that enrollees of an insurance lines, and incentives to use primary care physi- company within a particular canton or subregion cians as “gatekeepers.” In a sense, the reforms of a canton pay premiums for the same lump sum, seek to modernize the health system by im- regardless of individual risk. Thus, premiums do proving quality and efficiency or resource allo- ______13 This reflects data collected as of 2003. See Buchmueller 14 This section draws on Minder et al. (2000) for factual and Couffinhal (2004) for details. information. 15 not differ by age or sex, but children and de- companies providing compulsory insurance are pendent teenagers, however, cost less. also the main providers of complementary Companies calculate premiums based on insurance. estimates of health care expenditures in a canton or sub-region of a canton, and The Federal Office for Social Insurance audits premiums 3.4 The Netherlands: A Hybrid of before they are introduced. If premiums are too Private and Public Financing, with high, the federal government can force companies a Significant Role for Private Health to reduce premiums. This external auditing Insurance17 system is feasible because Swiss cantons have the right to access insurance company infor- Reform of the health care system has been on the mation regarding premium calculations. In sum, policy agenda in the Netherlands for almost 20 public health financing, amounting to 59.1 per- years. In March 1987, the Dekker Committee, cent of total health expenditures in 1997, can be established by the Dutch government to evaluate broken down as: taxes (24.9 percent), compulsory the structure and funding of health care, pub- health insurance (27.5 percent), and other statu- lished its report Willingness to Change, which tory health insurance schemes (6.7 percent).15 included recommendations aimed at reducing Private Health Insurance. In Switzerland, health care expenditures via volume and utili- private health insurance plays a complementary zation controls, deregulation, and reform of the role to the public scheme, covering additional health insurance system at large. The govern- services not included in the public package (e.g., ment’s response encapsulated in the report access to single rooms for inpatient care, dental). Change Assured revealed its vision for health Estimates reveal that 70 percent of the Swiss insurance—that of a single system providing population carries such supplementary insurance universal coverage and comprehensive benefits. packages (Van de Ven et al. 2003, 92). In con- With this proposal, the government sought to trast to the public system where premiums are remove the divisions between coverage under community-rated, premiums under private com- the various insurance schemes, thereby creating plementary insurance are risk-rated. Altogether, a national health insurance system in which all nonpublic sources of health care financing residents would be obligated to participate. As amount to 38.7 percent of total health expendi- such, supplementary private insurance would be tures, including out-of-pocket payments (27.6 available for care excluded in the state-defined percent) and supplemental health insurance (11.2 benefits package. These changes, slated for percent), the latter of which included 1.2 percent gradual implementation beginning January 1, of total health expenditures from for-profit 1989, would ultimately erode the distinction be- organizations and 10.0 percent from nonprofit tween sickness funds and, as well, private insur- organizations (Minder et al. 2000, 30).16 ance, and public servants’ insurance schemes. The It is noteworthy that the number of individuals subsequent implementation of the proposed re- with supplementary private health insurance has forms has been slow. declined due to increasing private insurance Generally, this slow implementation illustrates premiums and an expansion of compulsory the difficulty in introducing effective market benefits under the public scheme. Interestingly, competition while preserving solidarity and equity, a common problem in the German con- ______text as well. If anything, Dutch reform efforts 15 “Other statutory insurance schemes” is defined by the highlight the importance of having the appro- HIT Switzerland 2000 country report as: occupational and priate institutional structures in place to “manage” non-occupational accident insurance, old age, and disability insurance. See Minder et al. (2000, 30). 16 “Other statutory insurance schemes” is defined by the ______HIT Switzerland 2000 country report as occupational and non-occupational accident insurance, old age, and disability 17 This section draws on den Exter et al. (2004) for factual insurance. information. 16 competition in a way that does not sacrifice (2004). In sum, approximately 63 percent of the these policy objectives. population holds this obligatory insurance cover- The Health Care Financing Scheme Up to 2005. age (2004). A unique feature of the Dutch health system is Financing the second compartment involves that it is composed of three “compartments,” both income-related and flat rate contributions. each under different regulatory regimes.18 The Employees make smaller (1.75 percent) contribu- Netherlands therefore lacks a coherent national tions, whereas employers make larger (6.35 per- health plan. Nonetheless, the Dutch system pro- cent) contributions in 2001 (Tapay and Colombo vides near-universal coverage under these com- 2004, 18). The government determines income- partments: related premiums and social insurance providers determine the amount of flat rate payments. (1) National health insurance for “exceptional Tapay and Colombo note that, although the flat medical expenses” (AWBZ). The first compart- rate contribution has historically been held to ment of the Dutch health system consists of quite low levels (€188 annually in 2000), this statutory insurance covering exceptional medical amount has increased nearly three-fold in recent expenses due to long-term care or high-cost years, amounting to €750 in 2003. treatment, as stipulated in the AWBZ. With few Individuals that do not qualify for this com- exceptions, individuals resident in the Nether- pulsory (statutory) insurance scheme include ap- lands are covered under this first “compart- proximately 5.1 million persons (approximately ment,” which accounts for 40 percent of total one-third of the population), due to income health expenditures. eligibility criteria (Tapay and Colombo 2004, This scheme is financed via percentage con- 18). Nearly all of those ineligible opt for volun- tributions and government funds. Employees tary private insurance (PHI). The remaining make payroll-based contributions and those liable 5 percent are covered under special insurance for tax/social security contributions make per- schemes such as those for local government em- centage contributions. Individuals without taxable ployees (i.e., civil servants and police officers). income do not contribute to this scheme. Thus, (3) Voluntary supplementary health insurance. nearly all residents of the Netherlands are by The third compartment provides health services law required to make contributions and those not included in the first two compartments (e.g., electing not to contribute must pay an additional luxury hotel services during hospitalization, income tax (Tapay and Colombo 2004). adult dental care, prolonged physical therapy), (2) Normal/short-term medical care: compulsory and thus reflects a “supplemental” insurance sickness funds and private insurance. The package, on which Lamers et al. (2003) provide second “compartment” of Dutch health care detailed information. For these services, individ- covers general practitioner (GP), specialist, and uals can voluntarily purchase risk-rated supple- inpatient care. This is funded via both com- mentary health insurance from a private insur- pulsory sickness fund insurance and voluntary ance provider. Importantly, more than 90 percent private insurance (PHI). To qualify for insurance of all sickness fund enrollees have some form of under this compartment, the government estab- supplementary insurance. lishes income eligibility criteria; thus, individ- 19 uals (e.g., workers, welfare recipients, elderly) Recent Reforms. Given the complexities in- earning below €32,600 annually are required to herent in the current system, the implementation purchase this social health insurance package of recent reforms to dissolve the distinction ______19 This paragraph is based on the Finalization of Health 18 The following information is based on a summary report Insurance Act; available at http://www.minvws.nl/en/ written by André den Exter, Herbert Hermans, Milena nieuwsberichten/staf/2005/finalization-of-health-insurance- Dosljak, and Reinhard Busse, Health Care Systems in act.asp; Internet, 1 (accessed 17 November 2005); and ad- Transition: Netherlands 2005, (Copenhagen: WHO Regional ditional information from Health Insurance in the Nether- Office for Europe on behalf of the European Observatory lands; available at http://www.minvws.nl/en/folders/z/2005/ on Health Systems and Policies; available at http://www. health-insurance-in-the-netherlands.asp; Internet, 1 (accessed observatory.dk; Internet, 1 (accessed 15 July 2005). 