International Health Care Systems

Economists generally define efficiency in two manners: productive efficiency and allocative efficiency.  Productive efficiency means producing a good or service using fewest inputs.  A car company who produces a car that costs $20,000 to manufacture is less efficient than a company that can produce that same car (at the same quality) at a cost of $15,000.  Allocative efficiency is more subtle.  Are we producing the right amount of cars compared to trucks?  As gas prices rose, allocative efficiency compelled many car makers to shift to smaller passanger cars and hybrids compared to trucks.

Alan Garber and Jonathan Skinner (2008) apply the dual concepts of productive and allocative efficiency.  They ask: is the American health care system efficient?  The authors find that the American health care system is inefficient in both a productive and allocative sense.  The health care provided in other countries, however, is also inefficient, often for different reasons.

Productive Efficiency

Not providing low cost, high quality care or prescribing unnecessary treatment both decrease efficiency.  “There are sins of omission–one recent U.S. study suggested just half of recommended care is provided in a typical primary car visit (McGlynn et al. 2003)– as well as sins of commission–the spinal fusion surgery that provides marginal relief and more complications compared to conservative management (Rivero-Arias et al. 2005).”

Table 1 from the Garber and Skinner paper compares some key healthcare statistics between the U.S., Canada, France, Germany, the Netherlands, U.K., and Japan.  Any evaluation of a health care system must take into account the health of individuals before they are treated by medical providers.  Americans have the highest levels of obesity and diabetes and lowest levels of smoking in the world.  Further, rates of motor vehicles accidents and homicide are high compared to those in the rest of the developing world.  After taking these baseline population characteristics into account, is the production of American medical care efficient?

Table 1 also show that the U.S. has low levels of EMR usage and high administrative cost.  Elderly influenza vaccination, however, is fairly high compared to other developed nations.

An interesting survey by the McKinsey Global Institute looks at the cost and outcomes for 3 procedures (gallstone disease, breast cancer and lung cancer) in Germany, the U.K. and the U.S.

“In each case the United Kingdom was more parsimonious in its use of resources for the management of each condition.  However, Germany, not the U.S., use the most resources in the three conditions in which it was included.

In the treatment of lung cancer, patients in the U.S. experienced better outcomes than those in Germany and far better than for patients in the United Kingdom.  For breast cancer, outcomes were slightly better in the U.S. while for gallstone removal, the United Kingdom had worse outcomes than the U.S. or Germany.  Germany in turn had slightly better outcomes than the U.S. but much greater resource use.”

Allocative Efficiency

Allocative Efficiency determines whether health care spending is at the correct level.  Should we increase health care spending or instead spend those resources on education, roads or R&D?

Table 1 shows some statistics to quantify the allocative efficiency of the U.S.  Physicians per capita in the U.S. is in line with that of other nations, but this does not reveal the U.S. preference towards utilizing more specialist physicians than generalists.  Hospital beds per person is fairly low in the U.S., but this statistic hides the fact that the U.S. uses more outpatient facilities and that hospital care in the U.S. is more resource intensive than is the case in other countries.  Surgery wait times in the U.S. are fairly low, but many 20% of Americans receive unnecessary medical care.  Further, the American reduction of preventable deaths was the lowest of any country in Table 1.

While the U.S. does have a famously high MRI rate of 26.5/million, Japan loves the MRI machine the most.  The Japanese MRI rate is 40.1/million.  “The cost structure of …[high-tech] treatment seems ideally suited to rapid diffusion in the U.S.: high fixed cost of installation, low marginal cost of operation, and reimbursement rates based on average rather than marginal cost.”

Conclusion

The Garber and Skinner paper provides a nice overview of the American health care system compared to those of other countries.  While the paper works mostly in generalization and country-level statistics, it does provide a nice framework for thinking about health care reform.  The American health care system is certainly inefficient, but so are the health care systems in other countries.  How inefficiency manifests itself depends on the health care system adopted by the country.  In the U.S., inefficiency is mostly due to the fact that “the U.S. typically does not consider effectiveness relative to its costs or to the costs of alternative treatments.”  Further, because of the fee-for-service compensation system, American patients have high quality care available to them, but at a high cost.  Further, fee-for-service compensation induces providers to recommended unnecessary or less cost-effective care to patients.

• Garber, Alan M. and Skinner, Jonathan (2008) “Is American Health Care Uniquely Inefficient?” NBER WP 14257.

This is the question asked by Newhouse and Sinaiko in their 2008 paper in the Forum for Health Economics and Policy. The answer is yes.

Source OECD

From the table above, we see that when we exclude the U.S., many multi-payer systems have similar health care costs as single payer systems. Further, Newhouse and Sinaiko find that states in the lower quintile of health care spending spend similarly to the single-payer nations cited above.

Specifically applying a single payer system to the U.S. might not reduce health care costs as much as conventional wisdom thinks. The paper wisely notes that “the dominant American fee-for-service reimbursement method is likely to generate greater billing costs than hospitals on fixed budgets, as in Canada, but it is not necessarily the case that implementing a single-payer regime in the United States would change how hospitals are paid.”

So is a single payer system right for the U.S? This question is still up for debate. A single-payer system is likely a sufficient condition for having lower health care spending levels, but it is not a necessary condition for reducing health care costs.

• Joseph P. Newhouse and Anna Sinaiko (2008) “Can Multi-payer Financing Achieve Single-Payer Spending Levels?,” Forum for Health Economics & Policy: Vol. 10: Iss. 1 (Frontiers in Health Policy Research), Article 2.
  http://www.bepress.com/fhep/10/1/2

Merrill Goozner writes about MDR-TB in Russia in a four-part feature article in Scientific American.

In the July/August 2008 edition of Health Affairs, health economist Mark Pauly discuss his opinions with respect to the evolution of health insurance in India and China. He notes that in both countries, rising incomes has lead to increased demand for medical care, especially in urban areas. Despite the increased demand for medical care, there has not been nearly as much an increase in health insurance coverage. Out-of-pocket payments as a portion of total health care spending are 80% in India and 60% in China.

This has lead to calls by many politicians to increase “access to care” by increasing health insurance coverage rates. Pauly, cautions that mandating generous health insurance coverage may not be ideal:

“The problem with insurance that ‘improves access’ to care is that such additional use of care will almost surely raise average spending on care and, therefore, the premium that an unsubsidized insurer would have to charge…using regulation to push access and equity that makes insurance seem like a bad buy to its middle-class customers will be undesirable.”

If legislating a more generous insurance benefit package will reduce demand for health insurance, one solution is to have the government provide health insurance for all its citizens. This will increase equity, but could lead to other undesirable outcomes such as rent-seeking behavior, and politically determined medical care decisions. Further, using taxes to fund the public health insurance system could increase “black market” activity. That is,

“Using taxes as a vehicle to make insurance compulsory runs the risk of driving measurable and taxable income underground for people who expect to pay more in taxes from public goods than they will get.”

Dr. Pauly reminds us, that there is no easy way to solve the health care needs facings the citizens of the world’s two largest countries: India and China.

• Pauly MV (2008) “The Evolution of Health Insurance in India and China” Health Affairs, 27(4): 1016-1019.

Below is a side-by-side comparison of health care and economic statistics from China and India.

• Winnie Yip and Ajay Mahal, (2008) “The Health Care Systems Of China And India: Performance And Future Challenges” Health Affairs, 27(4): 921-932.
• Jin Ma, Mingshan Lu and Hude Quan, “From A National, Centrally Planned Health System To A System Based On The Market: Lessons From China” Health Affairs, 27(4): 937-948.
• CIA World Factbook.

Health Affairs’ July/August 2008 edition discusses the health care system of 2 emerging powers: China and India. Today, I will analyze the two countries health care systems over time and what they they can expect in the future.

Like most developed countries, healthcare spending as a percentage of GDP has risen over time for these two countries. Health care is a luxury good, and the rise in health care spending should be expected due to these countries incomes have increase significantly over the past few decades. Despite the increase in spending, health care is often unaffordable for many individuals. Many individuals do not seek physician care or hospitalization when needed since they cannot afford this care. In both countries, provinces and states with higher levels of GDP per capita have better health care outcomes than provinces and states with lower levels of GDP per capita.

Funding

Overall both countries have experienced a significant shift from government funded health care to privately funded health care. In China, this was mainly due to the transition from a centrally planned to a more market-oriented economy. Government spending decreased from 30% of GDP in 1978 to 10% in 1996 and government health spending fell concurrently. In India, government spending as a percentage of GDP has been between 20-25% for the last 2 decades, but debt payments and pension liabilities have eroded the government’s ability to fund adequate health care.

Health Care Delivery

“China has maintained public ownership over most health facilities, making public provision of care the dominant mode for the majority of services while legitimizing profit-seeking behavior at public facilities through a set of perverse incentives. In contrast, India has followed a policy of benign neglect and allowed entrance into and expansion of the private sector to fill in the gaps, with little effective regulation or enforcement.”

In China, government subsidies for public health facilities fell drastically in the early 1990s and prices for most basic medical were below cost. In order to operate in the black, public hospitals can charge high prices for high-tech tests and pharmaceuticals. “These seemingly sensible cross-subsidies have created perverse incentives for providers, who now have to generate 90 percent of their budget from revenue-generating activities, turning hospitals, township health centers, and village doctors alike into profit-seeking entities. As a result, even though structurally the delivery system of China is public, the behavior of public facilities is consistent with that of for-profit private providers.”

In India, the government pays for most of the care in public facilities, but–like in China–prices are generally low or below cost. The government, however, allows public practitioners to run private practices which means that many providers try to divert their patients to their higher margin, private practice. Yip and Mahal claim that in this environment, “supplier-induced demand is prevalent.”

Quality

In China and India, providers are well known for systematically overprescribing drugs and tests (this is where they make their money). Counterfeit drugs are often used in rural China. In India, it has been shown that even licensed doctors generally provide poor-quality service. Smaller hospitals in India lack basic medical equipment and trained personnel. “The public sector, too, is inefficient, with shortages of drugs and consumables and frequent absenteeism.”

Reform

In China, one major reform is the New cooperative Medical Scheme (NCMS) discussed in the 10 Aug 2008 post. India has introduced the National Rural Health Mission (NRHM) which aims to increase Indian government spending on health to 2% of GDP. The NRHM hopes to expand insurance coverage by establishing risk-pooling schemes. In addition, the Indian government, beginning in 2003, introduced an insurance scheme, heavily subsidized by the central government budget and targeted to the poor. Enrollment is voluntary, and to date the take-up rate is low.”

• Winnie Yip and Ajay Mahal, (2008) “The Health Care Systems Of China And India: Performance And Future Challenges” Health Affairs, 27(4): 921-932.

On Friday I reported that the U.S. scored poorly on the Commonwealth Fund’s National Scorecard. Those in favor of universal health care are probably rejoicing. “The U.S. system is dysfunctional beyond repair and we need universal health care!”

Yesterday, the Economist reported on an article in The Lancet Oncology journal which found that the U.S. has the best five year survival probabilities for breast and prostate cancer. Score one for those against universal health care. “The American free market is always the best!”

How can this be? How can we reconcile these two results?

The Lancet Oncology article controls also for other covariates which are related to survival probabilities, but do not relate to the quality of health care. For instance, if Americans get cancer later in life than people from other countries this is taken into account since people who are older are more likely to die of almost all causes, including cancer. Further, if traffic mortalities or the homicide rate are higher in the U.S. than in other countries, this will likely decrease the probability a cancer patient survival for 5 years, but is unrelated to the quality of medical care. If Americans are more likely to be obese, this also will decrease their survival probabilities, but should not be an indictment against the health care system. For these reasons, the 5 year cancer survival probabilities are adjusted to take into account the age and death rates in the general population. After these effects are taken into account, the U.S. scores very well in terms of cancer survival.

Of course cancer survival is only one of a myriad of ways of measuring the quality of the American health care system. Further, the U.S. spends the most money on healthcare (in total and per capita) compared to any other country. While the U.S. may (or may not) be the best, it is certainly the most expensive.

• Michel P Coleman et al. (2008) “Cancer survival in five continents: a worldwide population-based study (CONCORD).” Lancet Oncology DOI:10.1016/S1470-2045(08)70179-7.

The Washington Post reports that U.S. Health Care [is] Still Ill. This conclusion comes from a report from the Commonwealth Fund titled Results from the National Scorecard on U.S. Health System Performance, 2008. Even though the U.S. still spends more money on medical care than any other nation, performance on the Scorecard has not improved between 2006 and 2008.

Today, let’s look into some of these measures in detail.

• Preventable Deaths/100,000 Population. This is calculated as the annual ratio of people below age 75 or below who die from diseases such as heart disease, stroke, bacterial infection, diabetes. These figures are age-adjusted so that if one country has a lot of old people, this does not count against them. This is a very good aggregate metric of how well the health care system is doing and it turns out that the U.S. is in last place.
• Percent of adults (18+) who received all recommended screening and preventive care. Here we see pretty much no change between 2002 and 2005 (49% to 50%). However, using a metric such as all preventive care hides some improvements along the margin. For instance, let us assume that there are 5 key vaccines. If and half the population get all the vaccines and half of the population did not, then we would have a 50% score on this metric. On the other hand, if we had a huge improvement where the people who were not getting vaccinated now got 3 of the 5 vaccines, we would still be at the same 50% mark.
• Quality of Care. We note that in most of the measurable quality metrics, performance increased. The number of diabetics with HbA1C<9% increased; the percent of people who received the proper care for heart attacks, heart failure and pneumonia increased as well. We see that more and more patients now receive written instructions after they are discharged from a hospital. Much of this improved quality may be coming from pay-for-performance interventions. As I have mentioned in earlier blog posts, P4P may improve the quality of care on measured dimensions, while reducing the quality of care in unmeasured areas.
• Nursing Home hospitalizations. The percent of nursing home patients who were hospitalized in a year increased. This may be due to worse care, or an older–and thus generally sicker–population of adults being the ones who enter into nursing homes.
• Off-Hours care: Although there was some improvement from 2005, Americans in 2007 were the least likely to be able to receive non-emergency care on nights, weekends, and holidays.
• Access: The percent of people who are uninsured has risen greatly between 2000 and 2006. Further, 41% of adults have an outstanding medical debt of bill problem.
• Coordination of care. When Americans have test done, they are the least likely to have these results available at the time of the next appointment. Among countries in the Commonwealth Report, only Canadians primary care physicians (PCPs) are less likely to use electronic medical records than American PCPs.

Can these report cards help improve care? Yes an no. Of course, pointing out short-comings in the American system is the first step that is needed in order to improve care. The report, however, does not really explain why these short falls are occurring or how to fix them. Are adult preventive care levels low because physicians are not doing their job, or are patients avoiding needed checkups? The answer to this question will determine whether a physician-focused or public health-focused approach would work best. Similarly, we see that nursing home hospitalization are increasing. Why is this? Is this because of worse nursing home care or are the patients who enter into nursing homes sicker on average in more recent years? The the former is the culprit, what specific problems are leading to more hospitalizations and how can we fix them.

I applaud the Commonwealth Fund for collecting this data. As they wisely state, “what receives attention gets improved.” However, more detail studies are needed if we really want to improve the quality, access and efficiency of health care in the 21st century.

Children’s Hospital Boston and Harvard Medical School has launched HealthMap, an automated data-gathering system used to track disease. HealthMap aims to organize and disseminate this online information using feeds from various public health organizations.

This is similar to the concept I first saw at the Who Is Sick website, but the HealthMap seems to be a step forward. One the one hand, Who Is Sick site has user-generated data which may be more cutting edge, but Health Map has more data and data from more reliable sources. Further, HealthMap has the backing of prestigious organizations. I would not be surprised if HealthMap incorportated a user generated “Who is sick?”-like feature into their website.

Public Health thrives on the exchange of information, and new IT developments are certainly improving the quality of public health around the world.

• H.T.: ITNews “Doctors turn to the web for disease tracking“

The Telegraph reports that Britain’s National Health Service (NHS) has enacted a constitution.  “[The constitution] will set out the rights and responsibilities for patients and what they can expect from the NHS in the 21st century.  It is being seen by ministers as a chance to reiterate the founding principles of the health service, emphasising that care should be universal, free at the point of access and based on clinical need, not ability to pay.”

The document includes a list of patient responsibilities which includes keeping appointments and treating minor ailments at home.  The question is, what will happen if a person does not keep an appointment?  Will there be a charge?  Sometimes missing an appointment may mean the patient is irresponsible, while other times there may be a family emergency or a child who needs to be picked up from school.  There is no sense of responsibility unless there is some reprocussion to missing an appointment.

Will the constitution significantly change how health care is provided in the UK?  I doubt it.  The constitution does not explicitly determine what services, drugs, operations and treatments the NHS will provide.  Thus, if the NHS does not provide a given service to a patient, the patient will still not have legal remedy. If the NHS Constitution is simply a wish list of how health care within the NHS should look, it may serve as a motivating mission statement for employees and politicains.

The document will only be powerful if a patient can receive a remedy when their rights are violated.  For instance, if there is a long wait for services, will the NHS pay for treatment overseas?  The consitution allows patients the right to register with a GP, but will this be a true choice or will there be a long wait to register with all the best GPs?

In 1991, John Major instituted the Patient’s Charter which also set out a number of rights entitled to NHS patients, however the Patient’s Charter was ineffective since it had no power.

NHS Blog Doctor write about how the NHS Constitution creates an illusion of choice.

A recent paper by Wesiz et al. (Eur J Pub Health 2008) attempts to compare mortality rates and avoidable mortality rates in the urban core of 3 world cities: London (Inner London); New York (Manhattan) and Paris. Mortality

The authors find that Paris has the lowest mortality rates and New York has the highest mortality rates with London in between.

Avoidable Mortality

Avoidable mortality is death from diseases such as tuberculosis, septicemia, hypertension, influenza, peptic ulcer, appendicitis, etc. Paris also has the lowest avoidable mortality rates while London has the highest and New York in between. The authors also find that the difference between Paris and New York is higher when measuring avoidable mortality than total mortality. Avoidable mortality rates are higher within poor areas of each city.

Interpretation

The authors interpret these findings as avoidable mortality is due to a lack of access to care, especially for the poor. Government provided health insurance is far less prevalent in the U.S. than in the other countries so this access to care in the U.S. may be lower than in other countries. However, it could also be the case the physician practices are better in Paris than in the New York or London. Further, Great Britain also has a national health insurance system yet avoidable mortality is higher in London than in New York. It is possible that the frequency with which the population visits a doctor is culturally different in the three cities in a way that is unrelated to insurance coverage. Thus, while Paris should be celebrated for having the lowest avoidable mortality rate, the cause of their success is unclear from this study and what steps New York or London could take to decrease avoidable mortality are also unclear.

• Daniel Weisz, Michael K. Gusmano, Victor G. Rodwin, Leland G. Neuberg (2008) “Population health and the health system: a comparative analysis of avoidable mortality in three nations and their world cities” European Journal of Public Health, Vol. 18, No. 2, 166–172

As mentioned in previous posts, most health insurance in the France public health care system involves significant copayments. While this helps to reduce the moral hazard problem, it may prevent poor individuals from utilizing the care they need. In 2000, France introduced free complementary health insurance plan which covers most out-of-pocket payments for the poorest 10% of French residents. Did this policy change increase utilization?

This is the question analyzed by Grignon, Perronnin and Lavis (2008). The authors note that three groups are effected by this change. This first is the very poor who already paid very few copays due to the existing means tested program (Aide Médicale Générale). The second group of individuals who were eligible for the complementary insurance program previously had commercial insurance, which in France is often used to finance the copayments of the national health insurance system. For the first two groups, we would expect little change in medical utilization. The third group, however, had no commercial or means tested complementary insurance and thus becoming eligible for the new French program likely will have a significant impact on access to care.

Results

The authors do not find a strong positive effect of being eligible for the the free complementary insurance plan, but this is likely because 87% of the sample was previously eligible for means tested benefits. There was some evidence that the utilization of specialist care did increase for the population eligible for the free complementary insurance program. Individuals who enrolled voluntarily into the free plan had significantly higher probability of using all types of care.

The authors summarize their findings concerning the increased utilization of those previously not covered as follows:

“This impact of the free plan on health-care utilization of those previously not covered has three causes: (1) a true price elasticity of demand for health care among the poor: faced with a lower (indeed zero) price, individuals use more care, mostly specialist visits and drugs than when faced with a variety of co-payments averaging 23%; (2) pent-up demand: the change in utilization among those previously not covered reflects the slope of their demand as well as the stock of past unmet needs and can therefore overestimate the longer-run elasticity of demand; and (3) enrolment bias: those who voluntarily enroll may be those who expect to use health care more. “

• Michel Grignon, Marc Perronnin, John N. Lavis (2008) “Does free complementary health insurance help the poor to access health care? Evidence from France,” Health Economics, Volume 17, Issue 2 (p 203-219)

Canada has a single payer system but the provinces have the bulk of the responsibility of running the health care system for their own residents. In order to qualify for federal funding, each province must meet the following criteria.

