Switzerland: Selected Issues

This Selected Issues paper attempts to quantify the impact of the demographic shift on growth and public finances in Switzerland. It examines the intertemporal consistency between current policy plans and unfunded liabilities, focusing primarily on social security, and explores policy options. It finds that so far, the impact of aging on the economy has been moderate. The number of pensioners has risen in recent years, but this is mainly owing to early retirees taking advantage of the generous disability and pension systems. The paper also examines the need for health care reforms in Switzerland.

Abstract

This Selected Issues paper attempts to quantify the impact of the demographic shift on growth and public finances in Switzerland. It examines the intertemporal consistency between current policy plans and unfunded liabilities, focusing primarily on social security, and explores policy options. It finds that so far, the impact of aging on the economy has been moderate. The number of pensioners has risen in recent years, but this is mainly owing to early retirees taking advantage of the generous disability and pension systems. The paper also examines the need for health care reforms in Switzerland.

II. The Need for Health Care Reform25

A. Health Care Spending in Switzerland

65. Switzerland’s health care system produces good results, thanks to a high quality of services. Switzerland’s life expectancy of 80½ years is second in the world to Japan, but infant mortality is twice as high as in the best performing countries. Overall, the Swiss population is paying a high price for these results. Cost increases have resisted several attempts at reform—most recently in 1996—and are turning into a fiscal problem.

66. Switzerland has the second-highest ratio of health spending to GDP in the world. The country spends 11.5 percent of GDP on health care, more than any other industrialized country except the United States with 14.6 percent. This share has more than doubled from 5.4 percent of GDP since 1970, the steepest increase in the OECD.

67. Much of the rise in the Swiss health care ratio is due to slow growth—the denominator effect. The table below shows that real per capita health care spending even grew below the OECD average. Disaggregated spending items were also well aligned with OECD averages. Overall, Swiss health care spending is not extraordinary by international standards. Rather, it has become incompatible with the country’s poor growth record.

68. Continued discrepancy between health care costs and income growth could put pressure on the Swiss economy. If the private sector bears the cost, lower income classes would suffer; if the public sector bears the cost, fiscal imbalances would widen. Either way, a health care sector that absorbs an ever larger share of resources will eventually lower GDP growth further. In contrast, it may be worth noting that Scandinavian countries, in particular Finland and Sweden, have managed to contain or even reduce their health-to-GDP ratios over time.

uA02fig01

Other countries beat Switzerland’s health...

Citation: IMF Staff Country Reports 2005, 188; 10.5089/9781451807271.002.A002

uA02fig02

...but only one country has higher cost (the US).

Citation: IMF Staff Country Reports 2005, 188; 10.5089/9781451807271.002.A002

Health Care Spending in Switzerland

Median values for 1970-2002

(OECD average in brackets)

article image
Source: OECD Health Data (2004).

B. High Prices and Their Causes

69. Swiss health care is expensive mainly because of high prices rather than large quantities. Volume grew less than the OECD average, but relative prices grew faster. This points to distortions on the supply side of the sector. In particular, four problems may be identified: (1) regional fragmentation, (2) financial fragmentation, (3) supply-induced demand, and (4) insufficient competition.

uA02fig03

Price pressure was strong.

Citation: IMF Staff Country Reports 2005, 188; 10.5089/9781451807271.002.A002

  • Regional fragmentation limits competition and economies of scale. In the Constitution, the provision of health care is assigned to cantons. This has led to a proliferation of hospitals, as most cantons strive to provide the full spectrum of health care services. Switzerland has the third-highest number of hospitals per capita in the OECD, most of them small and not very specialized. The canton of Bern alone e.g. has the same number of hospitals as Sweden. Operating costs of public and subsidized hospitals are fully reimbursed by compulsory sickness insurance and cantons, removing incentives for hospital managers to control cost. Similarly, Switzerland has the third-highest number of physicians per capita in the OECD. Specific regional regulations and licensing cause a bunching of physicians in the cities and inhibit national competition. Insurers must cover treatment by every doctor, even the most expensive ones, which complicates cost control.

  • Financial fragmentation further weakens incentives to limit cost. Three different institutions finance health care in Switzerland. Most treatments are covered by private health insurers (KV). In addition, more generous financing is available from public accident (UV) and disability insurance (IV). The lines between the three are not always sharp and give providers room to shift patients from one scheme to the other. Disability insurance in particular has grown rapidly in recent years, and there are indications that it is being used for early retirement. This is leading to a pooling of risks in the (generous) disability insurance.

