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West Germany has about 11 hospital beds per 1,000 population, which is about twice the comparable American number. Close to half of all West German hospitals beds are in publicly owned facilities, mainly municipal hospitals. Another 35 percent of beds are in private, not-for-profit community hospitals, and close to 13 percent are in privately owned, for-profit facilities.

As a rule, the capital budgets of West German hospitals-even of privately owned, for-profit hospitalsare furnished by the state governments, subject to a regional plan. The operating funds of hospitals, on the other hand, come from the nation's health insurance system in the form of predetermined per diems that are negotiated by each hospital separately with regional associations of health insurers, under an allpayer-system.

At this time, the average cost per inpatient day in West Germany is about DM 300 ($ 180), although there is some variation about this average, depending on the type and location of the hospital. About 15 percent of the total per-diem cost represents the salary of hospital-based physicians. An inclusive perdiem cost of $ 180 or so may seem extremely low by American standards, but it is not strictly comparable to the American per diem cost, because the average length of stay in West German hospitals is over twice the American average. Part of that differential reflects the widespread use of West German hospital beds for long-term care. But average length of stay in West Germany is close to twice the American average even for well defined cases, such as a normal vaginal delivery. The average patient-day in West German hospitals is thus not at all the same as is an American inpatient-day. Even so, it might be very interesting for Americans to study the West German hospital industry more closely to ascertain whether significant cost differentials remain even after adjustment for case-mix and length of stay.

Figure 2 presents compact data on the sources and uses of direct health-care expenditures in West Germany. The Statutory Health Insurance system accounts for about 70 percent of these outlays and private health insurance only about 7.4 percent. In contrast to the United States, where over 40 percent of direct health-care expenditures now flow through government budgets, only about 12 percent of West German health expenditures come directly from government budgets.

It will be noted that the West German hospital sector absorbs only about 36 percent of total direct health expenditures, and that figure includes the salaries of the country's over 80,000 hospital-based physi

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expenses for health care at the time such care is received. By contrast, American households pay directly out of pocket some 26 percent of total direct health expenditures, which is the highest degree of cost sharing by patients in the industrialized world. This circumstance may come as a surprise to those who view excessive health-insurance coverage as the main culprit behind America's high health-care expenditures.

A quite unique feature of the West German health system is the so-called "Concerted Action" (Konzertierte Aktion), an annual assembly of all of the stakeholders in the country's health care system. This annual assembly was mandated by Federal law in 1977. It includes representatives of the associations of all of the providers (including pharmacists), of the Statutory and private health insurance carriers, of the pharmaceutical industry, of the major unions and associations of employers, and representatives of the state and local governments. It is the task of this assembly to establish annually broad, national guidelines for the economic development of the health care system, among them the overall growth in expenditures relative to the expected growth of the Gross National Product (GNP).

The assembly was intended by government to serve as a consensus-building device. It does not have governmental powers. For example, the guidelines it establishes are not legally binding upon any of the parties; they merely serve as benchmarks for negotiations over fees, prices and per diems of health services that take place annually at the state level between associations of insurers and of providers. The assembly has, so far, carried forward its work with varying success, but is generally credited with having had some constraining effect on negotiations at the lower level. Furthermore, its work is widely covered in the media.

WEST GERMANY'S

HEALTH INSURANCE SYSTEM

Virtually the entire West German population has comprehensive health insurance coverage for a very broad range of benefits that includes ambulatory physician care, all inpatient care, prescription drugs, dental care, medical supplies and appliances, and even recreational stays (the so-called Kuren) in health spas following major bouts of illness or merely a state of exhaustion. With minor exceptions, the covered services are made available to patients free of coinsurance

and deductables at point of service. Until the HealthCare Reform Act of 1988, the sickness funds even paid for taxis the elderly might take to see the doctor.

As a general rule, all West Germans have free choice of doctor, hospital, pharmacist and other providers of health care. Closed-panel arrangementssuch as the American Preferred Provider Organization (PPOs) of Health Maintenance Organization (HMOs) that lock patients into defined subsets of providers-are unknown in West Germany, although there had been unsuccessful attempts to introduce HMOs in West Germany prior to World War II.