1. Universality. Available to all provincial residents on uniform terms and conditions;
2. Comprehensiveness. Covering all medically necessary hospital and physician services;
3. Portability. Allowing residents to remain covered when moving from province to province;
4. Accessibility. Having no financial barriers to access such as deductibles or copayments; and
5. Public administration. Administered by a nonprofit authority accountable to the provincial government.

Nevertheless, the 2005 Canadian Supreme Court ruling striking down Quebec’s prohibition on private insurance contracting may foreshadow significant changes in Canada’s health care system. 

Percent Insured. ~100%

Funding. Funding is provided jointly by the federal and state governments. The federal government uses funds from general revenue to provide a block grant to each of the provinces. The block grant finances only about 16% of each province’s health care expenditures. The remainder is funded by provincial taxes: mostly personal and corporate income tax. Health care spending makes up between one-third to one-half of provincial social welfare spending. For the nation as a whole, health care costs only 9% of GDP.

Private Ins. “At one time, all provinces prohibited private insurance from covering any service or procedure provided under the government program. But in 2005, the Canadian Supreme Court struck down Quebec’s prohibition on private insurance contracting.” Private clinics are barred from offering medical services which are covered by the Canada Health Act, but many begun to offer services in the black market.

Physician Compensation. Physicians work in private practice and are paid on a fee-for-service basis. Since these fees are set by a centralized agency, wages are fairly low which has lead to a physician shortage. There are only 2.1 physicians per 1,000 people. This is far less than the OECD average of 3.0 physicians per 1,000. Hospitals are funded on a global budget basis. Capital expenditures are reviewed and approved on a case-by-case basis.

Physician Choice. Referrals are required for all specialist services except the ED.

Copayment/Deductibles. There are generally no copayments or deductibles for services. However, British Columbia, Alberta and Ontario charge insurance premiums (although health services cannot be denied because of inability to pay).

Technology. The U.S. has five times as many MRI machines per capita as Canada and three times as many CT scanners. However, because of Canada’s proximity to the U.S., many Canadians do have the option of coming to the U.S. for treatment.

Waiting Times. In a 2005 decision striking down part of Quebec’s universal care law, Canadian Supreme Court Chief Justice Beverly McLachlin wrote that it was undisputed that many Canadians waiting for treatment suffer chronic pain and that “patients die while on the waiting list.” For instance, the Fraser Institute finds that 800,000 Canadians are waiting for treatment at any given time. “According to [the Fraser] survey, treatment time from initial referral by a GP through consultation with a specialist, to final treatment, across all specialties and all procedures (emergency, nonurgent, and elective), averaged 17.7 weeks in 2005.”

If you are interested on more information about the Canadian health care system, see my October 2, 2007 post.

• Tanner, Michael D. (2008) “The Grass Is Not Always Greener: A Look at National Health Care Systems Around the World” Cato Policy Analysis no. 613.

The most significant difference between Germany’s health care system and that of other countries is its use of sickness funds. All Germans with incomes under €46,300 are required to enroll in one of the sickness funds. Those with higher incomes can either join a sickness fund themselves or opt out and instead buy private insurance.

The federal government decides the global budget and which procedures to include in the benefit package. The National Association of Sickness Funds and the National Association of Physicians also help to form which benefits are included in the sickness fund benefit package. The state government regulates physicians and sets physician reimbursement rates.

In 2006, Angela Merkel proposed reforming the health care system by creating a centralized health fund, shifting funding from payroll taxes to general revenues, trimming benefits, and increasing cost sharing. This plan was abandoned due to a lack of public support and political opposition.

Percent Insured. 99.6% (There are about 300,00 uninsured individuals)

Funding. Sickness funds are financed through a payroll tax which averages 15% (but varies depending on the fund chosen). The tax is split between the employer and employee. In 2006, Germany ran a €7 billion deficit and the government has proposed a 1% increase in the payroll tax.

Private Ins. Approximated 9% of Germans have supplemental insurance. The private, supplemental insurance covers items not paid for in the sickness fund benefit package. As mentioned above, only middle- and upper-class individuals can opt-out of the sickness funds. Of those eligible to opt out, only about 1/4 of individuals do decide to opt out.

Physician Compensation. Physician reimbursement is set through negotiation with the sickness funds. Most of the negotiating power, however, lies with the sickness funds. Thus, the purchasing power of German physician’s wages is about 20% of that of physicians in the U.S. In 2005, there were physician strikes over low wage compensation. Further, physicians have to deal with significant reimbursement caps and budget restrictions. According to Tanner, physicians only attempt to provide the minimum care necessary.

Copayment/Deductibles. Until recently, there have been almost no copays or deductibles. Recently, Germans have begun paying €10 copays for prescription drugs, doctors visits, and hospital stays.

Technology. The U.S. has four times as many MRI units per capita and twice as many CT scanners per capita. Tanner claims that the existence of a small private insurance market helps to supplement technology spending. For instance, CT scanners at one point were almost non-existent in the public sector, but competition with private insurance companies meant that the public system had to add more CT scanners.

Waiting Times. It is a matter of some debate whether or not there are long waits for medical care in Germany. A WHO report says that “Waiting lists and explicit rationing decisions are virtually unknown.” On the other hand, another study finds that care is frequently rationed. For instance, the elderly and those with terminal illnesses are often denied care. Since hospitals are run through a global budget, this can reduce their incentive to treat those with serious, expensive-to-treat medical conditions.

Benefits covered. There is an extensive benefit package which even includes sick pay (70% to 90% of pay) for up to 78 weeks.

• Tanner, Michael D. (2008) “The Grass Is Not Always Greener: A Look at National Health Care Systems Around the World” Cato Policy Analysis no. 613.

I have already written about Switzerland in previous posts (see Swiss Healthcare Sytem: Part I, and Part II). Still of all the countries with universal health care, Switzerland’s is the most market-oriented and merits discussion. Switzerland’s health care spending as a percentage of GDP is second only behind the U.S. (11.6% of GDP for Switzerland, 15.3% for the U.S. according to Frontline), yet the government pays for very little of this funding. The Swiss system is similar to the “managed competition” health care plan proposed by the Clintons in the early 1990s.

Percent Insured. 99.5%. Does this mean a mandated system system would lead to universal coverage in the U.S?  This is unlikely.  In Switzerland, a mandate for auto insurance has nearly 100% compliance, but in the U.S. the auto insurance mandate’s compliance rate is only around 83%.

Funding.  Insurance is purchased by individuals.  Individuals generally must pay the full cost of premiums, but the government helps to finance insurance purchases for the poor.  “These subsidies are designed to prevent any individual from having to pay more than 10 percent of income on insurance,” and one third of Swiss citizens receive this type of subsidy.    Thus, the Swiss government only pays for 24.9% of health care costs (compared with 44.7% in the U.S.).

Private Insurance.  All insurance is private insurance.  However, insurance companies are mandated to offer the same “basic benefits package.”  Some physicians operate outside the negotiated schedules and individuals are beginning to purchase supplemental insurance to cover the cost of these higher cost physicians.  Some estimates claim that 40% of Swiss citizens have purchased supplemental insurance.

