This Selected Issues paper examines Germany’s growth record in 1992–2001 and analyzes how future performance might be enhanced. The paper focuses on the longer-term strains on the public finances. It reviews Germany’s external competitiveness, which deteriorated substantially in the wake of unification, and concludes that, by the beginning of the current decade, competitiveness had been largely restored. The paper also examines the recent slowdown in credit, which has gone beyond what might be expected on cyclical grounds.

Abstract

This Selected Issues paper examines Germany’s growth record in 1992–2001 and analyzes how future performance might be enhanced. The paper focuses on the longer-term strains on the public finances. It reviews Germany’s external competitiveness, which deteriorated substantially in the wake of unification, and concludes that, by the beginning of the current decade, competitiveness had been largely restored. The paper also examines the recent slowdown in credit, which has gone beyond what might be expected on cyclical grounds.

V. Health Care Reform in Germany68

A. Introduction

151. Germany’s health care system has come under increasing criticism in recent years for its high and rising costs and disappointing health outcomes. Cost pressures are likely to intensify with population aging and the diffusion of highly sophisticated treatments to an increasing number of patients. Public spending on health care is comparable in size with outlays for pensions. And, as it is predominantly financed through payroll taxes, health policy has significant implications for the labor market. Reform proposals range from a plethora of minor changes to wholesale reorganization of the health care system. This chapter argues that higher patient co-payments with rebates for the use of efficient providers and prevention appear promising reform elements. Supplementary regulatory intervention might also be necessary.

152. From a macroeconomic point of view there are three main concerns about health care:

  • Its large fiscal costs. Public health care spending currently amounts to 8 percent of GDP, the largest spending ratio in the world and the second largest government spending program after pensions.

  • Its tax burden on labor. Payroll taxes, currently almost 16 percent of gross wages, finance the bulk of health care expenditure in Germany. Payroll taxes drive a wedge between labor costs and take-home pay. Employment suffers unless hikes of payroll taxes are fully compensated by commensurate reductions of take-home pay. A full offset is unlikely since generous social programs, the possibility of moon lightening, and the benefits of leisure all set a floor to take-home pay. In surveying the empirical literature Nickel and Layard (1999, p.3061) conclude “that overall labor tax rates do influence labor costs in the long run and hence raise unemployment.”

  • Its waste of resources. Health care makes up a significant sector of the economy, accounting for about one out of every nine jobs (Statistisches Bundesamt, 2002). Reports of waste abound. About half of all x-rays are performed unnecessarily, drugs worth some 0.1 percent of GDP are thrown out, almost 80 percent of knee arthroscopies are unwarranted, hospital stays are almost twice as long as in other countries, etc. (Public Health Insurance Fund, 2002). Non-negligible welfare gains could probably be reaped if these wasted resources were gainfully redeployed elsewhere.

153. Inadequate incentives for economical behavior are the root cause of excessive costs and waste. Pervasive insurance coverage gives rise to moral hazard on the part of patients. Since they essentially face a zero price for medical treatment they have an incentive to always demand the highest quality services without regard to cost and seek all treatment that could conceivably have beneficial effects. Providers have every reason to comply as they typically earn more when they render more services. Indeed, physicians might even exploit their professional authority and provide unwarranted treatment, perform useless tests, and discharge patients overly late from hospitals. This phenomenon is known as the problem of induced demand. Moreover, dynamic effects compound these static inefficiencies: the medical profession and the pharmaceutical industry have an incentive to develop ever more sophisticated treatments. As costs are not a consideration for patients, demand for such new treatments is always assured, even if they offer little medical advantages at vastly higher costs. On the other hand, incentives to develop new treatments that offer the same medical benefits as existing treatments at much lower costs are absent.

