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many now and in Holland in the past-the carriers can go bankrupt.

Between Social Insurance Carriers and Private Insurance Companies

Over an earnings ceiling in Germany today and in Holland until the 1990's, certain classes of subscribers have had to buy statutory health insurance but may buy it from either the social funds or the private companies. Under either arrangement, the subscriber and his employer pay the standard payroll taxes.

As in the aforementioned choices among social insurance funds, the subscriber prefers a carrier that offers more benefits, better services, and an attractive public image. In addition, this category of persons prefers carriers that charge lower premiums, even if the benefit package is thinner. These people are younger, healthier, less at risk, and reluctant to pay extra cash to cover the costs of the worst risks.

The private carriers appeal to this group by offering lower payroll taxes (or premiums) and/or better benefits. They select preferred risks and have fewer expensive subscribers than the social insurance funds do.

This competition and the preferred risk selection arouse protests by the social insurance carriers and by the political Left: the social carriers are left with the elderly and other bad risks, and they run deficits; the private carriers do not share the burden of a supposedly universal social program; the taxpayer should not be forced to rescue the social insurance funds with subsidies, while the private carriers waste money, say the critics. Whether reforms take place depends-like many other health policies-on the political decisions of the government-of-the-day:

• The Center-Right Cabinet in The Netherlands during the 1980's amended the health insurance law and required the private health insurance carriers to keep their members after retirement. These companies can no longer force the elderly to transfer back to the overburdened and subsidized social insurance carriers, by charging them very high age-related premiums.

• In order to avoid punitive actions, the association of private health insurance funds in Holland has given the association of social insurance carriers several lump sums to cover the bad risks and elderly subscribers that the private carriers avoid recruiting and once avoided keeping.

• All the Dutch political parties agreed to amend the law in the late 1980's, making statutory health

insurance universal. Holland therefore ceases to be the last European country with a large unregulated private market, with benefits and premiums selected by the subscribers according to their own self-interest. Every Dutch citizen is now covered by payroll taxes, every social insurance fund and all private companies become carriers for basic benefits, every citizen has free choice of carrier, preferred risk selection by a carrier is banned, and the extra cash collected from the better paid persons covers the extra costs of the elderly and of the bad risks.

• None of these remedial measures have been adopted in Germany. Healthier risks steadily and voluntarily move to the "substitute" funds (Ersatzkassen) from the workplace funds (Betriebskrankenkassen) and from the regional funds (Ortskrankenkassen). As a result, many workplace funds run deficits and close; and the regional funds must charge higher payroll taxes and offer lower benefits than the substitute funds do. Legislative reform is blocked by the fact that the political party allied with the substitute funds (the Free Democratic Party) has been part of every coalition government in the national and most provincial governments for twenty years.

Among Private Insurance Companies

In these arrangements, one type of private market sells basic coverage to the upper income persons exempt from obligatory insurance, as in Germany today and in Holland until the 1990's. (Such a separate private market for basic coverage does not exist in Switzerland, since all Swiss get basic benefitsobligatorily or voluntarily-from the mainstream carriers who receive grants from government.) Another type of private market sells voluntary supplementary policies for those benefits not provided by statutory social insurance. It exists in all European countries, will survive in The Netherlands, is targeted at all persons, covers many people in some countries (such as France), but is purchased only by the wealthy in most countries.

Both of these private markets are very competitive, and subscribers do considerable shopping. Since these markets are not part of social insurance financed by payroll taxes and public subsidies, the subscriber pays his own cash. He may get a voluntary subsidy from his employer, but private employer group insurancecommon in the United States and in private insurance in Great Britain-is rare in Europe. Subscribers prefer private policies with the following characteristics:

• Lower premiums. Since they are affluent, they can afford higher cost-sharing (in return for lower premiums) and can afford to self-insure for routine services (such as general practice and pharmaceuticals).

• Adequate coverage of big risks.

• Coverage of specialists' fees. The patient is then guaranteed personal attention from the chief of service when he is hospitalized. Social insurance covers hospitalization in general and care by the entire medical staff.

Some new benefits attract subscribers, such as dentistry and long-term care.

The private insurance companies compete with the following offers:

• Lower premiums, particularly aimed at the young. Bursts of competitive price-cutting occur, preventing established private insurers from community rating and eliminating extra cash to cover the elderly redistributively.

• A great variety of options, particularly policies with schedules of lower premiums for greater patient cost-sharing.

• Limited policies that omit general practice. • Development of policies and literature making each company's offers appear unique and hindering consumers' comparisons among companies.

• Some benefits exceeding those of other companies, such as more generous coverage of physicians' fees.

• Occasionally individual companies offer completely new policies, such as coverage of long-term care. However, others quickly follow. Because regulatory bodies discourage undue insurance risk that will ruin the company and strand subscribers, the association of private insurance firms may design new packages for the entire industry. The companies then compete over variants and over price.

COMMUNITY BEARING OF RISKS

Every European statutory health insurance arrangement is part of the larger social security system, and the entire package is permeated by the vocabulary and spirit of "social solidarity." None of these countries are "socialist" in government or in economies: private enterprise, the pursuit of individual gain, and wide variations in income characterize their societies.

But health care financing differs and is designed to protect the vulnerable through redistribution:

• The poor, disabled, and elderly are guaranteed mainstream coverage under insurance. