The market in health care

Everywhere in Europe, market-oriented health care proposals and policies have been introduced. But everywhere these have gone hand in hand with plainly anti-competitive mechanisms which have brought the command-and-control structure of Europe's health care systems under even greater government control. Market mechanisms were only introduced as a means to limit costs, not with the goal of empowering patients. The goal has been to limit the economic growth of the health care sector by restricting consumption.

In markets with an unrestricted supply of services and competition, prices decrease because of the natural expansion and differentiation of the services offered. Consumers have a real say. Since they demand, choose, and pay for a service, that service had better be good and reasonably priced. Consumers have rights—they can insist on quality—and they have obligations—to be cost-conscious and limit over-consumption (or pay the bill themselves).

In order to achieve patient empowerment, we need competition in health care services as well as an unrestricted supply of these services. The latter has been lacking from the so-called market reforms in Europe. These reforms were actually a form of managed competition or the creation of internal markets within a global budget in order to control costs. However, if one does not allow economic growth and expansion, the market becomes a perversity and consumers lose their options. In managed competition, consumers have no say. The competition we currently see in European health care systems is a competition to cut costs by lowering the quality that is provided, or to attract healthy patients and discourage the sick. This is a parody of health care and of markets.

Capitalization versus privatization

Markets and market mechanisms only make sense within a capitalist system—a system that is driven by capital. The problem with European health care systems is that capital is running dry. All of the European systems, even the present private ones, are financed on a pay-as-you-go basis whereby today's healthy and young foot the bill for today's sick and elderly. The costs of the present generation are shifted to the next generation, but this has become unsustainable given our present demographic evolution.

Today there are no adequate financial reserves available in the health care system. Without these reserves, economic growth is impossible. Therefore, we should transform our health care systems from pay-as-you- go systems into systems financed by means of capitalization. In a capitalization system, the money that is put into the system today is set aside for future needs. In the meantime, these savings are invested as capital and, as a consequence, they generate new capital. Only this "capitalist" approach will allow the health care sector to expand.

Privatization of the health care sector can only be an answer to the current problems to the extent that it implies capitalization, hence an expansion of the health care economy. If, as is often the case today, privatized health care is also financed on a pay-as-you-go basis, private health insurers will also try to ration quality health care and restrict access to it. To replace the state with an insurance company is not an alternative to the current health care crisis, nor will it empower patients very much. If health care is rationed and patients' access to a treatment or a drug they need is blocked because of budget limits, it is hardly relevant to them whether the rationing authority is the government, a sickness fund, a health maintenance organization, or an insurance company.

A privatized health care system is preferable to a government-run system as it has one big advantage over a government-regulated system: it allows more room for experimentation. Privatized health care systems are better equipped for the future because they adapt more easily to challenges. They constitute interesting laboratories for health care reform. They toy with interesting ideas like medical savings accounts, health care vouchers, and bonuses.

However, the most crucial element in patient empowerment is capitalization rather than privatization, or the introduction of so-called market mechanisms. Capitalism is the medicine that we need.

Health care in Europe

As in Canada, most European governments think they know best what is good for patients. Regarding health care insurance, as a citizen—and hence a potential patient—one is trapped either within a government-run single-payer system, or within a government-regulated sickness fund system. If you prefer another kind of health insurance, one where as an individual you can choose your own options, you will have to purchase additional health insurance out of your own pocket. In this case you have to pay twice for health care, once through your taxes or your sickness fund contributions to the official government-run or government-regulated system, and once to your own private health insurer. Consequently, the option to buy health insurance on the market is only open to the rich, to those who can afford to pay twice.

In some European countries, citizens (or at least some of them) are allowed to leave the government-regulated system altogether. They can stop paying contributions and premiums to the official health insurance system and use the money they previously paid in taxes and premiums to buy their own private health insurance. In Germany, the Netherlands, and Switzerland, people do not have to pay twice in order to insure themselves according to their own wishes.

Germany

Germany is the prototype of the European social insurance-based health care system, or the so-called sickness fund system. Contrary to a single-payer system (like the one here in Canada) where health care is paid for and organized by the government either at a national or a regional level, a sickness fund system is, theoretically at least, an entirely private system. Health costs are not paid by the government with tax money, but by various sickness funds with money they derive from the contributions of their members. These sickness funds are private, independent organizations.