154. Equity considerations and concerns about market failure are the traditional arguments against organizing health care systems according to market principles. A market-based system without insurance would avoid the above inefficiencies, but is subject to a host of serious drawbacks. The poor might be unable to afford medical treatment, there would be no solidarity transfer from the healthy to the sick, and people would be exposed to large risk. A market-based system with insurance would be prone to many of the above inefficiencies. In addition, markets might make insurance premiums unaffordable for the poor and higher for the sick than for the healthy, thus compromising solidarity and protection from risk. Moreover, there is the more general concern that risk-selection seriously impairs the efficient operation of insurance markets (Rothschild and Stiglitz, 1976, Cutler, 1996, Luft, 1986, and Holahan, 1997).

155. Inefficiencies become more of a concern as the capabilities of medicine expand. When modern health care systems were established, medical capabilities were limited, health care costs were low, and the health care sector was small. Under those circumstances inefficiencies could easily be tolerated. Writes Cutler (2002, p.881), “countries were content to have inefficient medical-care systems provided they treated all equally.” With health care now having grown into a major industry this is no longer true.

156. Inefficiencies can be redressed through regulation, reliance on incentives, or both. During the 1980s and 1990s policy makers relied primarily on tightening regulation. While Germany did not go as far as some other countries, the number of physicians, drug prices, the budgets of hospitals and out-patient services, and the purchase of major medical equipment became subject to regulation. Disappointed with the results of more regulation, improving incentive structures has increasingly become the new mantra of international health care reform (Cutler, 2002).

157. There are no easy answers to the rising burden of health care costs, but a few measures nonetheless appear promising. Virtually all advanced economies are grappling with health care reform and blueprints for optimal health care systems do not exist. Moreover, system design requires value judgments and raises fundamental ethical questions if state-of-the-art medical treatment is simply becoming too expensive to be made available to every member of society. Nonetheless, the case for mobilizing efficiency reserves is clear. There is a growing consensus that the introduction of meaningful co-payments should be part of this mobilization effort, although the government is currently not prepared to go down this route. “When designed properly, they would strengthen economical consumer behavior and foster competition among providers, while not undermining solidarity. Co-payments are no panacea, however, and might need to be supplemented with regulatory reform elements. Flexible global budgets for health care expenditure might be an option and so is government support for cost-reducing medical innovation.

B. The German Health Care System69

158. A brief description of the German health care system shows that incentives for economical behavior are missing and points to overall inefficiencies with particular failings in non-core health care expenditure, in-patient services, and prevention and health promotion. Universal insurance coverage, generous benefits, free access, and modest co-payments compound to ideal conditions for high health care demand. Fee-for-service remuneration of providers along with lack of competition among them are conducive to ample supply. The large resources that are consequently devoted to health care do not, however, translate into a particularly favorable population health. This might partly reflect too little emphasis on prevention and health promotion. Other inefficiencies appear to be mostly across-the-board. There is tentative evidence, however, that medical spending outside the main categories is a particular problem. Moreover, above-average hospital utilization rates combined with below-average hospital spending shares might indicate that hospital budgets have compressed outlays but not dealt sufficiently with excessive hospital stays.

159. The German health care system follows the social insurance model. Generally, all gainfully employed as well as other defined groups such as pensioners, students, and the unemployed are legally required to be insured against sickness under the public health insurance. Under certain conditions one can opt out and purchase private health insurance instead. Public health insurance is financed through payroll taxes and coverage extends to dependents at no extra charge. Out-patient care is provided by private physicians and in-patient care by a mix of private and public hospitals. Legislation in the area of health care is generally the joint responsibility of federal and state governments with oversight of its proper implementation resting with the federal government for issues that concern Germany as a whole and with state governments otherwise. State governments are also in charge of prevention, medical education, and hospital planning and investment. Corporatist bodies such as doctors’ associations, health insurance associations, and doctor-insurance committees negotiate fee schedules, allocate global budgets, regulate the number of doctors by region, and determine the details of coverage under the public health insurance.