17 November 2005). 17 between public and private health insurance may €3,825 as of January 2003) that enables high-in- come as little surprise. On October 4, 2005, the come groups earning above the threshold to Dutch Upper House agreed to introduce and choose between public and private insurance. In amend the Health Insurance Act (Zorgver- sum, the Citizens’ Health Insurance would zekeringswet), which, as of January 1, 2006, re- relegate private health insurance to a supple- quires that all residents in the Netherlands take mentary role, solely for benefits not covered out a basic package of health insurance at a flat under SHI, and end its current substitutive role rate of approximately €90 per month, supple- for high-income earners, as Kifmann (2003, 6) mented by a payroll-tax at 6.5 percent. All sick- explains. ness funds will be abolished in their current form Outstanding Issues. As mentioned previously, and private profit-seeking insurers are allowed the difficulties in evaluating either reform pro- to compete on prices as well as on the basis of posal lie in the lack of details. In the context of special contracts with selected suppliers of care. the Citizens’ Health Insurance, issues that re- But, every health insurance company in the quire further elucidation include: Netherlands is legally obligated to accept any in- Income Sources. As of Spring 2005, the Green dividual applying for health insurance. In effect, party favored the inclusion of all income sources the new health insurance system supplants the (e.g., capital, rent, interest), whereas the SPD existing national health insurance, private health favored the inclusion of only interest income (in insurance, and civil service health insurance addition to salaries and wages) when calculating schemes. social insurance contributions (Mosebach 2005, 5). However, the SPD currently states that it seeks to include “interest and other capital in- 4 Health Care Financing Reform come.”20 Co-insurance for Dependents. The Green Proposals in Germany party previously challenged (Spring 2005) the co-insurance status for individuals that do not 4.1 The Bürgerversicherung or Citizens’ care for children or the elderly, claiming that Health Insurance both spouses should make individual contribu- tions to the public scheme (Mosebach 2005, 5). Overview. The Citizens’ Health Insurance pro- Thus far, the SPD has not challenged the co-in- posal entails a broadening of the contribution surance status for dependents provided for in the base for the public health insurance scheme via existing health care financing scheme. three primary levers, as described in Busse and Administration. Another important issue that Riesberg (2004). First, social insurance con- remains is whether social insurance contribu- tributions would remain income-dependent, that tions, if they include all sources of income, is, proportional to an individual’s gross monthly will be collected by the general tax authorities earnings. However, the contribution assessment (Finanzämter) or continue to be collected by limit would be increased by approximately one- Germany’s approximately 300 sickness funds. In third to €5,100 of gross monthly income, from addition, it is yet to be determined how the vari- the existing level of €3,525 in 2005. Second, the ous income sources will be identified in a seam- proposal entails an expansion in the definition of less, cost-effective fashion without increasing “contribution income” to include other types of transaction costs. revenue (e.g., capital, rent, interest). Third, the reform calls for an obligatory SHI scheme for all individuals (including those currently exempt, such as civil servants, self-employed, farmers, ______retirees), by abolishing the income eligibility 20 Die Bürgerversicherung: gerecht und solidarisch!; limit (monthly gross income earnings below available at http://www.spd.de; Internet, 1 (accessed 30 August 2005). 18

4.1.1 What Could the Citizens’ Health What Would the Wider Economic Impact Be? Insurance Achieve? As the health care system depends on the labor Would the Citizens’ Health Insurance Prevent market for funding (i.e., as contributions are Contribution Rates from Rising? levied according to wages and salaries), social One of the factors plaguing the German health insurance contributions as they stand presently system today is the steady increase in contribu- and would continue under the Citizens’ Health tion rates. Rates have been mounting due to sick- Insurance would also weaken the vitality of ness funds’ increasing deficits and, correspond- German industry. ingly their 100 percent financial responsibility Social contributions under the Citizens’ for deficits/surpluses as the German health Health Insurance would continue to be a “tax” system lacks risk sharing. on labor and would contribute to rising nonwage As illustrated above, the subsequent rise in labor costs, particularly if they are levied pri- contributions has been driven largely by macro- marily on wages and salaries. This would con- economic factors (e.g., unemployment, growth tinue to place the German industry at a compara- of “mini” jobs) that either do not involve con- tive disadvantage relative to other global players. tributions or minimize contributions to SHI Thus, given the comparatively higher labor costs funding. Thus, the Citizens’ Health Insurance caused by this unqualified tax on labor, disin- would do little to alter macroeconomic factors centives for companies to operate in Germany that are dependent, instead, upon GDP growth would persist. Moreover, this might also deter and gains in full-time employment. In addition, investment by multinational companies, and for- as the sickness funds’ 100 percent financial re- eign and domestic firms with relatively low sponsibility would remain intact, they would be international relocation costs, and might further forced to continue financing deficits via con- increase unemployment. tribution rate increases. In sum, expanding the How Would the Bürgerversichung Accommodate health care financing base by including all Demographic Change? persons might provide temporary relief for rising The aging of Germany’s population has resulted contributions but is not likely to ameliorate the in health care payments being borne unequally long-term problem of contribution increases to across generations, so that relatively fewer the extent necessary. Rather, genuine long-term younger individuals pay for the needs of a grow- contribution reductions under the Citizens’ Health ing elderly population. This is so because the Insurance would require some form of risk shar- present system does not incorporate age-related ing and, more fundamentally, macroeconomic contributions, calculated to cover average expen- recovery. ditures within a specific age group for a given Would the Citizens’ Health Insurance Reduce period of time.21 Such age-related contributions Labor Market Dependency? would imply, however, that both the young Although the Citizens’ Health Insurance might and middle-aged save privately to afford rising relax the health care system’s dependence on the future health care costs, approaching a system of labor market, as contributions would become private medical saving accounts (as found in linked to income sources other than pure wages Singapore). and salaries, it would not entirely eliminate this Similarly, building up capital to finance future dependence. Particularly with the addition of medical care, which can be expected to become interest income only (as previously advocated by more expensive, could be used in the German the SPD and in contrast to the inclusion of all context to remedy this intergenerational financ- income sources) in health contribution assess- ing burden. The Citizens’ Health Insurance ments, statutory health insurance would remain proposal, however, offers no such solution and largely vulnerable to labor market volatility. thus would not remedy the health care financing ______21 See Breyer (2004, 684) for a discussion of this issue. 