Though originally private organizations with members joining on a voluntary basis and providing health insurance according to market mechanisms, the sickness funds have become heavily government regulated over the last century. The sickness funds have almost become government institutions, where the government sets all the rules and decides everything. Hence, the difference between a government-run single-payer system and a social insurance-based sickness fund system has become merely theoretical: sickness fund systems provide universal coverage, membership in a fund is compulsory, and, in some countries, members are obliged to join the fund of their profession.

In a sickness fund system, fund members pay a premium which operates like a payroll tax. The government collects the money and distributes it among the funds according to the number of members. In Germany, in theory, 50 percent of the premiums to the sickness fund are paid by the employee and 50 percent by his employer. This is theoretical because the amount of the premium is set by the government as a percentage of the wages and is deducted from the wages before these are paid out—often the members do not know the amount of the premium, as they do not personally pay anything to the fund. The premiums constitute about 13 percent of the gross salaries of the working population.

Unlike other countries' sickness fund systems, people in Germany who earn over a certain income are free to opt out of the system. In this case they are no longer obliged to pay a percentage of their wages to the sickness fund; they can use this money to buy private health insurance. As with the sickness funds, where 50 percent of the premium is paid by the employee and the rest by the employer, the employer will also have to pay 50 percent of the premium if his or her employee opts out of the government system and joins a private insurer. German citizens who can leave the sickness fund tend to do so because people who are privately insured can choose doctors and hospitals who, when treating a privately insured patient, are not restricted by the many stringent government imposed budget limits that have been introduced in the past decades.

At present, over 10 percent of the German population has opted out of the public system. These people pay premiums which reflect the health risk of their age group in five-year cohorts. When you select private insurance in Germany, you pay the premium for the five-year cohort to which you belong. In the course of the insurance the premium is never increased as a function of the insured's age. Even as you grow older, you still pay the premium for the age group you were in when you joined the insurance plan. The premium can only be raised to reflect general increases in health care costs affecting all age groups. Because the premium you pay will always be the premium of the age group you were in when you bought your insurance, it is in your interest to insure yourself as young as possible. If you start to pay when you are young and your health risks are low, you pay less.

As insurers are not permitted to refuse clients, every citizen, whatever his personal risk, can acquire affordable health insurance in Germany. Contrary to the American system, individuals provide their own coverage, not the employer; thus, losing a job in Germany does not mean losing health coverage. In the American private health insurance system, the premium is calculated on individual risk. In the German private insurance, coverage provision is individual but the premium is calculated upon a group risk. German private insurance premiums will therefore never become exorbitant for people with a high individual health risk.

This all sounds very good, but there is a problem. Like the government sickness funds, Germany's private insurers are also predominantly financed on a pay-as-you-go basis. They, too, have hardly any capital reserves. The money which their clients of a certain age cohort pay today is not set aside for the future needs of this generation, but is almost entirely spent on the contemporary needs of the insurance company's elderly clients.

The fact that the German private health insurance system is not financed on a capitalization basis and, as a consequence, lacks capital reserves, has two important consequences. First, the demographic evolution in society—which raises the average age of their members—forces private insurers in Germany either to increase premiums dramatically for their younger members, or to gradually ration health care because they spend more money than they receive. They, like the government, have begun rationing health care, deciding what care their members can get and how much that care may cost.

Second, there is no portability of reserves. Once they have joined a private insurance company, clients cannot leave it without losing all of their rights. If you join your insurance company when you are 25, you will still be paying the premiums of a 25-year-old when you are 45. But if at 45 you decide to join another private insurance company because you have come to the conclusion that their service is better, the benefits of 20 year membership will be lost. You can only join the other company by starting all over again—you will be regarded as a new client and will have to pay the premium of a 45-year-old. If choosing another insurer implies that you lose everything you have paid for, the client is hardly left with a choice. If your private insurer starts to diminish the services provided, and you, as a client, do not agree, you cannot go somewhere else.

It is true that as a patient in a privatized health care system funded on a pay-as-you-go basis, you have more freedom than someone who is obliged to join a one-size-fits-all, government-run, sickness fund health care system. You can choose between different private insurers, each with different premiums according to the different service they provide. However, once you have made your choice, you can never really change your mind. You are as trapped within your private insurance company as others are trapped within their government-run National Health Service or their sickness fund.