160. Virtually the entire German population has health insurance. Some 88 percent is covered by public health insurance, which comprises some 420 different funds, each servicing either a geographical region, an occupational group, or employees of specific companies. They offer similar benefits, but contribution rates may differ. Private health insurance covers another 9 percent of the population. Employees with incomes above Є3,375 per month can opt out of public health insurance and purchase policies for themselves and their dependents from one of about 50 private health insurers instead. Civil servants and judges receive partial insurance coverage from the government and typically purchase supplementary private insurance. Soldiers, police officers, and recipients of social assistance benefit from free government health care and account for another 2 percent of the population.

161. Generally, public health insurance covers all medically necessary treatments, access to health care services is free of restrictions, and co-payments are moderate. Exclusions of treatments are possible but rare in practice. Most drugs become reimbursable upon approval. Public health insurance also extends to dental coverage, but excluding treatment for purely cosmetical purposes. Benefits are typically provided in kind. Providers are reimbursed by insurance funds and bill patients only for co-payments, if any. For the first 14 days of a hospital stay patients have to pay Є9 per day out-of-pocket. Co-payments for drugs vary between Є4 and Є5, depending on pack size. Non-physician care, dental crowns, and dentures require higher co-payments. There is no annual deductible and co-payments are waved for low-income families and capped for all others.

162. Remuneration of providers traditionally follows the fee-for-service model but the use of budgets has gained ground in recent times. In out-patient care, public health insurance funds and doctors’ associations set overall budgets which are allocated across individual physicians in proportion to the services they provide. To guard against excessive treatment, random checks tally per-patient services of individual doctors against averages and doctors are required to explain above-average provision of services. Under the system of “dual hospital financing,” in-patient facilities receive investment financing from state governments and health insurance reimbursements cover operating expenses. Reimbursements are a combination of per-diems, procedure case fees, and prospective fees, but total reimbursements are also subject to target budgets for each individual hospital. Overruns reduce reimbursements by 50-90 percent. Hospitals are allowed to retain 40 percent of savings. A new system where reimbursements depend only on the so-called Diagnosis Related Groups (DRGs) of treated cases, is planned for introduction during 2003-07. As to pharmaceuticals, target budgets now apply at the level of individual physicians, after attempts to introduce more stringent budgeting had failed repeatedly. Regulations fix wholesale and retail margins for drugs. Ex-factory prices of drugs responsible for about 65 percent of pharmaceutical expenditure are subject to fixed reimbursement limits. Limits are set at the lower 33rd percentile of prices for comparable drugs. In addition, physicians are encouraged to prescribe active ingredients of drugs rather than brand names to allow pharmacists to pick the cheapest drug. In private health insurance, remuneration of providers is on a fee-for-service basis.

163. Organization of health care providers is a private-public mix. Physicians in private office, typically organized as a single-doctor practice, operate on a for-profit basis. They are overseen by doctors’ associations, which guarantee availability of appropriate medical services throughout Germany in exchange for the monopoly to render out-patient services. The associations also regulate the number of physicians by region. Currently, only 20 percent of regions are open for new doctors (of all fields of specialization) to set up practice (Bundesanstalt fur Arbeit, 2002). Hospitals are mostly either publicly-owned or operate on a not-for-profit basis. For-profit hospitals account for 7 percent of hospital beds. The pharmaceutical industry is highly developed with about 1,100 for-profit companies, making Germany one of the leading drug-exporting countries. Pharmacies are for-profit, but highly regulated. There is currently no restriction on setting up new pharmacies, but margins are set by regulation and chain pharmacies as well as drug-distribution by mail are illegal.

164. Competition among insurance funds is increasingly being embraced. Since 1996 the insured have been free to choose between public health insurers, that are legally obligated to contract with any applicant. A government-operated risk equalization scheme compensates insurance funds with bad risks, and taxes insurance funds with good risks. The size of the transfer depends on the age, sex, and income composition of the insured, as a rough approximation of their morbidity, but refinements are in train. Private health insurance funds compete for members and generally charge risk-based premiums. They can reject applicants because of medical risk. Premiums are written on a level-lifetime basis, i.e., they are set for life at the time of application, taking into account age, sex, and current health status, with a view of accumulating enough reserves when the insured is young to cover anticipated greater health care expenses in old age (Jost, 2001). Reserves are not portable between insurances making it unattractive for policy holders who are old or in bad health to switch insurers.