19 concerns engendered by an aging populace. Spain’s transition from social insurance con- Rather, the proposal calls for a continuation of tributions to general taxation funding (i.e., its the pay-as-you-go financing scheme, as opposed transition from “Bismarck to Beveridge”) has to a system of capital accumulation whereby led to claims that the system is in fact under- savings would be pooled to finance individuals’ funded, characterized by long wait-lists for future health expenditures. hospital procedures and an “ineffective” primary care sector that, in turn, have contributed to How Would the Citizens’ Health Insurance Meet growing public dissatisfaction (Rodrígez et al. Other Policy Objectives? 2000, 117–119). Thus, underfunding jeopardizes In striving for the appropriate balance between Spain’s future commitment to provide universal state intervention and market orientation, it is accessibility to comprehensive medical care. important to evaluate the ability of the Citizens’ If the Citizens’ Health Insurance does, in fact, Health Insurance to adequately address Ger- entail the inclusion of all income sources (there- many’s health care reform objectives as outlined by approaching a general taxation scheme), why above. In doing so, it helps to draw upon inter- not supplant the current system of competing national comparisons and lessons learned from sickness funds with a general taxation revenue countries pursuing similar health care reform ob- system with a special tax earmarked for health- jectives. Both the Spanish NHS and the French care? Why operate via the near 300 sickness hybrid of social insurance and general contribu- funds that collect contributions? The downside tions can offer Germany insights as it moves of such a general tax financing system, as cited forward with much-needed health care financing in the Spanish example, would be its subjection reform. to national budget appropriations to health care, Solidarity. In defining solidarity as equal thereby instilling a sense of unpredictability (and access to medical care, regardless of income or perhaps volatility) in health funding from year to social status, coverage would remain unchanged year. under the Citizens’ Health Insurance. In sum, it The German model of health care financing appears to retain the solidarity principle in health can also draw upon lessons learned from France’s care, as it would do the following. (i) It would current hybrid of Beveridge- and Bismarck-style maintain equal access to medical care regardless health systems, that is, strong state intervention of income or social status. As such, medical care in tandem with sickness funds. Like the German would continue to be provided according to need and Spanish systems, the French system pre- and ability to pay. Contributions would remain serves solidarity by providing equal access to income-dependent, as a percentage of gross medical care, regardless of income or social monthly earnings, albeit with a ceiling or contri- status. However, despite the universality of the bution assessment limit. (ii) It would maintain system, the coverage provided by the public comprehensive benefits for the entire population. sphere is incomplete, culminating in 86 percent As noted earlier, a social safety net currently of the current population electing to have private exists to protect low-income or “vulnerable” complementary insurance to reduce the burden groups (e.g., unemployed, low-income earners) of cost-sharing and/or obtain benefits poorly- and the Citizens’ Health Insurance would leave covered by public insurance, such as dental and this social safety net unaltered. optical benefits (Buchmueller and Couffinhal An important question remains whether the 2004, 4). Citizens’ Health Insurance (with its incor- In line with the current German debate, France poration of additional, if not all, income sources) has attempted to expand its health care financing would approach a general-revenue financing base via the inclusion of all income types in scheme, similar to Spain’s, which could have “contribution income” calculations. However, the implications for the preservation of solidarity. French transition from social insurance to total Despite the Spanish NHS’s provision of near- income-based financing (mandated by the 1996 universal coverage and comprehensive benefits, Juppé Reform) has purportedly not increased 20 revenues (Sandier et al. 2004, 37). In fact, the Moreover, if the Citizens’ Health Insurance current system is in a state of crisis, carrying a (in its call for a move toward the inclusion of €32 billion deficit (2004), as actual health ex- all income types) marked a transition toward penditures consistently exceed federally mandated general revenue financing, this might have posi- targets (Jemiai 2004). In sum, the financial in- tive equity implications, as health care would stability of the French health system, plagued by be funded by Germany’s already-progressive chronic deficits, has prompted the state to limit taxation system.23 Interestingly, however, Spain’s health care accessibility for those eligible for transition toward a general revenue scheme has state-provided medical aid (AME) and short-term not brought about the anticipated equity in health residents (i.e., individuals residing in France for care financing. Rather, the introduction of VAT less than three months). and other indirect taxes after Spain’s accession Similarly, solidarity may be jeopardized in the to the European Union in 1986 created what in German context if financing reforms continue to effect amounts to an almost proportional taxation prove inadequate. Given that approximately 10 scheme whereby individuals pay a fixed propor- percent of the current population (82.5 million) tion of their income, independent of their total is privately insured, the entrance of potentially income level (Rico et al. 2000, 40). In an inter- 8.25 million new enrollees into the public national context, Spain ranked intermediate in system under the Citizens’ Health Insurance terms of equity in Western Europe throughout (with the inclusion of all citizens) could generate the early 1980s and 1990s, as the progressive substantive revenues.22 However, as the con- nature of income taxes was tempered by the re- tribution assessment limit would remain capped gressive nature of the VATs. The Spanish ex- (albeit at a greater level of €5,100 of gross perience reveals that funding via general taxation monthly income), there are limitations to the requires a holistic view, in light of parallel taxa- earnings potential under this scheme. Moreover, tion systems, and may not directly translate into Germany’s health care financing base has al- a more equitable financing system. ready been gradually expanded to include greater Turning again toward the French model, and greater income eligibility thresholds (as lessons can be drawn from the French hybrid of noted above) and these too have proved inad- social insurance contributions and total-income equate. related (CSG) contributions. Although the CSG Equity. Defining equity as the incidence or is proportional to income, a lower rate applies to burden of health care financing across income those receiving benefits, making the CSG in fact groups, the Citizens’ Health Insurance would progressive.24 Additionally, the 2001 Social appear, overall, to be regressive. At first glance, Security Funding Act reduced the CSG con- the proposal seems to enhance equity because tribution for low-income earners, thus providing contributions remain income-dependent, burden- a social safety net for those with limited ability ing higher income groups proportionally more to finance their own health care. However, French than lower-income groups. However, the financ- equity may be jeopardized by the impending ing of the system would remain regressive due to finance reforms that will reduce the progressive the proposed ceiling, or cap (although increased income tax by 10 percent (benefiting high-in- to €5,100 of gross monthly income), up to which contribution assessments can be levied (Busse ______and Riesberg 2004, 59). 