TCS Daily

Cure for What Ails EU

By Karen Hoehn - September 3, 2003 12:00 AM

Gerhard Schröder, German chancellor, yesterday received a major boost for his reform plans when the government and opposition agreed to slash healthcare costs -- Financial Times, 22 July 2003 


Healthcare reform is now coming to continental Europe, as it came to the U.S. two decades ago. Not only has Germany now established a firm continental foothold for healthcare reform, but it also breaks new ground in emphasizing the need to cut costs. Europeans generally prefer discussing healthcare reform within the comfortable rhetorical context of "equity" and "social inclusion." Schröder's success makes it clear that reform is needed to cut public spending and stimulate Europe's slumbering economy. 


Smart European policymakers will look to the U.S. for guidance on how to cut health costs without enraging consumers/taxpayers. This statement is not so shocking as it may seem to observers of recent transatlantic relations. True, most Europeans believe the "private" U.S. healthcare system is a disaster, while European systems, being "public," are fundamentally better. The U.S. healthcare system is rife with problems, to be sure, but this false dichotomy ignores a steady march of progress in U.S. knowledge about how to effectively and efficiently manage health systems.


The U.S. healthcare "system" is actually a patchwork of systems, public and private, regulated by local, state and federal government authorities. In 2000, government paid 44 percent of personal healthcare costs in the U.S., private health insurance paid 35 percent and individual consumers paid 17 percent. Like most European health systems, it combines profit and nonprofit organizations, as well as publicly and privately owned and managed physicians, nurses, hospitals, pharmacies and insurance schemes. 


When double-digit healthcare inflation hit the U.S. in the late 1970s, state and local governments were squeezed between declining tax revenues, increases in public health spending and general consumer unhappiness. This is the scenario facing many countries in Europe today.


Over time, governments in the U.S. have launched thousands of distinct policy initiatives in order to improve quality while cutting costs. Most of these involve some form of privatization -- contracting with outside vendors for deliverables that politicized and bureaucratized government agencies could not achieve. As a result, U.S. companies, private nonprofits and state and local governments -- many of whose healthcare systems are as large as European countries' -- now have more than a decade of experience in these areas. What have they learned?


Competitive outsourcing, done well, can stimulate innovation, cut costs, improve health outcomes and create an enforceable contractual obligation otherwise missing from the public "contract" between governments and taxpayers. Even if outsourced performance falls short of expectations, the outsourced contractor, unlike government agencies, can be fired, the contract re-bid and issued to a more competent vendor.


Leading health management trade newsletters in Europe now read much like comparable U.S. newsletters ten to 15 years ago, with articles focusing on healthcare outcomes and cost containment, re-integration of fragmented systems, introduction of capitation, Quality Adjusted Life Years, and so on. The Diagnostic Related Groups (DRGs) recently established for hospital payment in Germany have been used by the U.S. federal Medicare program since the 1980s.


At 13.2 percent and rising, the U.S. still spends more on health as a percentage of GDP than other industrialized countries. For each year from 1994 to 1999, however, U.S. healthcare spending per capita dropped from double-digit inflation to less than 5%. Why? Most analysts, looking at the almost five-fold increase in managed care enrollment between 1981 and 2000, would be comfortable attributing this to capitation and privatization. Five years of modest growth may not sound like a big success over a 20-year period, but remember that we're talking about billions of dollars of savings.


Comparing U.S. performance to a European nation's may not actually be the best measure, though, because of differentials in population size and the vast multiplicity of public and private insurers across the U.S. compared with most countries in Europe. Looking at state government healthcare systems may be more appropriate, and here there's even more interesting news. During the period when state governments most dramatically increased outsourcing and "capitation" of Medicaid, their largest healthcare program, cost inflation dropped into single digits for the first time since the 1970s.


Extensive studies of healthcare quality in the U.S. have found no significant evidence of overall declines in quality in the past two decades, despite anecdotal evidence often presented in the press. And, despite panicky news reports about Americans being lazy and fat, major health indicators have improved steadily over time. Infant mortality has dropped and life expectancy has increased. Use of preventive care, e.g., prenatal, mammograms for breast cancer screening, influenza immunization among the elderly, has increased. Cigarette smoking has almost disappeared, an accomplishment David Byrne, the European Commission's top guy for public health, must dream about.


Whatever Europeans may think about the U.S. healthcare system, it has been an excellent laboratory for testing the best and worst ways to pay for, provide and manage health services. Smart Europeans will meet with leading U.S. healthcare companies, and the state and local policymakers that hired them, to learn what works and what does not.


Karen Hoehn is a health policy and systems analyst in Brussels. She has developed public/private health systems serving 2 million low-income and disabled individuals. Her email address is


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