165. Insurers’ ability to select efficient providers remains narrowly circumscribed. Public health insurance funds continue to contract with providers as a group through doctors’ associations. The insured retain free access to all physicians and their choice remains unencumbered by financial considerations. Competitive pressure on insurance funds thus cannot translate into pressure on providers to improve efficiency. In the case of in-patient care, insurers contract collectively with individual hospitals and patients are free in their choice of hospital. Again, without the possibility to contract selectively with efficient hospitals, or steer their patients to such hospitals, health insurance funds cannot compete on the basis of arranging for more efficient in-patient services.

166. Public health insurance finances the bulk of health care expenditure. In 2000, it was responsible for 57 percent of health care expenditure, followed by private households (12 percent) and private health insurance funds (8 percent), (Figure V-1). Only a fraction of outlays by private households relates to co-payments and medical services/goods not covered by insurance though. This category also includes, for example, estimated time costs for the private care of elderly family members. Co-payments under the public health insurance accounted for less than a third of private households’ health care expenditure in 1996 (Statistisches Bundesamt, 1998).

Figure V-1.
Figure V-1.

Germany: Health Care Expenditure by Sponsoring Agency, 2000

(Share of total in percent)

Citation: IMF Staff Country Reports 2002, 240; 10.5089/9781451810431.002.A005

Source: Statistisches Bundesamt, Gesundheitaberichterstattung des Bundes 2000.

167. Social security contribution rates for public health insurance have been rising relentlessly and are beginning to rival contribution rates for public pensions. In 2002, average statutory contribution rates reached 14 percent compared to 12.4 percent in 1991 and 8.2 percent in 1970 (Figure V-2). On top of this, contribution rates for the long-term care insurance for the elderly, introduced in 1995, are 1.7 percent. Rates apply to employees’ gross wages up to a ceiling (Є3,375 per month in 2002). Total contribution rates of 15.7 percentage points are not far behind the 19.1 percent rate financing pensions.

Figure V-2.
Figure V-2.

Germany: Social Contribution Rates for Health Care and Pensions, 1970-2002 1/

(In percent)

Citation: IMF Staff Country Reports 2002, 240; 10.5089/9781451810431.002.A005

Sources: Ministry of Health; Ministry of Labor and Social Affairs.1/ Rates relate to Western Germany through 1990 and to reunited Germany thereafter. Rates related to health care include contributions to the long-term care ftind for the elderly.

168. Public health care expenditure is higher in Germany than in any other country and total health care expenditure is among the highest in the world (Table V-1). Public health care expenditure amounted to 8 percent of GDP in 2000, compared to 5.7 percent of GDP for selected OECD countries, making health care the second largest public spending program in Germany after pensions. Total health care expenditure, i.e., if private spending is also taken into account, comes to 10.6 percent of GDP. This is about the same spending ratio as in Switzerland and is surpassed only by the United States, which spend 13 percent of GDP. However, health care expenditure is financed in a less distortionary way in these countries: Switzerland relies to a large extent on lump-sum per capita contributions and the United States rely on private financing.

Table V-1.

Selected OECD Countries: Health Care Expenditure, 1970-2000

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Source: OECD Health Data 2002

169. Health care expenditure is relatively high across the board. The shares of in-patient, out-patient, and drug spending are comparable with those observed in other OECD countries (Table V-2). However, the share of other spending is unusually high. This appears to be due to a combination of: (i) high administrative costs, accounting for some 6 percent of total health care expenditure, an even higher share than in the United States; (ii) above average expenditure on home care; and (iii) above average expenditure for therapeutical appliances.

Table V-2.

Selected OECD Countries: Health Care Expenditure by Type 1/

article image
Sources: OECD Health Data 2002 and IMF staff calculations.