23 Taxation in Germany; available at http://en.wikipedia.org/ wiki/Taxation_in_Germany; Internet, 1 (accessed 24 August 2005). ______24 This information is based on a summary report written 22 These population and insurance statistics reflect data in by Simone Sandier, Valérie Paris, and Dominique Polton, the European Observatory on Health Care Systems’ Health Health Care Systems in Transition: France 2004, (Copen- Care Systems in Transition (HIT): Germany 2004 country hagen: WHO Regional Office for Europe on behalf of the profile. Since the time of the HIT publication, these European Observatory on Health Systems and Policies; statistics may have changed (Busse and Riesberg 2004, 1 available at http://www.observatory.dk; Internet, 3 (accessed and 57). 15 July 2005). 21 come earners) and raise the general social con- would not come into play because health sector tribution tax (Jemiai 2004, 2). allocations would remain independent from the Both the Spanish and French experiences annual budgeting by the government. However, illustrate that policy-makers must heed caution allocative efficiency concerns would emerge if in implementing financing changes in Germany, the Citizens’ Health Insurance signaled a transi- particularly as equity may be jeopardized if re- tion toward a general revenue-financing scheme. forms prove inadequate. As the Citizens’ Health (ii) Technical Efficiency: Assuming that in- Insurance currently stands, it retains a cap on dividual sickness funds continue to collect con- social insurance contributions. Therefore, Ger- tributions, technical efficiency gains would be many’s existing health care financing scheme minimized under the Citizens’ Health Insurance. would remain mildly regressive, as in its present In this scenario, Germany’s approximately 300 form. sickness funds would continue to act as the pur- Market Orientation and Efficiency. (i) Allo- chasers of care for their enrollees, minimizing cative Efficiency: In terms of the resource allo- the potential for economies of scale obtainable cation to health care relative to other sectors, the under a more centrally administered financing continuation of social health insurance under the system. Citizens’ Health Insurance would promote allo- Levels of technical efficiency depend, of cative efficiency because contributions for health course, on the details of the reform package. care remain earmarked or determined by revenue Questions to consider include: Which entity/ specifically raised for the health care sector. entities will measure and track the various re- If the Citizens’ Health Insurance marked a venue sources (e.g., capital, interest, rent) to be future transition toward general revenue financ- included in social insurance assessments? Which ing that included all income types, allocative revenue sources will be included? And will con- efficiency concerns might emerge, since annual tribution assessments vary by income source, as health sector allocations would remain vulner- in the case of France—and, if so, by how much? able to budget appropriations, driven by the In sum, as the administration of the system in- competing needs of other national budget items. creases in complexity—that is, as there are more Such is the case in Spain and France, where the revenue sources to identify and contribution stability and predictability in health financing, assessments to levy—technical efficiency wanes. due to national budget constraints, varies from The benefits of a more centrally administered year to year. Spain’s general revenue-based system can be witnessed through the Spanish financing system implies that health care com- and French experiments with health care financ- petes annually with other national budget items, ing reform. The Spanish NHS retains a relatively perhaps contributing to the health sector’s cur- high level of technical efficiency, as taxes are rent underfunding. raised primarily centrally, since regional and In the French context, allocative efficiency local governments have limited fiscal indepen- concerns remain, as health expenditure targets dence from central authorities.25 From an ad- are established at the national level via the ministrative standpoint, however, the financing national ceiling for health insurance expenditures of the French system appears complicated and (ONDAM) established annually by the National incongruous with varying contribution assess- Assembly (Sandier et al. 2004, 32). It is note- ments applied to different sources of income.26 worthy that, since ONDAM’s introduction, the ______national health expenditure target was attained 25 Health Care Systems in Transition: Spain Summary only in the first year (1997), whereas in sub- 2002; available at http://www.observatory.dk; Internet, 3 sequent years actual health spending largely (accessed 15 July 2005). exceeded the target. 26 As defined by the Social Security Funding Act (2001), In the context of Germany, as long as health the CSG rate varies according to income source, with a 5.25 percent assessment levied on earned income, capital, care contributions remain earmarked for the and gambling earnings, and a 3.95 percent assessment health sector, such allocative efficiency questions levied on benefits such as pensions and allowances (Sandier et al. 2004, 37). 22

Administration of health care is further ex- sarily lessen the problem of risk selection in acerbated by France’s struggle to decentralize Germany’s health insurance market. Incentives and centralize decision-making simultaneously, for risk selection would remain as they currently due to tension between the government and stand, due to the imperfect risk adjustment health insurance funds.27 Moreover, although mechanism in place, which is characterized by: the decision-making capacity of the National (i) the lack of health-based risk adjustment fac- Assembly has been increased (via the annual tors, which would not be implemented until determination of the ONDAM, for example), the 2007, and (ii) the absence of risk sharing. responsibilities of individual actors remain un- In terms of lessons learned abroad in pre- clear. Such administrative complexities hamper empting selection, there is little that can be technical efficiency in the long-term. drawn from the Spanish and French models. As Again, the Citizens’ Health Insurance’s call the Spanish health care system is nationally for the continued presence of Germany’s ap- funded, the federal government serves as the proximately 300 sickness funds and, moreover, insurer or purchaser of care for the entire popu- inclusion of additional (if not all) income lation. Spain lacks a system of competing in- sources and individuals to finance the health surance providers in which perverse incentives system would be likely to reduce technical effi- for adverse- and risk-selection could exist. ciency and increase administrative expenses, as The French system is unique in that it retains such a multi-faceted financing proposal would a hybrid of strong state intervention and sickness only complicate the management and adminis- funds within the three primary health insurance tration of health care policy, as opposed to the schemes: general, agricultural, and nonagricul- implementation of a more centralized, stream- tural self-employed, as explained in Sandier et al. lined approach to health management. (2004). Each of the three predominant schemes Additionally, although the Citizens’ Health has, in turn, a national health insurance fund Insurance would preserve competition between with local structures that vary depending upon sickness funds, there would (in a sense) be less the scheme’s geographical distribution. In sum, competitive pressure for funds to operate effi- the health insurance schemes function as man- ciently, as sickness funds would no longer have agers of the public health insurance system, to compete with the private insurance market for carrying out the mandate (e.g., managing bud- high-income earners. gets/expenditures) established at the federal level. (iii) Market Failures—Adverse Selection and In contrast to the German system of com- Risk Selection: The advent of the Citizens’ peting sickness funds, French health insurance Health Insurance would resolve the problem of funds do not “compete” as insurers or purchasers adverse selection caused by consumers choosing of health care. In fact, the consolidated nature of between private and public insurance, because the sickness funds’ organization accords author- PHI would assume a solely supplementary role. ity primarily to the national fund in state-fund Of course, incentives for adverse selection might negotiations. Moreover, the funds do not hold a persist between statutory sickness funds them- high degree of management responsibility as the selves, due to imperfect information when in- government has traditionally assumed financial surers know more about their health status than and operational oversight (i.e., the determination the insurance provider. However, an uneven dis- of premiums/contribution levels) over statutory tribution of consumer risks across sickness funds health insurance at large (Sandier et al. 2004, 8). is mitigated (to some degree) by Germany’s cur- In sum, the incentives for adverse selection or rent risk equalization scheme. risk selection between public sickness funds are However, the Citizens’ Health Insurance not generally an issue in the French system. Nor proposal, in its current form, would not neces- is selection between public and private insurers ______problematic, as private insurance plays a com- 27 Health Care Systems in Transition: France Summary plementary role, providing goods/services not 2004; available at http://www.observatory.dk; Internet, 8 covered or poorly covered by the public system. (accessed 15 July 2005). 23