The comprehensive insurance coverage enjoyed by West Germans is provided by a highly structured and highly regulated insurance system that cannot be easily labelled as either private or public in the American sense of those terms. About 90 percent of the population is covered by the so-called Statutory Health Insurance system (the Gesetzliche Krankenversicherung or GKV) that has, for over one hundred years, constituted the backbone of the country's health-insurance system. Close to 9 percent of the population is covered by private, commercial insurance carriers. The remainder is covered by various governmental programs, notably those for the police and the military. The number of uninsured individuals at any point in time is below 0.3 percent.

Figure 3 provides a road-map of this structured health-insurance system. The percentages shown in that display represent the fraction of the West German population belonging to each type of insurance carrier.

The Statutory Health Insurance System (The GKV)

The Statutory Health Insurance System (the Gesetzliche Krankenversicherung or GKV) is composed of some 1,200 fiscally independent, self-governing, not-for-profit sickness funds, each of which serves either a specific, typically small geographic area (the Local Sickness Funds or Allgemeine Ortskrankenkassen), or the workers of a particular firm (the Betriebskrankenkassen), or members of a particular trade or craft (the Innungskrankenkassen). Together, these funds are commonly referred to as the "RVO" funds. They have been the corner stone of the country's social security system, which dates its

3 There are some co-payments for certain dental procedures and for some higher-priced brand-name drugs for which lower-priced substitutes are available.

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Subsequently, there were added to the RVO Funds the Substitute Funds (Ersatzkassen) for white-collar workers. There are now 15 such funds, each of them operating nationwide. The Substitute Funds, too, are subject to the federal insurance statute and form an integral part of the Statutory Health Insurance system (the GKV). Until very recently, blue-collar workers in the Statutory system did not have access to the Substitute Funds, which were reserved strictly for white-collar workers. The latter, on the other hand, could elect membership in either a Substitute Fund or the RVO fund relevant to their locality or company. Since the Health Reform Act (Gesundheitsreformgesetz or GRG) of 1989, however, blue-collar workers exceeding a certain income limit may elect membership in either their appropriate RVO Fund or a Substitute Fund or private health insurance. It can be expected that, before long, the archaic distinction between

4 Incidentally, the RVO Statute has served as a model also for the Dutch and Belgium health insurance systems.

blue- and white-collar workers will disappear altogether from the Statutory system.

Every West German is entitled to join the Statutory Health Insurance system. An individual's "membership" in a Statutory sickness fund automatically covers all of the member's dependent family members. Membership in the Statutory system compulsory for employees with a specified income limit (currently about DM 55,000 ($30,000) per year) and for retired persons who had belonged to the system during their work life. At this time, roughly three quarters of the 90 percent of the population insured under the Statutory system are compulsory members. The remainder have joined the system voluntarily.

Once a West German joins a particular sickness fund within the Statutory system, he or she typically remains with that fund for life, unless his or her income rises above the threshold below which Statutory insurance is compulsory and the individual exercises the option either to join a Substitute Fund or to choose private health insurance.

Employed sickness-fund members pay for their own and their families' insurance coverage with a contribution that is strictly a percentage of their total compensation (roughly, salary and fringe benefits before taxes) 5 and not at all related to either the size of the family or its health status. The premiums of retired persons are paid by the retirees' pension funds in the form of a flat percentage of the retiree's pension (now a national average of 12.9%). That percentage is equal to the average payroll contribution rate (the Beitragssatz) working members make to the fund.

Obviously, the premiums paid by the elderly are much below the true actuarial cost of caring for the elderly. In 1989, for example, the premiums paid by the elderly covered only about 40 percent of the sickness funds' outlays on the elderly (in 1977 that percentage had still been as high as 65 percent). The difference is made up by cross-subsidies paid by working members of the funds, a transfer that is becoming a source of contention among the generations. Funds with a particularly heavy load of retired members receive compensating contributions from a national reserve fund (the Krankenversicherung der Rentner). The objective of that system is to equalize across the various sickness funds the financial burden imposed by the aged on working members.