Average during 1996 and most recent year available.

170. Growth of health care spending slowed in the 1980s and 1990s, both in nominal and real terms, although growth rates continued to exceed those of GDP somewhat. In the last two decades expenditure growth came down to 4-5 percent per year in nominal terms and around 2 percent in real terms (Table V-3). The long-run expenditure trend was similar for in-patient treatment, out-patient services, and drugs. Mirroring the findings of the cross-country comparison, other components, such as non-physician medical services and non-pharmaceutical medical goods, expanded above average. Health care inflation accounts for about half of the increase of the health care expenditure ratio over the last twenty years, but is much less pronounced than in other countries. Since 1980, health care prices grew some 0.6 percentage points faster (per year) than the GDP deflator. The wedge is below the OECD average and significantly below the 2.3 percentage points experienced in the United States.

Table V-3.

Germany: Health Care Expenditure by Type, 1970-2000

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Sources: OECD Health Data 2002 and IMF staff calculations.

Includes laboratory, diagnostic imagining, patient transport, emergency services, and ancillary services.

Dispensed to out-patients only

Excluding reunification years 1900 and 1991

Growth of nominal health care expenditure components divided by the GDP deflator

171. The latest data indicate a renewed up tick in the growth of health care expenditure. Up-to-date information on health care expenditure is only available for outlays financed by public health insurance. Efforts to contain costs kept per capita health care expenditure growth to around 2 percent per year in the second half of the 1990s, but it accelerated to above 3 percent in 2001 (Table V-4). Outlays for drugs have been growing at an annual rate of 6.6 percent in the last five years, thus raising a particular concern.

Table V-4.

Germany; Evolution of Per Capita Expenditure of Public Health insurance Funds, 1992-2002

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Sources. Ministry of Health (Daten dea Gesundheitswesens 2001, Press release 3/7/2002, and Press Release 9/2/2002) and IMF staff calculations,

In 2001.

First of the year.

Dispensed through pharmacies

172. The long-term expenditure outlook is clouded by demographic aging and cost pressures from the diffusion of increasingly sophisticated treatments. Under present policies, the pure demographic effect is estimated to add about 2 percent of GDP to publicly financed health care over the next fifty years (Chapter IV). Although hard to quantify, technological progress in medicine could deal a potentially stronger blow. In the 1990s the use of expensive invasive treatment soared around the world, including in Germany where, e.g., the performance of coronary bypass surgery and coronary angioplasty more than doubled. Their use is still much less widespread than in the United States, indicating that the trend toward more invasive treatment has much room to continue. Moreover, technological cost pressures appear to be particularly pronounced in the case of the elderly, implying that rapidly aging societies would be particularly hard hit (Ulrich, 2000).

173. Health care resources and utilization are generally comparable to other OECD countries but appear exceptionally high in the hospital sector (Tables V-5 and V-6). The density of physicians, dentist, pharmacists, and technical equipment in Germany is close to that observed in other highly advanced economies. However, the number of acute-care beds in relation to population is higher than anywhere else and twice as high as in the United States. As a mirror image of this pattern, health care utilization is high by international standards in the hospital sector, but about average for patients’ use of physicians and dentists The average length of stay in acute-care is the longest among selected OECD countries and the acute-care hospital admission rate is higher only in Austria.

Table V-5.

Selected OECD Countries: Indicators of Health Care Resources 1/

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Sources: OECD Health Data 2002 and IMF staff calculations.

Data refer to the year 2000 or latest date available, except in the case of CT scanners where data refers to 1997.

Table V-6.

Selected OECD Countries: Indicators of Health Care Utilization1/

article image
Sources: OECD Health Data 2002 and IMF staff calculations.

Data refer to the year 20O0 or latest date available.