Given this decision-making paradigm, the Income sources. How will the contributory French model can offer little guidance for Ger- income sources be defined, that is, would the in- many in reducing incentives for selection. come-adjusted contributions (7 percent of gross However, as illustrated below in the discussion income for employees) be assessed upon all of the Flat Rate Insurance, the Swiss and Dutch income sources (e.g., capital, rent, wages)? models offer some interesting guidance. Premium subsidies. The establishment of an “Employers’ Solidarity Fund” would require building up capital over time. Prior to the estab- 4.2 The Kopfpauschale or Flat Rate lishment of the fund, would of premium sub- Health Premiums sidies for low-income earners be financed via the tax system, as conceptualized by the CDU’s After initial disagreement regarding the content initial reform proposal?28 of their joint health care reform proposal, the CDU-CSU reached a compromise in November 4.2.1 What Could the Flat Rate Insurance 2004 in favor of income-adjusted flat rate insur- Achieve? ance premiums. The following analysis outlines the compromise reform package in terms of its Would the Flat Rate Insurance Prevent Con- ability to address the aforementioned policy ob- tribution Rates from Rising? jectives and the inadequacies of Germany’s The CDU-CSU compromise of a €169 flat rate existing health care financing scheme. contribution would provide a certain consistency Overview. The Flat Rate Insurance involves in health care contributions, as payments would implementation of flat rate, community-rated, remain the same across individuals from year per capita premiums or contributions, uniform to year. As mentioned earlier, if payments ex- for individuals below a given income threshold. ceeded the €169 target, the excess would be High-income earners would remain eligible to pooled into a solidarity fund, whereas payments opt into PHI. Thus, in a sense, the Flat Rate below the target would draw upon solidarity Insurance retains a parallel, two-tiered insurance fund revenues to make up the difference. What system, with private insurance playing the sub- remains uncertain, however, is what would stitutive role it does today (see Kifmann (2003, happen between now and the time the solidarity 6) and Mosebach (2005, 5)). fund becomes operational, that is, the time it has The monthly individual contribution of €169 built up sufficient reserves to finance premium would include a maximum individual income- subsidies for low-income earners. Moreover, it is adjusted rate paid by the employee (7 percent of important to consider whether the flat rate would gross income, with a ceiling of €109) and an increase if the solidarity fund consistently lacked income-related contribution paid by the em- sufficient revenues to finance consumer pay- ployer (6.5 percent of the employee’s gross in- ments below the €169 target. Could flat rate come, uncapped), reports Mosebach (2005, 6). If premiums also experience an upward spiral, the sum of the employers’ and employees’ similar to the current rise in social insurance payments exceeds the €169 target, the excess contributions, particularly if consumer payments would be pooled into a government-run “Em- consistently fall below the target payment, as ployers’ Solidarity Fund.” If payments fall be- would occur under continued unemployment and low the target, however, revenue from the fund economic stagnation? would make up the difference. Consequently, low-income earners would pay correspondingly lower health contributions. Outstanding Issues. The details of the reform ______package remain ambiguous and several outstand- 28 The CDU initially recommended a capital-funded flat ing issues remain: rate insurance scheme to replace the current SHI system in 2013, once a build-up of capital funds had be completed (Mosebach 2005, 5). 24

Would the Flat Rate Insurance Reduce Labor How Would the Flat Rate Insurance Meet Other Market Dependency? Policy Objectives? The income-adjusted contributions based on the In evaluating the Flat Rate Insurance’s in- CDU-CSU compromise would seem to reduce cidence and its ability to sufficiently address the future labor market pressure, particularly if all aforementioned reform objectives, it is bene- sources of income (as opposed to just salaries ficial to examine the reform package in tandem and wages) were included in premium calcu- with similar health care financing models in the lations. However, given that both employee and European context. In particular, the Swiss model employer contributions are income-dependent of flat rate, community-rated premiums and the (and thus dependent on salaries and wages Dutch three-tiered model of national health in- earned), ties to the labor market would remain, surance, compulsory sickness funds, and private albeit not to the extent apparent in the current supplementary insurance provide interesting system. lessons for Germany in its drive toward health care financing reform. What Would the Wider Economic Impact Be? Solidarity. Switzerland, often deemed as a By de-linking health care financing from the labor “blueprint” for redesigning the German system, market, nonwage labor costs (i.e., contributions) maintains solidarity because the health system would be less subject to health expenditure in- ensures equal access to care, regardless of in- creases. This would serve as a necessary measure come or social status, as enshrined in legislation to preserve the vitality of German industry, under the Federal Sickness Insurance Act which is currently strained by the rise in non- (KVG). The compulsory (statutory) health insur- wage labor costs (i.e., wage-based social insur- ance system is applicable to all Swiss permanent ance contributions) that effectively serve as a tax residents, with few exceptions (Minder et al. on labor. However, the Flat Rate Insurance pro- 2000, 27). Solidarity is further retained because posal would not necessarily curtail future growth insurance companies cannot compete based on in nonwage labor costs because employer contri- the comprehensive benefits package as pre-de- butions to the public system would remain un- fined by the act; all companies must offer the capped at a rate of 6.5 percent of the employee’s same package. gross income. Thus, nonwage labor expenses An examination of health reforms in the would remain linked to health spending. Dutch context can also prove illustrative for German policy-makers. Although the Nether- How Would Flat Rate Insurance Accommodate lands lacks a national health insurance plan, it is Demographic Change? able to provide near-universal coverage through As discussed previously, without age-related con- the culmination of its three insurance compart- tributions in place whereby younger generations ments and government intervention. Direct state “save” to finance future health expenditures (as intervention ensures that health care remains would occur under a system of private health affordable, even for high-risk groups (Tapay and accounts), there would be little relief for the Colombo 2004, 5). For example, individuals existing strain on health resources due to Ger- without taxable income do not contribute to the many’s aging populace. Indeed, neither reform compulsory (statutory) health insurance scheme proposal contains provisions for capital accumu- of the second compartment.29 In sum, less than lation to finance future health expenditures and, 1 percent of the population remains uninsured, in its current form, the Flat Rate Insurance’s solidarity fund would simply finance the needs ______of low-income groups, rather than those of 29 The following summary information is based on a report posterity. written by André den Exter, Herbert Hermans, Milena Dosljak, and Reinhard Busse, Health Care Systems in Transition: Netherlands 2005, (Copenhagen: WHO Regional Office for Europe on behalf of the European Observatory on Health Systems and Policies; available at http://www. observatory.dk; Internet, 4 (accessed 15 July 2005). 