Physician Compensation.  Physician compensation is negotiated between the insurance companies and doctors on a canton by canton basis.  Balance-billing is not allowed.  Switzerland has strong regulation with respect to nonphysician health care professionals (e.g., nurses, PAs, NPs,) and thus patients are often compelled to use expensive physicians even when this may not be medically necessary.

Physician Choice.  According to a WHO study, Switzerland ranks second only to the U.S. in terms of the ability of patients to choose their provider.

Copayment/Deductibles.  Premiums are community rated and only adjusted for sex and age.  Employers do not pay for workers insurance and thus many Swiss have opted for less expensive plans with higher deductibles.  This has lead to the Swiss paying for 31.5% through out of pocket expenses.

Waiting Times.  According to a WHO study, Switzerland ranks second only to the U.S. in terms of timely care.

Benefits Covered.  All insurers cover the “basic benefits package” so most competition between insurers is based on price and service.  A politically defined benefit package is susceptible to influence from special interest groups.  Thus, Uwe Reinhardt notes that “over time, the growth in compulsory benefits has absorbed an increasing fraction of the consumers’ payment, thus compromising the consumer-driven aspects of the Swiss system.”

• Tanner, Michael D. (2008) “The Grass Is Not Always Greener: A Look at National Health Care Systems Around the World” Cato Policy Analysis no. 613.

Great Britain represents all that is good and bad with centralized, single-payer health care systems. Health care spending is fairly low (7.5% of GDP) and very equitable. Long wait lists for treatment, however are endemic and rationing pervades the system. Patients have little choice of provider and little access to specialists.

Percent Insured. ~100%

Funding. Great Britain has a single payer system funded by general revenues. With any centralized system, avoiding deficits is difficult. In 2006, Great Britain had a £700 million deficit despite the fact that health care spending increased by £43 billion over five years.

Private Insurance. 10% of Britons have private health insurance. Private health insurance replicates the coverage provided by the NHS, but gives patients access to higher quality care, and reduced waiting times.

Physician Compensation. Unlike in the case of other single payer systems such as Norway, most physicians and nurses are mostly government employees. In 2004, the NHS negotiated lower salaries for doctors in exchange for reduced work hours. Few physicians are available at night or on weekends. Because of low compensation, there is a significant shortage of specialists.

Physician Choice. Patients have very little physician choice. However, under the experimental London Patient Choice Project, patients waiting more than six months for treatment will be offered a choice of four different treatment providers.

Copayment/Deductibles. There are no deductibles and almost no copayments except for small copayments for prescription drugs, as well as for optical and dental care.

Waiting Times. Waiting lists are a huge problem in Great Britain. Some examples: 750,000 are on waiting lists for hospital admission; 40% of cancer patients are never able to see an oncologist; there is explicit rationing for services such as kidney dialysis, open heart surgery and care for the terminally ill. Further, minimum waiting times have been instituted to reduce costs. “A top-flight hospital like Suffolk Est PCT was ordered to impose a minimum waiting time of at least 122 days before patients could be treated or the hospital would lose a portion of its funding.”

Benefits Covered. The NHS system offers comprehensive coverage. Because of rationing, care might not be as easy to get as advertised. Terminally ill patients may be denied treatment. David Cameron has proposed that the NHS refuse treatment to smokers or the obese (see 7 Sept 2007 post).

• Tanner, Michael D. (2008) “The Grass Is Not Always Greener: A Look at National Health Care Systems Around the World” Cato Policy Analysis no. 613.

Greece has an employer-based health insurance system in which all Greek employers enroll their employees in one of the “social insurance funds.” Due to strict regulation by the Greek Ministry of Social Health and Cohesion, Greece in essence has a single payer system. For instance, the Ministry controls employee contribution rates, insurance benefit packages, and the types of doctors a social insurance fund can employee. Also, employers can not choose among competing sickness funds as they can in Germany, they must choose an their industry-specific social insurance fund.

The National Health Service (NHS) also operates its own health care services. For instance the NHS operates hospitals and employs some physicians. One can see the NHS as a backup for the social insurance funds, but in some rural areas, the NHS is the principal provider of care.

Percent Insured. Similar to the U.S., only 83% of Greeks have health insurance covering primary care. Most Greeks (97%) do have health insurance for hospital care.

Funding. In Tanner’s opinion, “the Greek health care system is funded through payroll taxes, general tax revenue and bribery.” (see below)

Private Insurance. About 8% of Greeks have private health insurance but this number has been growing rapidly in recent years.

Physician Compensation. About half of physicians are employed directly by the social insurance fund. The other half are in private practice, but are contracted on a fee-for-service basis by the insurance funds. Unlike in France, no balance billing is allowed. Despite this fact, many physicians demand under the table payments in exchange for treatment. Further, physicians often “actively attempt to persuade patients to move from a doctor’s sickness fund contract to the doctor’s private practice. Patients who switch pay out of pocket but receive faster and better care.”

Physician Choice. Greeks must have a referral from a GP in order to receive care at a public or NHS hospital.

Copayment/Deductibles. In theory, there are no deductible or copayments. In reality, the need to make informal payments to providers means that most patients incur significant out of pocket expenses. In fact, one estimate claimed that informal out-of-pocket payments make up 42% of healthcare expenditures.

Technology/Quality. Hospital administrators are appointed not based on merit, but instead based on their political affiliation. Because of this, many hospitals suffer from poor quality. Pay for doctors and nurses is fairly low and thus there are severe staffing shortages. In NHS hospitals, “it has been estimated that less than half of authorized medical positions are actually filled.” The U.S. has twice as many MRI units per capita and 20% more CT units per capita.

Waiting Times. Wait times for medical care are very long in Greece. This is likely due to the provider shortages caused by low reimbursement rates. The wait for treatment at both public and NHS hospitals can be very long. There is a six month wait for some surgeries and the wait for appointments with specialists can be as long as 150 days. Simple blood tests often take a month.

Corruption and Inequality. There is significant corruption and inequality in the Greek system. For instance, some funds, known as “noble funds” have more extensive benefits and lower worker contributions. The reason for this is that strong worker unions are able to use their political clout to get a better deal for their workers at the expense of workers in other industries. Also, most doctors demand under the table payments in order to see patients or if patients want higher quality care. Further, many doctors receive kickbacks for referrals to private hospitals and diagnostic centers.

We can see that the centralized system of Greece is breaking down. Individuals are demanding higher quality care, but due to government rationing, significant corruption is occurring.

• Tanner, Michael D. (2008) “The Grass Is Not Always Greener: A Look at National Health Care Systems Around the World” Cato Policy Analysis no. 613.

Portugal is similar to Norway in that it is a very centralized health care system. Despite the fact that Portugal ranks highly according to the WHO, there is widespread discontent with the Portuguese system.

Most individuals in Portugal are insured by the state-run, single-payer National Health System. However, 25% of the population is insured through an occupation based insurance scheme. These occupation based schemes include most government, military and telecommunication workers. “These plans were originally intended to be incorporated into the NHS, but their powerful constituencies have prevented that from occurring.”