174. Despite the high level of health care spending, the health status of the German population is disappointingly mediocre. According to most commonly used indicators of population health, Germany ranks below its peers (Table V-7). In particular, the disability adjusted life expectancy (DALE) is lower than in two thirds of highly developed OECD countries. This low DALE score, combined with one of the highest health care spending in the world, dropped Germany’s health performance to position 41 in a WHO ranking of its 191 member countries (WHO, 2000). Likewise, the OECD observed in 1997 that health outcomes in Germany disappoint given the large resources devoted to health care. Such findings do not necessarily imply inefficient health care services in the narrow sense: poor health could be driven mainly by unhealthy lifestyle choices rather than inadequate medical services, and indeed Germans fare rather poorly on lifestyle indicators. But to the extent that this is seen as a failure of health promotion, the WHO/OECD findings indicate at least that health care provision in a wider sense is inefficient.

Table V-7.

Selected OECD Countries: Health Status Indicators

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Sources: OECD Health Data 2002 and WHO World Health Report 2000.

Disability adjusted life expectancy.

Potential life years lost

C. Reform Efforts and Proposals

175. Since the late 1970s a string of health reform legislation has sought to slow the rise of health care expenditure in Germany. The thrust of reforms often shifted, with new reform measures sometimes rescinding earlier ones. The goal of stabilizing contribution rates proved illusive however.

176. The latest major reform legislation, the Health Care Reform Act 2000, seeks to stabilize contribution rates while avoiding burdening patients with higher co-payments, improve the responsiveness of the health care system to patients’ needs, foster health promotion and prevention, and strengthen patients’ rights. The switchover to hospital remuneration based on DRGs during 2003-07 and the planned introduction of a positive list for reimbursable drugs could stem the rise of costs. Other elements of the reform package could improve the quality of care and generate savings in the longer run. These include (i) added emphasis on health promotion and prevention; (ii) the strengthening of the position of the general practitioner through a separate budget allocation from that of specialists and the introduction of voluntary insurance plans where general practitioners act as “gate-keepers;” (iii) efforts to overcome the traditionally rigid separation of in-patient and out-patient care; and (iv) larger scope for technology assessment.

177. Efforts in the last two years have focused on implementing the Health Reform Act 2000 and bringing drug expenditure growth under control. Many general provisions of the Health Reform Act 2000 needed follow-on legislation and implementing regulation. Regulation that allows insurance funds to offer disease management programs for diabetes and breast cancer are now in place. The Risk Equalization Reform Law allows extra transfers to insurance funds offering such programs. From 2003, costs for medical treatment of a patient above a certain threshold will be partially covered by a so-called high-risk pool rather than the respective insurance fund. The equalization mechanism is to be based on true morbidity criteria by 2007. Three pieces of legislation try to cope with rising drug expenditure: target budgets were adopted, maximum reimbursable prices for drugs were lowered, pharmacists were required to substitute for prescribed high-price drugs, pharmacists’ rebates to health insurances were increased, and the pharmaceutical industry agreed to make a one-off payment to public health insurers.

178. The recently re-elected government has pledged to maintain the thrust of the health reform effort (SPD, 2002). In particular, it wants to foster the use of evidenced-based medicine: a commission of independent experts would develop corresponding treatment protocols for all major diseases and determine which treatments are covered by public health insurance, a responsibility currently resting with the corporatist bodies. A similar independent commission would assess new drugs with a view of recommending insurance coverage only for those with significant value added. Contractual relations between insurers and providers would be further liberalized, but the traditional collective agreement with regional doctors’ associations would remain the norm. Distribution of drugs by mail would be allowed. Last but not least, the income threshold for opting out of public health insurance would be increased. The main opposition party likewise favors an evolutionary approach. It advocates, however, rolling back government regulation, such as budgets and restrictions on the number of doctors, and fostering more variety in health plans regarding out-of-pocket payments and coverage (CDU/CSU, 2002 and Stewens et al., 2001).