The Netherlands

In The Netherlands, one third of the population is privately insured, and the number is rising. Like the Germans, the Dutch also leave the sickness fund system once they earn more than a certain amount of income, but in the Netherlands this financial threshold is lower than it is in Germany. The Dutch make private insurance affordable to everyone by covering the highest risks—the so-called catastrophic health care—under a different nation-wide scheme. They differentiate between catastrophic health care, which is very expensive, and common health care. There is a compulsory government-regulated single-payer system for the expensive health risks, and a sickness fund system for the other risks. Catastrophic health insurance is mandatory and paid for through income taxes. It covers very costly medical procedures and long-term care. For these costly risks, the citizen is pooled in the largest possible risk pool, namely, the whole nation.

Catastrophic care is financed by the Exceptional Medical Expenses Fund into which all citizens have to pay according to their income. In theory, this fund covers medical care which would be too expensive to insure against if one had to go to a private insurer, plus very long-term care. However, some "catastrophic" care is provided by the sickness funds, and some non-catastrophic care is provided by the Exceptional Medical Expenses fund. For example, the sickness funds cover hospitalization up to 365 days and the Exceptional Medical Expenses fund covers from the 366th day on, but a hospitalization of 100 days can certainly be considered a financial catastrophe.

The Exceptional Medical Expenses Fund also covers certain drugs, forms of medical equipment, day care, family care, etc. Though this fund has been used for other things, the concept seems sound. If some Canadians object to health care privatization on the grounds that certain health risks are too expensive to cover with premiums affordable to everyone, The Netherlands has something to teach them. Realizing that the costs of certain acute as well as chronic medical care are exorbitant, the Dutch have required all citizens to pay into a catastrophic pool.

The so-called non-catastrophic health risks are covered by the sickness funds. Sickness fund membership is compulsory. The premiums to the fund are paid partly by the employer, partly by the employee. They resemble a payroll tax amounting to 1 percent of the employee's wage for the employee, and 0.95 percent of the wage for the employer. Compared to the average premium of 13 percent in Germany and premiums of over 10 percent in other social insurance-based health care systems in Europe, the premiums in The Netherlands are low, but the Dutch sickness funds do not cover the forms of expensive catastrophic medical care, which sickness funds in countries like Germany also have to cover.

What is specific to the Dutch sickness funds is that they expel their members as soon as they earn above a certain income. In Germany you are free to leave the sickness fund and purchase private insurance if you earn more than a certain amount. In the Netherlands you have to leave the public system. In this case, individuals can buy private insurance, if they want. Given that certain catastrophes are not covered if you do not take private health insurance, it would be very unwise not to insure yourself privately once the sickness fund has expelled you.

Dutch private insurers tend to provide a slightly better service than the sickness funds. They purchase services for their members, provide patients with information about health care choices, and create contracts with a variety of providers offering different types of care. But, like their German counterparts, the Dutch private insurance companies are undercapitalized. They, too, ration health care. Certain treatments are limited by making them less available or totally unavailable. As is generally the case, most patients are often unaware of the costly cutting-edge medicines and technologies that are not being used in their care. This knowledge asymmetry creates a veil of ignorance that is very useful in limiting resource use in systems constrained by budgets.

Switzerland

Switzerland is the only country in Europe with a health care system that is totally based on private insurance. Health insurance is not compulsory in the Swiss Confederation. Nevertheless, 99 percent of the Swiss population is insured in a social insurance fund or a private insurance company.

Swiss insurance payments are more akin to private than social insurance in other European countries, as premiums are not linked to income, but are instead set on a per capita basis with weightings for age of entry into a fund, regional cost differences, and gender. The Health Insurance Law defines the catalogue of benefits to which all Swiss insurance members are entitled, but individual insurance funds can offer additional benefits over and above this basic package.

Private insurance-based health care systems are often criticized because premiums take into account the individual risk and, as a consequence, they can differ substantially. Germany, The Netherlands, and Switzerland have each reduced the inequities in their own way: Germany by pooling the risks and taking the average risk of a five year age cohort into account; the Netherlands by taking the very costly catastrophic chronic and acute medical risks out of the private system; and Switzerland by handing out government subsidies to groups with higher health risks, so that everyone, even a high risk individual, will be able to purchase health insurance. The government in Switzerland, by paying a percentage of the premiums of high risk individuals, contributes roughly one third of health care funding in the Swiss Confederation.

In order to prevent private insurers from skimming off the enrollee pool, Switzerland has introduced a risk-adjustment system. All insurers in the market have to pay a portion of the premiums or contributions they collect into a central fund. The relative financial risk of each insurer is then calculated, and insurers with a larger proportion of less healthy, high risk members receive from the fund an amount that compensates adequately for the higher financial risks involved in insuring their members. In effect, the insurers with healthier members subsidize those with less healthy members. This type of risk-adjustment prevents a situation in which all low risk people flock to insurance companies that can keep their premiums low because they hardly run any risks, while other insurers have to ask exorbitant premiums because they get all the high risks.