  • Supply-induced demand may lead to overly expensive forms of treatment. Widespread information asymmetries characterize health care markets. Patients cannot accurately assess the quality and price of a product in advance. They often lack the medical expertise or are physically impaired, in particular when they need urgent treatment, and cannot negotiate on price. Thus, market power is concentrated on the supply side—doctors and hospitals—which leads to higher cost. Compared to other European countries, the Swiss health care system is highly decentralized, and shows strong evidence of supply-induced cost inflation, as documented by OECD (1991) and Oggier (2004): Switzerland has the third-highest number of nurses and (expensive) MIR and CT equipment per capita in the OECD, and the second-longest hospital stays. A widely documented correlation exists between cost and the density of physicians (Phelps, 2003). In a more typical market, a higher number of suppliers would lead to lower prices—this effect often fails in health care markets, and particularly so in Switzerland, as the figure shows: cantons with a higher density of physicians actually have higher health care cost per capita.

  • Finally, pharmaceutical prices are elevated due to import restrictions and possible collusive practices. Prior to 2000, a powerful cartel (Sanphar) managed prices and distribution channels of drugs. While antitrust authorities declared price fixing illegal in 2000, Sanphar continues to exist, and there is no evidence of a relative decline in drug prices in the CPI. In addition, parallel imports of drugs remain illegal. On the other hand, high prices have facilitated research and development and the emergence of strong multinational pharmaceutical companies. For these companies, the high-price Swiss market provides a testing ground, not unlike the (equally expensive) US and German markets for US and German companies.

uA02fig04

Health Cost across Cantons

Citation: IMF Staff Country Reports 2005, 188; 10.5089/9781451807271.002.A002

C. Financing of Health Care

70. Internationally, one can distinguish three basic types of health care systems. Following Oggier (2004), the key distinction is related to their financing:

  • National health services are financed by general taxes. Medical infrastructure is organized by the state, and treatment is free of charge for every citizen. Examples include the UK and Scandinavian countries. Because the tax system tends to be progressive, health care cost are financed mostly by higher income brackets.

  • Social security models are financed by payroll taxes. Membership is compulsory, but services can be provided by both private and public institutions. Examples include Germany, France, and the Netherlands. Because payroll tax rates tend to be flat, these systems have fewer redistributive effects.

  • Insurance systems are financed mostly by insurance premia (voluntary or compulsory). These premia vary according to risk factors and bear no relation to income. Accordingly, these systems tends to be regressive. The US and Switzerland are predominantly insurance systems.

71. Similar to the US, Switzerland has a mostly private health care system. Three quarters of health care costs are financed by the private sector, setting the country apart from the rest of Europe. About 40 percent of private health care costs are covered by health insurers, and the remaining 34 percent is paid by individuals out of their pockets (co-payments). Switzerland has the highest percentage of private co-payments in the OECD, where the average is only 13 percent. The state covers the remaining 26 percent of health care costs. Cantons and communes finance hospitals, while the Confederation and the cantons subsidize insurance premia of the poor. The public disability and accident insurances cover the costs for qualifying persons.

72. The strong reliance on insurance financing raises equity issues. The average private health care bill was more than SwF 5,000 per individual in 2002. Insurance premia and out-of-pocket payments have a regressive effect on income distribution—they are unrelated to income. Most affected are dependent individuals outside the labor force such as children, housewives and some of the elderly. For these persons, health care can be a considerable burden.

uA02fig05

The state subsidizes health costs of the poor.

Citation: IMF Staff Country Reports 2005, 188; 10.5089/9781451807271.002.A002

73. To alleviate the high cost of health care to the poor, the state subsidizes their insurance premia. The subsidy is income-related, and ensures that insurance premia currently do not exceed about 13 percent of household income. However, the mechanism is imperfect and strong regional disparities exist. Both premia and subsidies vary widely across regions. Insurance premia range from a minimum of SwF 2,300 per year in Nidwalden to a maximum of SwF 4,800 per year in Geneva (2004). They tend to be highest in cantons with a high number of physicians. Subsidies also vary greatly. While 33 percent of Swiss households received subsidies in 2004, regional values ranged from 23 percent in Aargau to 60 percent in Appenzell Innerrhoden. The Confederation contributes the lion’s share, while cantons can top up and control the distribution of subsidies. For budgetary reasons, cantons sometimes do not disburse all the funds allocated to them.

74. The subsidies for low-income households try to minimize economic distortions. Unlike payroll or income taxes, they have no immediate negative effect on labor supply and growth. As a result, the Swiss design of health care has attracted considerable attention from other European countries. However, subsidies can avoid distortions only as long as their volume does not become too large.

D. Fiscal Burdens

75. On present trend, health care can become an important fiscal problem. If the growth of health expenditures relative to income continues, more and more households would need subsidies. Recent simulations suggest that such additional expenditures could amount to 8 percentage points of GDP by 2050, which would be a serious threat to the public finances. The corresponding increase in tax rates could slow growth.