179. Other groups propose more radical reform. A group of experts close to the government would abolish collective contracts with doctors’ associations altogether and broaden the tax base of social security (Friedrich-Ebert-Stiftung, 2002). The Kronberger Kreis (2002), a pro-market think tank, would replace public health insurance with the requirement to purchase a basic benefit package from competing private insurers that would charge risk-based premiums and contract with providers of their choice. In 2000, the Council of Economic Advisers had advanced a similar idea (Sachverständigenrat, 2000).

D. Possible Reform Priorities

180. Reform steps should address some fundamental distortions of the system: the lack of patients’ incentives to take costs into account, providers’ bias to provide excessive treatment, and the disincentive for developing cost-saving new technology. There is a broad consensus that co-payments are an indispensable tool for sharpening patients’ cost awareness. And, if applied selectively, they can also help mitigate providers’ bias toward excessive treatment. But they are no panacea and there is much less consensus of how to deal with the remaining bias toward excessive health care. Two regulatory options are explored in more detail: global budgets and government support for cost-saving innovation.

Patient co-payments

181. At the very least, co-payments would provide for less distortionary health care financing than sole reliance on payroll taxes. Total social security contributions now top 41 percent of gross wages and inhibit the functioning of the labor market. This concern would be lessened if some health care financing could be shifted off social security contributions onto patient co-payments. The shift could be arranged so that income is not redistributed between employers and employees.

182. Co-payments would provide for better patient and physician incentives to choose less treatment and more cost-effective treatment. It is sometimes argued that existing co-payments in Germany have done little to reduce health care demand. But this likely reflects their modesty and structure, rather than a general ineffectiveness. It is hard to imagine that a co-payment of Є9 per day for in-patient care would seriously deter anyone from excessively long hospital stays. Similarly, co-payments on drugs that depend on pack size but not on the price of the drug hardly induce patients to opt for low-price alternatives. The broader experience, however, does suggest that co-payments work. In surveying the empirical literature, Zweifel and Manning (2000, p.436) conclude that “a number of observational studies have found that the demand for health care falls with increases in out-of-pocket costs, across a variety of populations and institutional settings. The magnitude of the estimated response varies widely, however.” From a theoretical point of view the merits of co-payments are even more clear cut: full insurance eliminates all financial incentives for patients to opt for cost-effective treatment while providers typically face financial incentives conducive to excessive treatment. Co-payments eliminate this one-sided bias. The basic truth of Arrow’s 1963 finding remains valid: the optimal health insurance contract involves out-of-pocket payments in the form of co-insurance and a deductible.

183. Co-payments could be differentiated to elicit more efficient consumer behavior. Once co-payments are generally in place, selective reductions can be used to influence consumer choice for the better. Rebates could be offered to those who choose a healthy lifestyle, e.g., by refraining from smoking, getting sufficient exercise, following a healthy diet, etc., and those who adhere to a preventive check-up program.

184. Selective co-payment rebates could serve as a substitute for selective insurance-provider contracting. It has rightly been argued that competition between insurance funds is rather pointless as long as they all contract with the same providers at identical terms. Room for efficiency gains at the level of insurance funds is probably rather limited, although competition might help to bring down their administrative costs and spur more health promotion. With the bulk of the potential efficiency gains at the level of health care providers, it is essential that competition among insurances is mainly about selecting cost-effective providers. Outright selective contacting, however, gives rise to a number of problems: (i) it challenges the traditionally strong position of doctors’ associations, which are currently the contractual partners of insurance funds; (ii) it is hard to square with free access, as insurance funds would have agreements only with a subset of providers; and (iii) it would take a substantial effort to establish the host of new contracts that would be required, given the large number of insurance funds and providers. Co-payments with rebates for the use of cost-effective providers would offer much the same advantages as selective contracting while avoiding such problems. Competition among insurance funds would be about identifying cost-efficient providers and then offering reduced co-payments to induce their members to use them. Doctors’ associations could continue to play their traditional role and access would remain free.