Because premiums in the Statutory system are based on ability to pay and cover also the insured

The system maintains the fiction that half of this contribution is paid by the employer and half by the employee. In fact, of course, the total contribution can be thought of as being paid out of the worker's gross wages.

member's dependent family members, while commercial carriers charge premiums based on actuarial cost, most individuals who do have the option to seek private coverage nevertheless prefer coverage under the Statutory system as well (although there has been somewhat more rapid migration to the private system in recent years). Furthermore, under the recently passed Health Insurance Reform Act of 1989 (the Gesundheitsreformgesetz or GRG), persons who have opted out of the Statutory system in favor of private health insurance lose the right ever to return to the Statutory system (as they hitherto could). Younger, single persons who may now find it financially advantageous to exit the Statutory system may later come to regret that step when they found families. They will therefore think twice before opting out of the system.

Administration of the Statutory System-The Statutory sickness funds are managed within the private sector, under the stewardship of boards of trustees, half of whose seats are filled from the ranks of unions and half from the ranks of employers, with the chairmanship rotating between these two groups.

In principle, each of these funds is to be fully financed by its members, who are either workers or retired persons. Since passage of the Health-Care Reform Act in 1988, however, sickness funds in particular fiscal distress do in some states receive crosssubsidies from financially better of funds.

Although the Statutory sickness funds tend to consider themselves part of West Germany's private sector, they are at best a distant cousin of what Americans would consider the "private sector." The Statutory funds operate within very tight Federal statutes that, as noted, dictate not only the catalogue of benefits these funds must offer their members, but also their governance, as well as their fiscal and regulatory relationships with the providers of health care. One may therefore think of the Statutory system also as a private-sector extension of the government's will. They are private, self-financing and self-governing entities charged with certain governmental duties and, therefore, endowed with certain governmental powers, among them the power to levy payroll taxes on employed persons and their employers and to redistribute economic privilege among its members.

Compensation of Providers Under the Statutory System-Within a region (usually a state or a sub-state region), the Statutory sickness funds join together in associations to negotiate with counter-part associations of physicians schedules of fees that must be accepted by the individual physician as payment in full. The regional negotiations are based on a

national relative-value scale (the Einheitlicher Bewertungsmassstab or EBM) that is negotiated for the entire Statutory Health-Insurance System between national associations of all sickness funds and the corresponding national associations of sickness-fund physicians.

Although, as members of the Statutory Health Insurance system, the Substitute Funds (Ersatzkassen) share with the RVO Funds the common, national relative-value scale for physician services, they negotiate the monetary value per relative-value point separately with the corresponding regional physician associations and have traditionally paid slightly more than the RVO Funds. In 1988, for example, they paid physicians Deutsche Mark (DM) 0.0935 per point, versus an average of about DM 0.0915 per point paid by the RVO Funds. The RVO Funds in a region all pay the same fees to physicians. Americans would describe such an arrangement as an all-payer system.

In 1985, the sickness-fund physician associations agreed to accept an overall expenditure cap for their services. Although it had been hoped by the associations that this cap would eventually be lifted, the cap is still in place and is apt to remain so for the foreseeable future. Because all Statutory sickness funds work with the same relative value scale, it is easy to implement the cap under that system: if the utilization of services threatens to put total expenditures over the cap, the monetary value per relative-value point is automatically reduced.

The expenditure cap is negotiated annually as so many Deutsche Marks (DM) per insured, after adjustments for age and sex. Once that amount has been set, the total budget is turned over by the sickness funds to their counter-part physician associations who then disburse the fund to their members on a fee-for-service basis. In a nutshell, then, the system subjects all physicians to a zero-sum-game jealously watched by the physician associations themselves. It is they who police their own members.

The introduction of the expenditure cap for physicians has not led to the rationing of health care, a consequence widely predicted by the American Medical Association for the expenditure targets proposed for the United States. On the contrary, the steady decline of the monetary value per relative-value point in West Germany suggests that the number of services delivered to patients has increased substantially as a result of the cap.