All of the health insurers operating within a single canton (the Swiss equivalent of a province) are subject to the risk-adjustment mechanism. Risk-adjustment is based on age and gender only—income is not included as it is not a factor in determining premiums. Calculations are based on actual costs, but only for care that falls under the basic benefits package. The system reduces differences in premiums within cantons, but significant differences still exist across cantons since risk-adjustment is calculated only for care covered by the basic benefits package. Funds with members who require additional care—for instance, AIDS-patients—may be disadvantaged, or they may be charged an additional premium to cover care outside the basic benefits package.

The Swiss health care system is self-managing. The government supervises the system but does not interfere in its operation. All funds are open for membership to the whole population. The health insurers set their health premiums themselves, subject to the risk-adjustment system. Premiums differ from insurer to insurer, but so do the services to the patient. The Swiss insurance funds have considerable freedom over the benefits packages they offer, as long as they include a basic list of services as outlined in the Health Insurance Law. However, even this law specifies services in a relatively vague way. This has led to a considerable range of options for consumers. The insurers usually offer different benefit packages for their customers that can be supplemented with various programs specifically designed for children, housewives, professionals, farmers, and other such groups.

In Switzerland, it is the responsibility of the people themselves to purchase health insurance. This includes children, for whom parents are responsible. Every Swiss citizen has to pay a premium. Those on low incomes receive an income subsidy from the government, rather than a health care premium subsidy. Self-management tends to lead to novel and innovative contracts between health insurers and providers. Many Swiss insurance companies are experimenting with American style health maintenance organization (HMO) schemes. HMOs buy health services for their members and, by buying pharmaceuticals or medical services in large quantities, they can limit the price for each individual product. HMOs in Switzerland are group practices owned by groups of insurance funds which offer primary care and have informal arrangements with hospitals. Members who join HMOs are offered significantly lower premiums than people who do not join them.

Other insurers have been discussing the introduction of bonuses. If patients do not use any health services in a given period, or remain below a set expenditure amount, they are paid back part of the insurance premium as a bonus. This encourages patients to use the system in a more cost-conscious way. However, the need for such a bonus does not seem to be great in Switzerland because copayments are very high.

Copayments are an integral part of the Swiss system. They apply to primary as well as hospital care, and cover about one third of the annual health care expenses. Copayments have the intention of reducing over-consumption of health care services. Their levels are set by the government, and, in most cases, the government does not allow citizens to insure against copayments.

Patients currently pay all their costs of ambulatory care up to the level of a deductible which is currently around 150 Swiss francs per year (US$125), and 10 percent of costs above that level. Ambulatory care in this context comprises primary care with a physician or specialist, outpatient care in a hospital, and medicines. The 10 percent copay- ment, following the deductible, uses as the calculation basis the doctor's charge, the price of the medicine, or other appropriate fee schedules. There is also an annual maximum level of copayments. For adults this is set at 500 Swiss francs (US$417). Special regulations apply for children and families with several children. Insurance funds are free to offer their customers higher annual deductibles in return for lower premiums.

For hospital care, patients have to pay the hotel costs for the duration of their stay in a hospital. It is possible to insure against copayments for the hotel costs of hospital care (but never for primary care). There is also a copayment of 10 Swiss francs per day which patients owe for hospital treatment costs. Citizens are not allowed to insure themselves against this type of hospital copayment.

Because one third of Swiss health care is financed through direct patient copayments and because it is illegal to insure oneself against most of these copayments, Swiss citizens have to rely on their private savings in order to prepare for future health risks to a large extent. As a result, the Swiss health care system relies a lot on capitalization. By forcing patients to pay a larger part of the health care costs themselves, patients are forced to start capitalizing by setting aside money for future needs and they are forced into patient empowerment—because they have to start making rational choices, which they cannot do without informing themselves.

Conclusion

It is a striking phenomenon that whatever country one goes to, and however bad a health care system it has, people will always tend to consider their own health care system "the best in the world." There is a certain laziness involved here. If it is the government's duty to pamper us and treat us when we fall ill, why should we worry? If one is forced to think about it, because the government is no longer capable of taking care of us, then we start to worry and look for examples of privatized and capitalized systems. Why? Because here we find that patients are empowered, and patients are put first. Why? Because the capital belongs to them.