Tuesday, May 1, 2012

West European Health Care Systems

Among the various health insurance systems operating across the world, the West European models of "managed competition" tries to strike a balance between the market-driven American and the  government-run British systems. In my op-ed last week, I had indicated my preference that the West European model should form the basis for designing the national health insurance system for India. Though the Dutch, Swiss and German health insurance models have several similarities, there are also important differences. This post will critically examine these three health care systems.

Germany has a statutory health insurance system, covering nearly 87% of its population. It is financed through a payroll tax, where employers and employees contribute equal shares. The payroll tax at 15.5% of income forms the premium. Employees and pensioners pay 8.2% of their gross wages/pensions, while employers/pension funds must contribute 7.3%, for a total contribution of 15.5% of gross wages/pensions upto a maximum wage of (or pension) of 44,550 euros. Unemployment insurance pays the premiums for unemployed individuals, and pension funds share with the elderly in financing their premiums, which are set below actuarial costs for the elderly. For long-term unemployed people with a fixed low entitlement, the government employment agency pays a fixed per capita premium. A uniform contribution rate will be set by the government for all others.

Premiums for children are covered by government out of general revenues. All coverage is for the entire family. Employees/pensioners earning above 49,500 euros (in 2011) are free to opt out of the statutory system and purchase private, commercial coverage, but if they do, they cannot ever return to the statutory system unless they are paupers.

The health insurance premiums paid by Germans are collected in a national, government-run central fund that effectively performs the risk-pooling function for the entire system. This fund redistributes the collected premiums to some 200 independent, non-governmental, competing, nonprofit “sickness funds” among which Germans can choose. These sickness funds act as purchasing agents on behalf of the central fund and patients and premiums are paid based on the individual's actuarial risk calculated using over 80 variables by the administrators of the sickness fund.

In addition there are 46 private health insurers operated on commercial principles which provide comprehensive coverage to the remaining 11% of the population (including civil servants) and also top-up supplementary coverage, if demanded, to those on statutory insurance. Recent federal legislation has forced private insurers to levy on younger people higher premiums than their actuarial risk can justify to build up an old-age reserve, thus preventing premiums from climbing too rapidly with age.

The Dutch health care system consists of three parts. The first tier covers exceptional medical expenses (long-term care and high-cost treatment), the second covers a basic package of benefits, and the third forms private health insurance. The first two are mandatory, while the third is obligatory and takes care of supplementary coverage. The first is financed by income-related salary deductions, co-payment by consumers, and government grant. However, it is the second tier, which was reformed in 2006, that has been the object of much international attention.

The second tier provides a standard package of healthcare benefits to all citizens. The standard benefits package includes both primary and tertiary care. The services are intermediated by competing private and for-profit insurers through various private and public service providers. Each insurer has to offer the standard plan at a flat rate premium, irrespective of age, to all citizens. Coverage is mandatory for all citizens. Consumers can comparison shop and purchase insurance from any of the insurers.

The insurers are private sickness funds who compete with each other in attracting citizens. The premiums are not determined by the government, but by the individual sickness funds. They attract citizens by offering lower premiums on the basic coverage plan, though with conditions like co-payments and restricted provider choice. Some insurers give consumers the option of accessing service providers of their choice (other than those contracted-in by the insurer) by introducing co-payments.

Insurers also offer collective policies aimed at specific groups of people. These policies, which have lower premiums, can be purchased by employers or local governments for specific categories of people whose premiums are paid by the government. 

Insurance contributions come either as income-related (for self-employed too) salary deduction (with a maximum ceiling) and nominal flat-rate premiums. The former are deducted from the taxable income of employees or social security beneficiaries by the employer or from a share of their income by the self-employed. However, the employers reimburse this amount and employees pay tax on it. The income-related contribution is set at 6.9 percent of the first €32,369 (US$45,442) of annual taxable income.

Income-related contributions of employees come in equal parts from employers and employees. The level of contribution (or the percentage) is determined so as to ensure that atleast 50% of the total inflows into the Health Insurance Fund come from income-related contributions. The government contributes about 5% and the rest 45% is obtained from individual permium payments.

The latter are paid by all those insured or come from the tax-credits provided by government for those who cannot afford their nominal premium. The percentage of income-related deduction is set by the government, mostly nationally, while the flat rate premiums are determined by individual insurers. The insurance coverage costs of children under the age of 18 are borne by the government. All these contributions flow into the Health Insurance Fund (HIF). A process of "risk-equalization" takes place and payments are then made to insurers.

Insurers, especially the larger ones, operate at national-level and offer plans across the country. This also means that premium-setting is on a national-level. Each year, the Ministry of Health sets the standard benefits package premium, which forms the basis for tax-credit payments. The insurers set their respective individual premiums around this rate. It is also mandated that if the real average of the premiums offered by the health insurers differs by more than Euros 25 from the standard premium, the government must adjust the latter.

In this model, the insurers cannot make profits on their basic plan coverage. Insurers offer lower premiums and differentiate themselves only to attract more citizens so as to capture their supplemental coverage.

Switzerland too has a mandatory coverage health insurance system. The coverage includes all regular illness and related primary and tertiary care, in the form of a standard benefits package based insurance plan.

Private and non-profit insurers compete, at the canton level, to provide this standard insurance plan. The premium charged by an insurer for this plan should be the same for all adults, irrespective of age and pre-existing health conditions. Unlike the Dutch model, plans operate and set premiums at canton level. Therefore premiums vary considerably across regions. Though individual insurers determine their own premiums, they are not allowed to profit from the mandated benefits package. They should make their profits from supplemental coverage.

The insurers are allowed to charge a minimum deductible and even coinsurance on the standard benefits plan. Insurers differentiate themselves to attract consumers by offering lower premium plans which have higher deductibles. Consumers who cannot afford the premiums and the taxes are subsidized by government. Patients have choice of doctors and service providers within each canton.

This health insurance system is financed through a mixture of income contributions, deductibles and some government contribution. There are no employer-sponsored or government-run insurance plans and everyone buys insurance from the private insurers. Consumers pay the insurance premium for the basic plan up to 8% of their personal income. However, if the premium is higher than this, then the government gives the insured a cash subsidy to pay for any additional premium.

Service providers prices are set annually through negotiations held between associations of insurers and associations of service providers at canton level. The Swiss model is praised by conservatives who are attracted by the fact that consumers are forced to individually choose their insurers. This is in contrast to employer or government-chosen insurance plans.

See this excellent comparative study of Dutch and Swiss health insurance systems. This is another very good comparison of various health insurance models.

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