Funding. Financing of the health care system is generated from general tax revenues. Health care spending accounts for 13% of government revenues. The National Health System (NHS) has an annual global budget, but it is often exceeded by a significant amount. Individuals in the occupation-based insurance schemes pay a premium of about 1% of their salary.

Private Insurance. About 10% of the population has private insurance. Private insurance pays for hospital stays and specialist care. Because there is no guaranteed renewability, premiums are often significantly raised or customers are dropped when they have very high claims amounts.

Physician Compensation. About half of primary care doctors are government employees and the other half work in private practice. Most specialists elect to go into private practice and are paid on a contractual basis by NHS.

Physician Choice. Patients must choose doctors from a list and can only change GPs with a written application. GPs act as gatekeepers. Referrals from the patient’s GP is needed to access specialist care.

Copayment/Deductibles. For most services, there is no or little copayments. For diagnostic tests, hospital admissions, specialists visits and prescription drugs, however, copayments can run up to 40% or more.

Technology. Portugal is seriously lacking in medical technology. The U.S. has 7 times more MRI units per person than Portugal and 20% more CT scanners.

Waiting Times. Waiting times are very long in Portugal. Further, there are often long waits for specialist visits. The European Observatory on Health Systems says the Portugal is heading towards “de facto rationing.” Because of this, many Portuguese either go to Spain for treatment or head to the emergency department. In fact, “at least 25 percent of emergency room patients do not need immediate treatment.”

Benefits Covered. On paper, all benefits are covered, but in reality, many benefits–such as dental care and rehabilitation–are rarely provided.

• Tanner, Michael D. (2008) “The Grass Is Not Always Greener: A Look at National Health Care Systems Around the World” Cato Policy Analysis no. 613.

All Norwegians are insured by the National Insurance Scheme. This is a universal, tax-funded, single-payer health system. Compared to France, Italy, Spain and Japan, Norway has the most centralized system.

Percent Insured. 100%. All Norwegian citizens and residents are covered.

Funding. The National Insurance Scheme is funded by general tax revenues. There is no earmarked tax for health care. The Norwegian tax burden is 45% of GDP. The government sets a global budget limiting overall health expenditures and capital investment.

Private Insurance. Norwegians can opt out of the the government system and pay out-of-pocket. Many pay out-of-pocket and travel to a foreign country for medical care when waiting lists are long.

Physician Compensation. Hospital and nonhospital physicians generally are paid on a salaried basis. Some specialists can receive an annual grant and fee-for-service payments. Reimbursement rates, however, are set by the government and, unlike in France, the physician can not charge higher rates than the centrally-set reimbursement rate.

Physician Choice. Patients choose general practitioners (GPs) from a government list. These GPs then act as gatekeepers for specialist services. Patients can only switch GPs twice per year and only if there is no waiting list for the requested GP.

Copayment/Deductibles. There are no copayments for hospitals stays or drugs. There are small copayments for outpatient treatment.

Waiting Times. There are significant waiting times for many procedures. Many Norwegians often go abroad for medical treatments. The average weight for a hip replacement is more than 4 months. “Approximately 23 percent of all patients referred for hospital admission have to wait longer than three months for admission.” Also, care can be denied if it is not deemed to be cost-effective.

Benefits. Very generous. The program also provides sick pay. “As Michael Moore has noted, the Norwegian system will even pay for ’spa treatments’ in some cases.”

• Tanner, Michael D. (2008) “The Grass Is Not Always Greener: A Look at National Health Care Systems Around the World” Cato Policy Analysis no. 613.

Japan has universal health insurance based around a mandatory, employment-based insurance. “The Employee Health Insurance Program requires all companies with 700 of more employees to provide workers with health insurance among some 1,800 ’society-managed’ plans. Nearly 85% of these plans cover a single company…Most of the rest of the [health insurance plans] are industry-based.” Small business workers join a government-run small business national insurance plan. The self employed and retirees are covered by the Citizens Insurance Program administered by municipal governments.

Japan has very generous health insurance benefits, significant provider choice, and high quality medical technology, but costs are not as high in the U.S. One reason for this is a significant level of cost sharing. The average Japanese household spends $2300 per year on out-of-pocket health care expenses (this figure excludes the payroll taxes used to finance health insurance premiums). Other reasons for lower health care costs is a healthy life-style, a lower incidence of disease and a general Japanese cultural aversion towards invasive procedures.

Another reason for lower costs is that the Japanese government sets a reimbursement fee schedule for all physician services. This has resulted in “assembly line medicine” where “two-thirds of patients spend less than 10 minutes with their doctor; 18 percent spend less than 3 minutes.”

Funding. The health insurance plans are funded by an 8.5% (for large business) or an 8.2% (for small-businesses) payroll tax . The small business national health insurance program is also supplemented by government funds. The payroll taxes are split almost evenly between the employer and the employee. Sometimes these funds are not sufficient to cover costs. In 2003, more than half of the insurance plans at large firms lost money and many companies are now joining industry-based plans. Those who are self-employed or retired must pay a self-employment tax. The Roken is financed by contributions from the Employee Health Insurance Program, the small-business national health insurance, and the Citizens Insurance Program. The elderly do not contribute to this plan.

Private Insurance. Very few Japanese use private, supplemental insurance. Private supplemental insurance pays for less than 1% of health care costs.

Physician Compensation. Hospital physicians are salaried employees but nonhospital physicians are paid on a fee-for-service basis. Hospitals and clinics are privately owned but the government sets the fee schedule, just as it does for private physicians. The fee-setting system, however, is very corrupt since there are over 3000 procedures whose price needs to be set. For instance, “[i]n 2004, a group of dentists was indicted for bribing the fee-setting board.”

Physician Choice. There are no restrictions on physician or hospital choice and no referral requirements.

Copayment/Deductibles. Copayments are 10% to 30%, but generally closer to 30%. Copayments are capped at $677 per month for the average family.

Technology. Japan has high levels of technology. Patients have just as much access to MRI and CT units as in the U.S. Further, because the government imposes a fee schedule, competition is based solely on technology (there is no price competition).

Waiting Times. Waiting times are a significant problem at the best hospitals. Since the best hospitals can not charge higher prices there will be a queue. Many hospitals have been known to accept “under the table” payment to see patients quicker. Thus, the market may be working, whether or not policy makers want it to do so.

Benefits covered. Very generous.

• Tanner, Michael D. (2008) “The Grass Is Not Always Greener: A Look at National Health Care Systems Around the World” Cato Policy Analysis no. 613.

The Spanish have one of the most centralized health care systems in the world. Patients have no choice of provider and there is almost no cost sharing. Like most centralized systems without cost-sharing, there are significant waiting times for procedures. This has resulted in a 2 tiered system where 12% of the population receives higher quality care by purchasing private insurance.

Spain ranks #7 on the WHO health care rankings and the Spanish the second-most satisfied with the quality of their health care in Europe (behind France).

Percent Insured. 98.7%

Funding. The Spanish health care system has decentralized control run by each of the regions (comunidades autónomas). Thus results in wide variations in health care spending and quality across each for the regions. The central government gives block grants to each region based on its population and demographics. These funds are raised from general revenues.