25 primarily illegal residents and groups refusing years, co-payments have been designed, in part, insurance due to religious reasons (Tapay and to reduce Germany’s comparatively high utili- Colombo 2004, 11). Solidarity is further retained zation rates that have driven medical expen- in the Dutch system via the comprehensive bene- ditures upward. In an international context, fits package of compulsory (statutory) insurance, Germany ranks among the highest in the WHO as detailed in a bylaw to the Sickness Fund European Region in terms of utilization. As an Act.30 Importantly, co-payments are virtually example, in 2002 Germany averaged 20.5 ad- absent from the basic insurance package, missions per 100 persons and an average length- strengthening solidarity. of-stay of 9.3 days, compared to the EU average Similarly, regardless of the reform package of 18.1 admissions and 7.1 days.32 In sum, Ger- Germany pursues (Citizens’ Health Insurance or many’s existing co-payment requirements are Flat Rate Insurance), maintaining a strictly de- unavoidable and in fact necessary (although in- fined benefits package standard for all SHI sufficient) to reduce the seemingly excess utili- enrollees (as defined by the Social Code) is zation of health care resources in Germany’s necessary to preserve solidarity. In contrast to already resource-scarce system. the Dutch model, however, Germany’s com- Equity. Switzerland retains a high degree of prehensive benefits package is accompanied by a equity in health care financing despite the flat controversial system of co-payments.31 In recent rate premiums that, at first glance, appear ______regressive. This occurs because health insurance 30 There is current discussion taking place regarding premiums for low-income earners are subsidized changes to the detailed way in which the Dutch benefits by the Swiss Confederation and the cantons package is described. Currently, benefit descriptions are in through Switzerland’s progressive taxation terms of providers, impeding sickness funds from denying payment for treatment if a more efficient alternative exists system (Minder et al. 2000, Felder 2002, 3). so that care can be delivered by an alternative provider Means-tested subsidies ensure that premium (Lamers, et. al. 2003, 51 and 53). subsidies vary according to the wealth or income 31 In response to the growth in co-payment exemptions and of the insured. In sum, the flat rate financing the rise in health care expenditures, user charges have in- scheme, combined with means-tested subsidies, creased and exemption rules tightened under the Statutory Health Insurance Modernization Act of 2004. Recent legis- ensures that lower-income groups do not pay lation incorporates the following changes. (i) Introduction proportionally more than higher-income groups of new co-payments: €10 per quarter for the first contact at in financing the public health system. a physician or dentist’s office and €10 for each contact with other physicians without a referral during the same quarter. Despite the promotion of universal access to (ii) Standardization of co-payments across sectors at 10 per- medical care, the financing of Dutch social health cent, with a minimum of €5 and maximum of €10 per good insurance (second compartment) via both in- or service. (iii) Revised exemption rules: continued co-pay- ment exemptions for children less than18 years of age, come-related and flat rate contributions is, in part, prenatal care, and preventive services. However, exemp- regressive because the flat rate contributions do tions for the poor have been abolished. (iv) Co-payment not vary by income. Moreover, as Tapay and ceilings: 2 percent annual gross household income, 1 per- Colombo (2004) report, these payments have cent for chronically ill. Annual financial burden of co-pay- ments capped at 1 percent. Deductions for spouses and nearly tripled in recent years from €188 (2000) children still apply (Busse and Riesberg 2004, 74–75). to €750 annually (2003). As noted by a recent Chronically ill is defined as an individual that has been treated for at least one year and is associated with at least ______one of the following characteristics: (i) A need for long- (5.5 days), Austria (6.0 days), and the United Kingdom (5.0 term care grade II or III, (ii) a 60 percent severe disability days) (Busse and Riesberg 2004, 112–113). or a 60 percent incapacity to work OR, (iii) a certificate 32 from the treating physician that the omission of continuous Data reflects 2002 or latest available year. health care (at least one physician contact per quarter for • France: 20.4 admissions per 100 population, 5.5 days the same disease) would cause a life-threatening aggravation, average length-of-stay a reduction of life expectancy, or a long-term reduction in • Netherlands: 8.8 admissions per 100 population, 7.4 the quality of life (Busse and Riesberg 2004, 74–75). days average length-of-stay Currently, Germany ranks as one of the highest countries in • Spain: 11.5 admissions per 100 population, 7.5 days the WHO European Region in terms of utilization, aver- average length-of-stay aging 6.5 physician visits per capita and an average length • Switzerland: 15.1 admissions per 100 population, 6.4 of hospital stay of 9.3 days in 2001, in contrast to France days average length-of-stay 26

OECD Health Report, this portion of social parent in Switzerland, particularly as the system insurance financing is made further regressive as of flat rate premiums earmarked for health care income levels rise, and is further exacerbated by would entail that the health sector does not the fact that social insurance premiums do not compete with other sectors for annual budgeting. vary with the enrollee’s family size or number of Moreover, Germany would also benefit from the dependents (Tapay and Colombo 2004, 30). more cost-efficient use of health care resources Similar to the Swiss model, the Flat Rate by consumers under a system of premium-based Insurance’s premium subsidies for low-income financing, especially given its comparatively earners would mitigate the regressive effects of high utilization rates noted above. the income-based flat rate financing scheme, In the Dutch context, the market-oriented made regressive in part due to the ceiling for the thrust of recent reforms will allow for resources maximum employee contribution (7 percent of to be allocated increasingly by the market in the employee’s gross income with a cap of subsequent years, with the potential to optimize €109). As proposed, premium subsidies would output and efficiency but also creating oppor- be financed via excess employer-employee con- tunities for market failures. However, as dis- tributions pooled into an “Employers’ Solidarity cussed below, the potential for “selection” in the Fund” and, for children, via Germany’s already- Dutch system’s competitive insurance setting is progressive tax system. The culmination of these limited due to the robust risk adjustment and risk factors would help preserve equity in health care sharing models in place. financing, especially when compared to the (ii) Technical Efficiency: Although, as noted current regressive system. earlier, there is no clear evidence that funding Market Orientation and Efficiency. (i) Allo- methods determine technical efficiency, ad- cative Efficiency: The financing of the Swiss ministrative or transaction costs may be asso- health system provides that health care does not ciated with revenue collection (Mossialos and compete with other national agenda items for Dixon 2002, 13). funding, thereby instilling a certain predictability In the Swiss model, premiums are subject to in health funding from year to year. Although auditing that may entail higher administrative state intervention in health care at the federal expenses. It is noteworthy that premiums are level has been minimized and the responsibility calculated by canton or region and may differ for health care administration (i.e., financing, across regions. In terms of premium subsidies, organizing, delivering) devolved