TCS Daily

A Market Safety Net

By Jens van Scherpenberg - January 6, 2005 12:00 AM

The current German system of compulsory health insurance essentially dates back to the 1920s. It has provided reasonably good health care for many decades. Times have changed, however. Today, the system's built-in tendency towards disproportionally high cost increases is jeopardizing its financial stability. The reasons are the same as in many other industrialized countries: scientific progress in medical treatment and pharmaceuticals, a wasteful use of health care services and the growing share of older people. Currently, the latter's higher health care costs have to be covered by charging the actively employed ever higher health insurance payroll taxes. As this leads to rising labor costs, ever more people choose to leave the regular labor market to start freelancing or moonlighting.

For two decades this vicious circle had been dealt with by stopgap measures that were sold to the public as major reforms. Now, however, the major political parties in Germany have come to realize that the time of makeshift repairs of the health care system is over. Recognizing the need of a system change in health insurance, they have embarked on a remarkable debate of fundamental reform alternatives that more or less encapsulates the full spectrum of approaches to general health care.

  • The socialist SPD has proposed a "citizen's health insurance", essentially a state-run unitary health insurance scheme which is almost indistinguishable from the British "National Health Service" (NHS).
  • The free market-oriented FDP, in contrast, has presented a model that provides for the complete privatization of health insurance while still requiring all citizens to obtain insurance.
  • Then there is the health insurance concept of the conservative CDU, which is currently in the headlines. It basically attempts to preserve the current system while decoupling health care financing from labor costs. In place of a payroll tax, everybody would be required to pay a fixed "health premium". After a long transition period, portability of ageing provisions would be possible, thus allowing for competition among insurers.

Thus far, however, little attention has been given to the compatibility of these approaches with the free movement of people in Europe.

As a classical NHS model, the SPD concept of compulsory public health insurance funded by a general payroll tax would require - and allow - all legal immigrants to be part of the system. Therefore, in order to avoid becoming the Mecca of all patients with chronic diseases EU-wide, Germany would either have to apply restrictions on citizens from other EU countries or to curtail health care to all insured, including German citizens, so that the system becomes less attractive to immigrants. As the British model demonstrates, the latter alternative is a practical way out of the NHS dilemma, though not a desirable one.

To some extent, this dilemma would be better addressed by the CDU approach since it requires all insured to pay fully cost-based insurance premiums. Low-income households would get subsidies from the general budget. The CDU model, however, is expected to be watered down substantially as a result of a compromise that will have to be reached with the CDU's Bavarian sister party CSU, which may be more conservative on values but which is far more socialist on social policies. Indeed, the outlines of a recently-developed highly complex joint approach seem to embody the worst of both the current system and the socialist concept.

The FDP model looks like the most promising one. Its main elements are the following:

(1) Each resident of Germany is obliged to get health insurance, at a minimum level of coverage to be determined by law. Health insurance can also be provided by foreign insurers so long as those minimum standards are met.

(2) Determining the price of insurance would be left to the market, i.e. to insurance companies according to their calculations. Those firms offering health insurance in Germany, however, would have to include ageing provisions in their calculations that are sufficient to preclude any premium rises due to old age. Insurers would be required to make those provisions portable.

(3) Those who cannot afford to pay full health insurance premiums due to their low income will receive additional benefits. Children would have to be insured independently - currently they are insured with their payroll tax-paying parents. However, public child benefits would be raised to account for the health insurance costs of children.

(4) Public health insurance institutions would have to compete with private insurers on a commercial basis. To do so they would be required to introduce portable individual ageing provisions. Since they lack such provisions in their accounting they would have to be given balance sheet assets by the state, as claims on the federal budget. These public liabilities, though considerable (an estimated 600-700 billion Euros) would not actually increase public debt but rather bring existing off-budget obligations into public accounting. They would be interest bearing and would be redeemed with a maximum maturity of 70 years, according to the liquidity requirements of insurers as their clients grow older and their health care expenditure rises faster than premiums.

(5) Insurers are not allowed to terminate contracts with their clients. Should an insured person be unable to pay public welfare would step in.

(6) Insurers are free to offer policies with higher deductibles and lower premiums.

(7) Insurers are free to negotiate the prices and costs of medical treatment to be charged by providers of health services as well as with pharmaceutical firms.

Much of this still has to be worked out in detail. But there is no question that it is a workable system. Thus, for the first time in the history of German public health care, there is an opportunity to engage in a reform process that meets two core principles of today's social reform requirements in Europe:

· Relations among participants in the health care market are governed by market mechanisms, and

ยท at the same time, social safety in health care is guaranteed for all residents.

To achieve this would constitute a spectacular breakthrough in the reform of Europe's social security systems.

This article received honorable mention in the recent TCS essay contest on reforming European health care systems.


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