Private Insurnace. About 12% of the population has private health insurance (about 25% of people living in Madrid or Barcelona have private health insurance). Like in other countries, we see evidence of a two-tiered system. Private insurance payments account for 21% of total heat care expenditures. Further, a fair number of Spaniards pay out-of-pocket for care outside the national healthy system.

Physician Compensation. Most physicians are quasi-civil servants and are paid a salary based on seniority and credentials. The fact that doctors are paid a salary reduces their incentive to under- or over-treat, but the fact that there is no merit pay may decrease physician effort levels. Lower pay has resulted that Spain has fewer physicians and nurses per capital than most OECD countries.

Physician Choice. Spanisards can no choose their physician. They are assigned a primary care doctor who must refer the patient in the case that specialist services are needed. Patients are not allowed to change doctors unless they have private insurance. According to Tanner, “This has sparked an interesting phenomenon whereby sick Spaniards move in order to change physicians or find networks with shorter waiting lists.”

Copayment/Deductibles. There are few copayments except for prescription drugs.

Technology. Spain has about one third as many MRI and CT units as the U.S.

Waiting Times. Waiting lists are a significant barrier to care in Spain. The average wait to see a specialist in Spain is 65 days. Waiting times for procedures are also long, up to 62 days for a prostectomy and 123 days for a hip replacement.

Benefits not covered. Rehabilitation and convalescence are not covered. Those with terminal illnesses are generally the responsibility of the patient’s relatives.

While France may have the highest rated health care system in the world, Italy is second according to the WHO. The Italian health care system is a decentralized version of the British NHS. Despite the high rankings by the WHO, Italians are dissatisfied with the quality of their care. Italians believe more patient choice will improve quality, but “given the general dysfunction of the Italian political system, and the entrenched opposition of special interest groups, substantial reform is not likely anytime soon.”

Cost: Health care spending rose by 68% between 1995 and 2003.

Funding. Funding is based on a regressive payroll tax. The tax starts at 10.6% of income for the first €20,660 and drops to 4.6% of income between €20,51 and €77,480. The rest of the funding comes from federal and regional general taxation (i.e.: income and value-added taxes). The regions are responsible for health care provision. The Ministry of Health funds these regions according to a formula based on weighted capitation and past spending. Then the regions allocate these funds to Local Health Authorities (LHA).

Private Insurance. Private health insurance in Italy is uncommon, but is occasionally offered by employers. It is not possible to opt out of the National Health Insurance system and insurance premiums are not tax deductible. Many Italians do pay for private health care. It is estimated that about 35% of Italians use at least some private health services, but the public sector certainly dominates the private in terms if its relative importance.

Physician Compensation. Physicians are paid via capitation. Hopsitals are paid via DRGs.

Physician Choice. Italians have limited choice of their physician but more than in the UK or in Spain. They must register with a general practitioner (GP) in their LHA. For any specialist services, patients must get a referral from their GP.

Copayment/Deductibles. Inpatient and primary care are free. For tests, diagnostic procedures and prescription drugs, copayments are as high as 30%. However, 40% of the population (e.g.: the elderly, pregnant women, kids) are exempt from these copayments.

Technology. There is a shortage of medical technology in Italy. The U.S. has twice as may MRI units per million than Italy and 25% more CT scanners.

Waiting Times. Waiting times are fairly long for diagnostic tests. The average wait for a mammogram is 70 days, for endoscopy 74 days. Tanner notes that: “Ironically, the best-equipped hospitals in northern Italy have even longer waiting lists since they draw patients from the poorer southern regions as well.”

• Tanner, Michael D. (2008) “The Grass Is Not Always Greener: A Look at National Health Care Systems Around the World” Cato Policy Analysis no. 613.

France is often seen by liberals as the ideal system. It has universal health care, with few waiting lists. France has the highest level of satisfaction with their health care among all European countries. How can this be? What is their secret?

France provides a basic, universal health insurances through large occupation-based funds. The General National Health Inusrance Scheme covers 83% of French workers, while other occupational specific (e.g.: for agricultural workers, for the self employed, for miners, etc.) cover the remainder. About 99% of individuals are covered by this universal health insurance system.

However, France utilizes more market-based ideas than most people realized. Copayment rates for most services are 10%-40%. About 92% of French residents have complementary private health insurance.

In essence, the French system avoids widespread rationing because, unlike true single-payer systems, it employs market forces. Even the OECD says that the “proportion of the population with private health insurance” and the degree of cost sharing are key determinants of how severe waiting lists will be.

Insured. About 99% of French residents are covered by the national health insurance scheme.

Cost. France is the third most expensive health care system (~11% of GDP). While the system has generally been well funded, in 2005 the health care system ran a €11.6 billion deficit and in 2006 the health care system had a €10.3 billion deficit. No centrally planned health insurance system will be immune from occasional (or even frequent) deficits.

Funding. Most of the funding is from a 13.55% payroll tax (employers pay 12.8%, individuals pay 0.75%). There is a 5.25% general social contribution tax on income as well. Thus, there is an approximately a 18.8% on employees for health insurance. There are also dedicated taxes which are assessed on tobacco, alcohol, and pharmaceutical company revenues.

Private Insurance. “More than 92% of French residents have complementary private insurance.” This insurance pays for additional fees in order to access higher quality providers. Private health insurances makes up 12.7% of French health care spending. These complementary private insurance funds are very loosely regulated (less than in the U.S.) and the only stringent requirement is guaranteed renewability. Private insurance benefits are not equally distributed so there is, in essence, a two-tier system.

Physician Compensation. French doctors are paid by the national health insurance system based on a centrally planned fee schedule, but doctors can charge whatever price they want. The fees are based on an up front treatment lump sum, which is similar to DRGs in the U.S. The patient–or their private insurance–must make up the difference between the fee charged by the doctor and the amount paid for by the universal health care system. The average French doctor earns only €40,000, although medical school is free for them and the French legal system is fairly tort-averse.

Physician Choice. The French have a fair amount of choice in which doctors they choose. However, recently the French have moved towards a more “managed care” practice style where patients have a “preferred doctors” who acts as a gatekeeper for specialists.

Copayment/Deductibles. 10% to 40% copayments.

Technology. The government does not reimburse new technologies very generously and because of global budgets and fee restrictions, there is little incentive to make capital investments in medical technology.

Waiting Times. France has generally avoided waiting lists, likely due to the fairly high coinsurance charges. Recent trends towards Increased restrictions, reduced reimbursement rates, and rationing has increased wait times however.

Tanner’s summary. “To sum up: the French health care system clearly works better than most national health care systems. Despite some problems, France has generally avoided the rationing inherent in other systems. However, the program is threatened by increasing costs and may be forced to resort to rationing in the future.”

• Tanner, Michael D. (2008) “The Grass Is Not Always Greener: A Look at National Health Care Systems Around the World” Cato Policy Analysis no. 613.

Recently I came across an article by Michael Tanner of the Cato Institute title “The Grass is Not Always Greener: A Look at National Health Care Systems Around the World.” I figured that the article would be a highly biased piece of writing which would show that the U.S. healthcare system is great and the universal health care systems of Western Europe are horrible.

While the article does tend to highlight some of the drawbacks of centralized, planned medical care, the article has a well-researched, thorough review of the health care systems of many countries.