to the cantons, cantons have some authority to define the municipalities, private insurance companies, and criteria for premium subsidies and, to some ex- private providers, federal law does not differ tent, determine the amount of the actual subsidy, substantially between cantons (Beck et al. 2003, e.g., as a percentage of the insured’s income 63). This provides a certain consistency in both (Minder et al. 2000, 29). This greater regional the administration of health policy and delivery autonomy in decision-making may reduce the of care, in a sense, ensuring that health care is technical efficiency of the system. Such a lack of maximized given the limited resources available. uniformity in premium and premium subsidy It is noteworthy that the financing of health determinations (and it is noteworthy that care through premiums does not distort individual premiums differ substantially between cantons) decisions in the labor market, since premiums may also drive administrative expenses and reflect services consumers’ expect from the in- transaction costs (Felder 2002, 4). surer (Felder 2002, 4). This optimizes con- Given the current complexities of the multi- sumers’ decisions with regard to the utilization tiered Dutch system and the transactions in- of health resources and prompts more efficient, volved in each, recent reforms aim at uniting the cost-effective use of services at an individual or disparate systems and realizing administrative micro-level. efficiencies in the creation of a national health Under the Flat Rate Insurance, the potential system. As noted above, under the Health In- for allocative efficiency should resemble that ap- surance Act (Zorgverzekeringswet), residents in 27 the Netherlands are obligated to have health increase, thus straining Germany’s already-scarce insurance.33 The legislation also creates a new health resources and perhaps placing pressure on health insurance system to supplant the existing health authorities to increase flat rate payments to national health insurance, private health insur- compensate for expenditure growth. ance, and civil service health insurance schemes. In contrast to the German model, adverse Regarding lessons learned for Germany in selection between the public and private in- terms of technical efficiency, the Flat Rate In- surance spheres does not threaten the Dutch surance would preserve the existing two-tiered system. In the second insurance compartment, system. It is plausible that the continued pres- as an example, private insurance is voluntary, ence of a private system parallel to the public covering “normal” medical expenses for ap- system would force sickness funds to operate proximately the top-third of income earners in- efficiently as they “compete” for high-income eligible for social insurance (Tapay and earners, thereby minimizing transaction costs Colombo 2004, 18). The remaining 63 percent of and overhead. Under the Flat Rate Insurance’s the population is obligated to purchase a com- proposal for tax-based financing of children’s pulsory insurance package run by the public premiums, administrative expenses would be system.34 Within the third compartment, private lower, as the taxation system is already in place insurance plays only a supplementary role for to regulate this subsidization. By the same token, “luxury” goods not offered by the first and the pooling of subsidies for low-income earners second compartments (Tapay and Colombo 2004, via a central fund would also generate efficien- 18). The first compartment provides national cies in the administration of health care financ- insurance against “exceptional” or catastrophic ing, as funds would be channeled and managed medical expenses for the entire population as via a central entity. protection against long-term and high-cost treat- (iii) Market Failures—Adverse Selection and ment (Lamers et al. 2003, 51). Thus, private and Risk Selection: In the Swiss model, private public insurers do not compete for consumers in health insurance is complementary only, cover- either compartment of Dutch health care, re- ing additional services not included in the public moving incentives for adverse selection. package. This reduces possibilities for adverse As noted above, a recent study by Van de Ven selection between the public and private insur- et. al. (2003) claims that, due to imperfect risk ance spheres whereby only low or “good” risks adjustment structures in Germany and Switzer- enter the private arena and high or “bad” risks land, insurance providers have financial incen- enter the public sphere, thereby increasing public tives for risk selection, which may culminate in expenditures. high-risk groups (e.g., elderly, sick, poor) lack- In contrast, the dual system of public and ing insurance. In the Swiss model, risk-ad- private insurance (the latter available solely for justment for the compulsory insurance scheme high-income earners) under the Flat Rate In- compensates for the varying age-sex distribu- surance would retain the current incentives for tions of enrollees across insurance providers; adverse selection whereby high-income, high- however, as this risk adjustment scheme is risk populations would opt-into the public imperfect, relying predominantly on demographic scheme. Conversely, high-income low-risk in- rather than health status variables, risk selection dividuals would elect private insurance because strategies remain profitable (Beck et al. 2003, 63). their risk-rated premiums under the private Although Germany’s risk adjustment scheme scheme would be lower relative to flat rate SHI currently relies on demographic variables, new premiums. As “costlier” high risks enter the adjustments to RSC will incorporate health public system, public health expenditures would status factors (effective 2007), creating a more ______33 Finalization of Health Insurance Act; available at http://www.minvws.nl/en/nieuwsberichten/staf/2005/finaliz 34 Health Care Systems in Transition: Netherlands ation-of-health-insurance-act.asp; Internet, 1 (accessed 17 Summary 2005; available at http://www.observatory.dk; November 2005). Internet, 4-5 (accessed 15 July 2005). 28 refined risk adjustment tool relative to that found peting sickness funds. According to Van de Ven in Switzerland. et. al., these adjusters appear to be effective in Importantly, both Germany and Switzerland preventing risk selection and, hence “cream lack risk sharing, which is pervasive in the skimming” by insurers.36 health systems of Belgium, the Netherlands, and In sum, irrespective of the reform package Israel (Van de Ven et al. 2003). In its absence, chosen, the Citizens’ Health Insurance or the insurance providers bear 100 percent of their Flat Rate Insurance, effective risk adjustment financial responsibility, creating strong incen- and risk sharing are necessary in a system of tives for the targeted selection of “good” risks. competing insurance providers to prevent the Opportunities for risk selection in the Dutch targeted selection of “good” risks, which, in turn, system are mitigated largely by two factors, could threaten the accessibility and affordability namely health-status-oriented risk adjustment of health care. Although a more refined risk and risk sharing, thus providing guidance for adjustment mechanism is scheduled for im- Germany as it contemplates reform. To preempt plementation in 2007, it is noteworthy that risk selection in the Netherlands, sickness funds neither reform proposal addresses possibilities receive a prospective risk-adjusted premium sub- for the incorporation of risk-sharing tools to sidy per enrollee from the Central Fund (CVZ), mitigate current incentives for selection. as reported in Van de Ven et al. (2004, 46). Subsidies equal the national predicted per capita expenses in the enrollee’s risk group, minus a fixed amount, and do not vary with the fund 5 Discussion chosen. In sum, the CVZ adjusts for part of the difference between the budget and expenditures The lack of consensus regarding the direction of of funds.35 Risk sharing via a central fund is health care financing in Germany has led to the deemed necessary so that sickness funds do not advent of alternative reform models, albeit with bear 100 percent of their financial risk that a dearth of economic analysis and international would, in turn, prompt them to target “good” comparisons. Importantly, many of the analyses risks. regarding the Flat Rate Insurance are outdated, In addition to the risk-sharing mechanism as they were written prior to the November 2004 through