185. Increasing co-payments raises the specter of undermining social solidarity. Germany’s health care system involves redistribution in its use and its financing. It redistributes income from the healthy to the sick because treatment is essentially free of charge. It also redistributes income from the rich to the poor because it is financed through a proportional payroll tax: the more you earn the more you pay. How all this affects equity depends on which concept of equity is considered, a much discussed topic in the health care literature (Hurley, 2000). Using equality of income as the yardstick, the free use of health care has no systematic effect on equity. Financing likely improves equity, but probably less so than one might think: the rich can opt out of public health insurance, the tax does not apply to capital income, and labor income above a certain threshold goes untaxed (Breuer and Zweifel, 2002). A system of co-payments probably does not worsen equity, as long as the ceiling for co-insurance and the deductible are linked to income. Consider, for example, a scheme with a 20 percent co-insurance up to 10 percent of income and a deductible of 1 percent of income. In years where the ceiling for co-insurance is reached it has better equity properties than the current system since all income is considered in determining the co-insurance ceiling. In no-claim years, the equity properties are worse, and in all other years the effect is ambiguous.

Regulatory options

186. For all the efforts to strengthen incentives, a bias toward excessive health care spending remains. Even with substantial co-payments, patients do not face the full marginal cost of treatment. Health care demand remains excessive. Even with competition among insurers and providers, elements of cost recovery in provider remuneration would be hard to eliminate fully. Incentives for overtreatment are still present. And co-payments do not even begin to address the dynamic dimension of the bias.

187. A global budget could serve as a second line of defense but would give rise to other problems. Budgets are a double-edged sword. Most economists are critical as a global budget might fix an inefficient level or composition of health care expenditure (see, e.g., Zweifel and Breyer, 1997). Yet, in practice, systems with open budgets have not fared well. Hsiao (2000) suggests that it is more than mere coincidence that the two countries with the most open budgets, the United States and Switzerland, also feature the highest health care spending ratios.

188. Existing budgeting could be improved upon. Efficiency losses can be particularly pronounced if budgets pin down spending in narrow categories. For example, separate budgets for drugs and other medical services might inhibit the use of cost-effective drug therapy in lieu of surgery. Elements of historic-cost budgeting in the case of hospitals perversely punishes past efforts to increase efficiency. A truly global budget covering all health care expenditure under the public health insurance would avoid such problems. But it would be essential to devise an implementation mechanism that steers the overall squeeze on resources to areas of inefficiencies. Utilization reviews would be a possibility. Such reviews could conclude, for instance, that Germany’s system of dual hospital financing hinders reduction of excess bed capacity or that overly generous margins for pharmacies lead to excessive market entry.

189. Governments are attempting to redress the dynamic bias toward excessive health care through technology-assessment mechanisms and, in the case of pharmaceuticals, through positive lists. Essentially, if the entity charged with technology assessment determines a new technology, or drug, to be cost-ineffective it is excluded from insurance coverage. The hope is that it will thus not be developed in the first place or at least not readily applied to large numbers of patients. Medical innovation in the global marketplace is, however, outside the control of any government. New medical treatments and drugs are developed for world markets rendering futile unilateral national efforts to alter the incentive structure.

190. Biased incentives in medical innovation could be balanced by government-sponsored research and development. If incentives to develop marginal and cost-pushing technologies cannot be lessened by any national government, it could at least compensate by directly sponsoring cost-saving medical innovation. With significant research and development resources already under government control a redeployment of existing funds might be all what is needed.

References

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  • Bundesanstalt für Arbeit (2002), “Arbeitsmarkt-Information für qualifizierte Fach-und Führungskräfte: Ärztinnen und Ärzte,Arbeitsmarktinformationsstelle, Bonn.

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68

Prepared by Christoph Klingen.

69

This section draws on Busse (2000) and Busse (2002).

Germany: Selected Issues
Author: International Monetary Fund
  • View in gallery

    Germany: Health Care Expenditure by Sponsoring Agency, 2000

    (Share of total in percent)

  • View in gallery

    Germany: Social Contribution Rates for Health Care and Pensions, 1970-2002 1/

    (In percent)