For the next week or so, I will be summarizing the health care systems in some of these countries. How do these health care systems operate? Which countries have the “best” health care systems? What are the pros and cons of each system? I hope you find these summaries enlightening.

The link to all the summaries can be found here. The countries who’s health care systems I will discuss are:

• France,
• Italy,
• Spain,
• Japan,
• Norway,
• Portugal,
• Greece,
• Great Britain,
• Switzerland,
• Germany,
• Canada.

The PBS program Frontline has focusing its show on the topic “Sick Around the World.”  The show airs on Tuesday, April 15 and may be of interest to Healthcare Economist readers.  From the Frontline publicist:

“To examine the question of universal health care coverage, FRONTLINE teams up with T.R. Reid, a veteran foreign correspondent for The Washington Post, to find out how five other capitalist democracies–United Kingdom, Japan, Germany, Taiwan and Switzerland–deliver health care and what the United States might learn from their successes and their failures. ”

After the broadcast, the program will also be available at the Frontline website.

In this blog, I have written about the Swiss (part one, part two) and Dutch healthcare system extensively. Both systems have a “regulated competition” where insurance is mandatory and insurance companies are mandated to provide a specific insurance benefit package. In the Swiss system, 85% of medical expenditures are financed by insurance premiums and 15% are financed by user fees. In the Netherlands, 50% of expenditures are paid by income-related contributions, 45% are paid by insurance premiums and 5% are paid by user fees. In both systems, the government pays a risk equalization premium to insurance companies who have a higher percentage of sick people to help eliminate cream skimming. However, does this risk equalization system still function when voluntary deductibles are introduced?

This is the question which a paper by van Kleef, et al. (2008) attempt to answer. Currently, the Swiss only count net claims (medical claims paid by the insurance company, ignoring out-of-pocket payments by insurers). Is this a problem? Let us give one example:

Let us assume that Healthy Hank spends $1000 on health care per year and is insured by HealthNet and Sick Sally spends $2000 on health care per year and is insured by SickFund. In the Swiss system, insurance companies receive (pay) a risk equalization payment based on whether they have above (below) average medical expenditures. This would mean that insurance premiums would be $1500, the average of Hank and Sally’s expenditures. HealthNet would pay $500 into the risk equalization pool and SickFund would receive $500.

What happens in the presence of deductibles? Let us assume that HealthNet offers an insurance package with a $500 deductible and HealthNet offers an insurance package with no deductible. Healthy Hanks will sort into the HealthNet deductible package and Sick Sallys sort into the no deductible SickFund package. Now, we have that HealthNet will have $500 of net claims on average since Hank will pay $500 and the insurance company will pay $500. SickFund will still have $2000 of cost.

Now the insurance premium will be $1250 since the insurance premium is based on net claims [(2000+500)/2]. HealthNet will have risk equalization payment of $750 and SickFund will receive $750. The insurance premium for Healthy Harry will be $1250 ($500 + the $750 equalization payment) . The premium for SickFund will be $1250 as well ($2000-the $750 risk equalization payment). Thus, there will be no benefit to choosing the deductible since there is no premium benefit. Yet policy makers would like people to choose the deductible plan to reduce moral hazard. The paper gives a few other scenarios where the risk equalization scheme fails and cream skimming occurs.

In general, economist love choice. Yet in insurance markets, the more choice is given to consumers, the more incentive insurance companies have to cream skim. Despite policymakers best attempts to control cream skimming through risk equalization payments, no risk equalization scheme will be perfect. Like everything in life, there is a tradeoff. In this case, the tradeoff is between offering consumers more choice, and reducing cream-skimming.

• RC van Kleef, K Beck, WPMM van de Ven, RCJA van Vliet (2008) “Risk equalization and voluntary deductibles: A complex interaction,” Journal of Health Economics , 27(2): 427-443.
  

Yesterday, I spoke about the Swiss health care system. One of the main attributes of this system is that patients are allowed to choose from any health care plan and the health insurers can not refuse to cover them. Further, since the insurance benefit is mandated by law, there is very little quality difference between plans. Only 8% of health plans restrict provider choice in any way.

An NBER working paper by Frank and Lamiraud analyzes how the number of firms offering health insurance in Switzerland has affected price dispersion and expected price.

Economists generally believe that when more firms/products enter the market, this will increase the probability that a superior health insurer will be available to the public. However, when more products enter the market, search costs increase. Thus, it is theoretically possible for more health insurance offerings to decrease utility.

A paper by Janssen and Moraga-Gonzales (2004) show that an the welfare impact of an increase in the number of sellers depends on the consumers’ search intensity. When consumers search with low intensity, having more firms will reduce search, will not affect expected price and will to greater price dispersion. One can think that inexpensive and/or infrequently purchased items would fall in to this category. When consumers search with high intensity, an increase in the number of firms will increase searching and decrease prices. In the 401(k) market, when employees are offered more than 10 choices, there are reductions in consumer responses (i.e.: less investment switching occurs).

Frank and Lamiraud aim to analyze how the number of firms affects insurance choice in Switzerland. They use a panel survey from the Federal Office for Social Insurance (OFAS). It contains a sample of 2152 individuals and asks about their insurance coverage between 1997 and 2000. Yearly premiums are available at the Federal Office for Public Health (OFSP) website. While there was consolidation in the health insurance market among firms, the average number of health plans offered per canton increased from 39 in 1998 to 52 in 2003. The number of people switching plans was 4.8% in 1997, 5.4% in 1998, 2.7% in 1999 and 2.1% in 2000.

How do people choose their plan?

…40% of people choose a health plan following their parents’ and friends’ choices, and what they see as tradition. Furthermore, as many as 25% individuals declare that they do not strive to pick the health insurance plan with the lowest premium. A substantial number of people explicitly report staying with their health plan based on habit (13.5%) or because they are satisfied with their arrangement (79%)

What do the authors conclude from the data?

First, we show that consumers that switch health plan pay 15% to 16% less in health insurance premiums per month holding ceteris paribus. Second, we show that among consumers expressing dissatisfaction with their health plans those in markets with fewer choices are more likely to express intent to switch. Finally, consumers that used an agent to help them purchase insurance consistently paid significantly lower premiums. This set of results suggests that “mistakes may have been made”.

Despite what orthodox economic theory states, no market is perfect. Understanding these market imperfection imparts important knowledge for economists and health policy makers.

• Richard Frank, Karine Lamiraud, 2008. “Choice, Price Competition and Complexity in Markets for Health Insurance,” NBER Working Paper #13817.

In November, I wrote a post about the Swiss healthcare system. Today, I am giving you a bullet-point summary, offering more detail concerning healthcare in Switzerland. Most of this information comes from Frank and Lamiraud’s working paper.

In the Swiss healthcare system:

• there is an insurance mandate for all individuals,
• the government defines a what the insurance benefit will be for all standard health insurers,
• insurance companies are not allowed to deny coverage to any individual,
• health insurance and medical procedure prices are made publicly available,
• in exchange for providing health insurance to consumers, insurance companies receive premiums from consumers and risk-adjustment payments from the government in order that insurance companies are not punished if they decide to insure a sicker population,