the CVZ, individuals today pay premium CDU-CSU compromise. contributions directly to funds and these con- In summarizing the competing notions of tributions remain the same across all enrollees of reform present in the existing literature, we the same fund. This further mitigates the possi- highlight just a few researchers. Kifmann (2003) bility of risk selection; meanwhile each fund can advocates long-term health care financing via set its own premiums, thereby allowing for com- collective capital formation within statutory petition between funds and greater efficiency health insurance (SHI) and, as well, individual (Van de Ven et al. 2004). private insurance in addition to SHI. In contrast, In its efforts to promote competition while Wrede (2002) supports mandatory insurance for maintaining solidarity, the Dutch government all, a reduced benefit package in the public has decided to pursue managed competition scheme, and incentives for private insurance to alongside implementation of health-based risk reduce costs. Similarly, Wambach and Wigger adjustment factors (Van de Ven et al. 2004, 45) (2003) consider expanding the SHI scheme In 2004, both diagnosis cost groups (DCGs) and while limiting mandatory coverage to lower pharmacy-based cost groups (PCGs) were used income earners (as occurs today), but they fail to to determine the premium subsidies for com-

______35 Health Care Systems in Transition: Netherlands 36 See also Health Care Systems in Transition: Nether- Summary 2005; available at http://www.observatory.dk; lands Summary 2005; available at http://www.observatory. Internet, 9 (accessed 15 July 2005). dk; Internet, 10 (accessed 15 July 2005). 29 provide a detailed operational proposal outlining commission’s recommendation failed to specify how to do so. how to determine the optimal level of capital Despite the heterogeneity in these views, there accumulation and, moreover, how to resolve seems to be a uniform notion that the current issues of intergenerational equity, particularly reform proposals are, in fact, a necessary but during the transition period. insufficient means to finance health care in the Historically, one can argue that the German long-term. It is noteworthy that, to date, the de- system of statutory health insurance has moved tails of each plan remain unclear. As Germany’s from actuarial fairness, when the main obligation coalition-based government entails compromise, of sickness funds was to replace lost wage in- it is no surprise that each political party leaves come during times of sick leave, towards some- many details open so that a coalition has a thing like a Ramsey tax scheme for the financing greater opportunity of finding a compromise, of a public good, that is, from a static point of filling those gaps as part of the bargaining. view, the guaranteed universal access to modern Finally, we have also argued that demographic health care and, from a dynamic point of view, and technological change makes it necessary to the growth of medical technology, which is consider the dynamic efficiency of the reform likely to be the greatest source of welfare gains st proposals. Raising sufficient revenue to finance in the 21 century. the expansion of the health care sector that dy- Aggregate expenditure risks associated with namic efficiency requires will be a major task for the introduction of new medical technology are the future. This raises two issues that a private an important feature of health insurance markets st competitive health insurance market cannot solve in the 21 century. They tend to undermine the easily: (i) the portability of individual aging whole notion of actuarial fairness, as this notion provisions and (ii) the financing of future ad- only makes sense when risks are uncorrelated vancements in medical technology that may only across the insured. The design of sustainable be obtained via borrowing against the future health care financing reform will have to take benefits of improved health care technologies, the changing role of medical technology into ac- which involves future generations and can there- count. More research will be needed to better fore only be achieved through government inter- understand how technological innovation changes vention, if at all. For both reasons, private com- the opportunities and constraints in which health petitive health insurers, which cannot extract the insurance markets operate. full current consumer surplus, are likely to raise too little revenue, so that unregulated premium increases amid population aging will eventually be inefficiently high and technological change 6 Concluding Remarks may be too slow. To be sure, the Herzog commission did at- It was outside the purview of this discussion tempt to take these broad changes into account, paper to propose entirely new financing solutions. albeit in a rather clumsy way. The idea of the Rather, the scope of our research was relegated to Herzog commission’s proposal was to combine a an analysis of the advantages and disadvantages flat rate health premium with capital accumu- of each coalition’s reform proposal, in the con- lation to finance future increases in per capita text of the policy objectives highlighted above health spending related to either aging or ex- and drawing upon lessons learned from abroad. pensive medical technology. For this reason, flat In sum, we view the “borrowing” and integration rate premiums were to be introduced only after a of foreign concepts as illustrative in Germany’s transitional period in which sufficient capital quest for innovative approaches that coalesce the was accumulated so that the excess spending of need for quality, universal care, and financial the elderly, relative to the general flat rate prudence. premium, could be paid from the returns of this Given the inadequacy of Germany’s long capital stock. Like all such proposals, the Herzog legacy of reforms to sustain the financial viability 30 of the health sector, both the SPD-Green and basis of demographic factors such as age, sex, or CDU-CSU coalitions have put forth ambitious pre-existing health risks. reform packages designed to infuse the health The Flat Rate Insurance reform package hence system with much-needed revenues. The SPD- offers the more ambitious financing reform Green proposal, the Citizens’ Health Insurance, strategy, based on flat rate contributions similar reflects an extension of the current system pre- to those found in the Swiss and Dutch contexts. dicated upon social insurance contributions; it We recognize that, given the scant details avail- continues to follow German health care’s tradi- able, it is difficult to predict the incidence of the tional pattern of incremental reforms versus reform packages directly. Therefore, we have outright structural change. based our discussion on the experiences of other It is commonplace in the literature to distin- countries with similar financing schemes. Draw- guish between the Bismarck model and the ing upon such cross-national learning, it appears Beveridge model of publicly provided health that the Flat Rate Insurance would produce the insurance. Germany’s statutory system of sick- more favorable impact on the labor market, while ness funds has not departed dramatically from preserving Germany’s long-standing tradition of th Bismarck’s original design in the 19 century. solidarity. The Citizens’ Health Insurance pro- By broadening the tax base to include all sources posal would not eliminate and perhaps not even of income and all citizens as contributors, the reduce the marginal burden on producer wages introduction of the Citizens’ Health Insurance very much, but would likely succeed in tapping a would represent a move toward the Beveridge relatively large share of consumers’ aggregate model, the tax-financed national health system willingness to pay, an important aspect of a found in Britain, Scandinavia, Italy, and Spain. dynamically efficient health care financing The introduction of the Flat Rate Insurance system under conditions of endogenous growth would represent a move in the other direction, in medical technology. toward a system based on market competition, in Ultimately, what remains uncertain is whether which regulation serves to enforce large-scale Germany is prepared to embrace long-overdue community rating at the national level and ef- structural reforms, or whether politics will dic- fectively eliminates all discrimination on the tate the extension of incrementalism in health reform.

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