The Statutory sickness funds negotiate jointly with each hospital a predetermined, binding per diem based on approved, projected line-item operating budgets.

As already noted, these per diems now average about $ 180. There has been some experimentation with reimbursement by DRG on the American model, or with a system that combines a basic per diem with a fee-for-service catalogue for ancillary services.

Unlike the typical American health insurance policy, West German insurance policies typically provide fairly complete coverage also for dental care (including dentures) and for all prescription drugs.

Dentists are paid negotiated, predetermined fees for their services. These fees have been so high in recent years that West German dentists enjoy a higher income than do West German physicians in private, ambulatory practice (who earn a pre-tax net practice income of about $ 90,000). In order to curb the disproportionate growth in their outlays for dental care, which appears to be driven by outlays for dentures, recent legislation has mandated substantial cost sharing by patients for dentures.

Until January of 1989, both the private insurance carriers and the Statutory sickness funds paid pharmacies the full retail price of whatever medications physician had prescribed. Patients did not share in the cost of prescriptions drugs, but merely paid a modest fee (DM 3) per prescription. The price the insurance carrier was forced to pay the pharmacist was the sum of (a) the manufacturer's price, which the manufacturer was free to set plus (b) a regulated, fixed wholesale mark-up plus (c) a regulated, fixed retail mark-up. The private carriers and the sickness funds all pay the same retail price.

This open-ended pricing policy left the demand-side of the market effectively without countervailing power. Combined with the effect of full-insurance coverage, it led to a relatively large allocation of West German health-care expenditures on prescription drugs. As is shown in Figure 2, close to 17 percent of total direct health-care expenditures in West Germany go for the payment of pharmaceuticals. In the United States, where over 75 percent of all drugs and sundries are still paid for directly by patients at point of receipt, only about 7 percent of total direct health-care expenditures goes for that item.

To control the large outlays for prescription drugs in the West German health system, the conservative Kohl government drastically altered the payment for insured prescription drugs as part of its so-called Health-Care Reform Act passed in November of 1988. For West Germany's pharmaceutical industry, this Act has been nothing short of revolutionary. It is bound to shrink the size of that industry in the years ahead.

Henceforth, prescription drugs are to be assembled into groups of "equivalent" drugs, where the definition of "equivalency" is to be broadened gradually over time eventually to include groupings of totally different chemical substances deemed to be "therapeutically equivalent" (Phase III in the evolving definition of "equivalency"). Under the new pricing policy established by the Act, the insurance carrier covers fully only the price of a selected low-cost drug in the equivalence group-typically a generic. If patients or their physicians insist on a higher-priced brand-name drug, the patient must pay the price differential out of pocket.

So far, the publication of the first equivalence groupings and the least-cost for each has completely shocked the pharmaceutical manufacturers and has led brand-name producers to slash their prices by up to 40-50 percent for competing drugs within the announced groupings. They have done so, because they fear that West Germany's spoiled patients will never consent to paying sizeable sums out of pocket for brand-name drugs in the equivalence groups.

The Commercial Insurance Carriers

The roughly 5.5 million West Germans (close to 9 percent of the population) covered by the 42 private, commercial (for-profit) insurance carriers in 1986 include civil servants, self-employed individuals, retirees who were covered by private insurance during their work years and white collar workers with an income above about DM 55,000 or $ 30,000 per year (in 1989/90) who have chosen to opt out of the Statutory system.

As already noted, the premiums charged by the pri vate carriers reflect the actuarial risk of five-year cohorts. Unlike the Statutory system, which employs coinsurance only sparingly, privately insured patients may choose among alternative plans, with varying degrees of cost-sharing and commensurately varying premiums.

An insured who enters an insurance contract with a private carrier pays the premium appropriate for his or her five-year cohort at that time. Thereafter, the premium is not raised further as a function of the insured's age. It can be increased only to reflect general increases in health-care costs that affect all age groups. In effect, then, this premium structure resembles the level-premiums American life-insurance companies levy for their whole-life life-insurance policies. And like these policies, a private West German health-insurance policy overcharges young people rel

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