76. The effects of rising health costs on public finances and the economy can be analyzed in a general-equilibrium growth model.26 For the coming 40 years, it was assumed that the quantity and price parameters of health care would evolve as in the past decade. In particular, the quantity of health care was assumed to have an income elasticity of 2, while health care prices would increase a quarter percentage point faster each year than the GDP deflator. Some additional cost pressures were modeled based on the rising old-age dependency ratio, to capture the effects of aging, mainly in the years 2010-35.

uA02fig06

Subsidies are under pressure to go up.

Citation: IMF Staff Country Reports 2005, 188; 10.5089/9781451807271.002.A002

77. To avoid income disparities, the central government would need to step up its subsidies. Direct public outlays for hospitals were assumed to grow in line with nominal GDP to keep cantonal finances in equilibrium. Increased health care cost would then be born by the private sector. Without higher subsidies, income inequality in Switzerland would increase significantly: a simulation suggests that the Gini coefficient could rise from 28.5 to 33.5. To assess the amount of subsidies necessary to keep inequalities constant, the threshold for private health spending was kept at 13 percent of household income, with subsidies covering the excess health care costs for qualifying income brackets.

78. A continued increase in health care costs would make private contributions to health insurance unaffordable for more and more households. The government would need to subsidize more and more income brackets. The model suggests that the share of subsidy recipients would rise to 41 percent of households in 2008, and to over 60 percent in 2015. The stepwise increase in the figure is due to the simplifying assumptions of the model; it would be smooth in reality. By 2050 around 90 percent of the population would depend on government subsidies. Swiss health care would be transformed into an essentially government-run system.

uA02fig07

More people will need subsidies.

Citation: IMF Staff Country Reports 2005, 188; 10.5089/9781451807271.002.A002

79. The fiscal costs would be very high. Subsidies would rise from 3 to 4 percent of GDP during the present decade, and accelerate with the onset of aging after 2010. By 2050, fiscal spending on health care would be more than 8 percentage points of GDP higher than today. To avoid an unsustainable build-up of public debt (as required by the constitutional debt brake), taxes would need to rise.

80. Tax increases of up to 8 percentage points of GDP would slow GDP growth, especially if these are affecting payrolls. With lower growth, the tax base would then narrow, and tax rates would have to increase even more to obtain the desired financing. Preliminary simulations suggest that the slowdown in annual GDP growth could reach more than 0.3 percentage points per year, which would lower the level of Switzerland’s real GDP by a cumulative 7 percentage points by 2050 compared with a scenario that does not require these tax increases.

E. Conclusions

81. Switzerland spends a high share of GDP on health care, and the current dynamics of health spending are incompatible with slow growth. Health care may thus evolve into a significant fiscal problem in coming years, unless progress is made in tackling distortions in the market for health care. The literature stresses the importance of economies of scale in health care. More centralized systems tend to have lower average cost. Switzerland in particular could reap benefits from overcoming the regional fragmentation of its health care infrastructure. The lack of coordination between cantons, and the limited regulatory powers of the Confederation make cost controls difficult. Large degrees of freedom for health providers and automatic reimbursement of costs, appear to inflate the supply of medical services. Increased government cooperation, at all levels, should thus be encouraged. In addition, potential reforms in the financing schemes could reduce incentives to accumulate higher risks in the public-sector insurance plans. Finally, consumers could benefit from a more competitive market for pharmaceuticals and the liberalization of drug imports.

uA02fig08

Comparing health care systems

Citation: IMF Staff Country Reports 2005, 188; 10.5089/9781451807271.002.A002

Data Sources

Figures 1, 2, 3 and 9, and Table 1: OECD Health Data (2004), CD-Rom.

Figure 4: Swiss Ministry of Health; and Swiss Physician’s Association (FMH).

References

  • Nickell, S. (2003): Employment and Taxes. Paper given at the Conference on Tax Policy and Employment in Venice, July 2003.

  • OECD (1991): The Reform of the Health Care System. In: OECD Economic Survey on Switzerland 1990/1991, Paris.

  • Oggier, W. (2004): Internationale Vergleiche. In: Kocher, G., Oggier, W. (eds.), Gesundheitswesen Schweiz 2004 - 2006, Bern: Verlag Hans Huber.

    • Search Google Scholar
    • Export Citation
  • Phelps, C. (2003): Health Economics. New York: Addison Wesley.

25

Prepared by Benedikt Braumann.

26

The basic framework is described in the Chapter I “Intertemporal Policy Consistency in Switzerland: Is the Current Social Insurance System Sustainable?” For this health-care chapter, we added the health care sector, and a feedback loop to labor supply.

Switzerland: Selected Issues
Author: International Monetary Fund