Health Reform Without a Publice Plan: The German Model

by Lesley Politi on April 20, 2009

Health Reform Without a Public Plan: The German Model

 Uwe E. Reinhardt is an economics professor at Princeton.

In the previous two posts, I sought to explain why the public health insurance plan that Barack Obama had firmly promised during the presidential campaign appears to have become a deal-breaker in President Obama’s quest to sign a genuinely bipartisan health reform bill later this year.

What if that plan were sacrificed on the altar of bipartisanship? Would it be the end of meaningful health reform?

Not necessarily, if the health systems of the Netherlands, Germany and Switzerland are any guide.

None of these countries uses a government-run, Medicare-like health insurance plan. They all rely on purely private, nonprofit or for-profit insurers that are goaded by tight regulation to work toward socially desired ends. And they do so at average per-capita health-care costs far below those of the United States — costs in Germany and the Netherlands are less than half of those here.

To see how this can work, think of the basic functions that any health system must perform. To wit:

  • 1. the financing of health care, that is, the extraction of the required funds from individuals and households who ultimately pay for 100 percent of all health care
  • 2. the pooling of individual risks with the aim of protecting individuals and households from the high costs of medical care in case of illness
  • 3. the purchasing of health care from its providers (doctors, hospitals, drug companies, etc.)
  • 4. the production of health care goods and services
  • 5. the regulation of the entire system so that it operates towards socially desired ends.

Who should perform these functions is powerfully driven by the distributive social ethic that nations wish to impose upon their health systems.

In Europe, as in Canada, that social ethic is based on the principle of social solidarity. It means that health care should be financed by individuals on the basis of their ability to pay, but should be available to all who need it on roughly equal terms. The regulations imposed on health care in these countries are rooted in this overarching principle.

First, these countries all mandate the individual to be insured for a basic package of health care benefits.

Many Americans oppose such a mandate as an infringement of their personal rights, all the while believing that they have a perfect right to highly expensive, critically needed health care, even when they cannot pay for it. This immature, asocial mentality is rare in the rest of the world. An insurance sector that must insure all comers at premiums that are not contingent on the insured’s health status — a feature President Obama has promised — cannot function for long if people can go without insurance when they are healthy, but are entitled to premiums unrelated to their health status when they fall ill.

Second, these nations try to tailor the individual’s contribution to the financing of health care closely to the individual’s ability to pay — almost perfectly so in Germany, albeit less perfectly in the other two countries.

In Germany, statutory health insurance, which covers 90 percent of the population, is financed by a payroll tax. The individual’s premium is not a per-capita levy, as it is in the United States. It is purely income-based. Ostensibly, about 45 percent of the premium is contributed by employers, although economists are persuaded that ultimately all of it comes out of the employee’s take-home pay (See this and this).

An employee’s non-working spouse is automatically covered by the employee’s premium.

Unemployment insurance pays the premiums for unemployed individuals, and pension funds share with the elderly in financing their premiums, which are set below actuarial costs for the elderly.

Finally, premiums for children are covered by government out of general revenues, on the theory that children are not the human analogue of pets whose health care should be their owners’ (parents’) fiscal responsibility. Instead, children are viewed as national treasures whose health care should be the entire nation’s fiscal responsibility.

The health insurance premiums paid by Germans are collected in a national, government-run central fund that effectively performs the risk-pooling function for the entire system. This fund redistributes the collected premiums to some 200 independent, nongovernmental, competing, nonprofit “sickness funds” among which Germans can choose.

For example, if individual A chooses sickness fund X, then the central fund will give to fund X a capitation payment that uses over 80 variables to identify individual A’s actuarial risk. The same payment would be made for this individual to any other fund.

Thus, the sickness funds in Germany only perform the third function mentioned above — acting as purchasing agents on behalf of the central fund and patients.

Space does not permit a detailed description of the Dutch and Swiss systems. But these countries, too, have married the financing and risk-pooling systems, which try to own up to the principle of social solidarity, with a delegation of the purchasing function to competing, private insurance carriers. In the Netherlands, the latter may be for profit or not for profit. In Switzerland, they are basically nonprofit, except for supplementary coverage for items not in the basic package.

All three countries offer their citizens reliable, portable health insurance based on the principle of social solidarity, but without a government-run health insurance plan like Medicare. The $64,000 question is whether America’s private health insurers would be willing to countenance the tight regulation required for that approach.


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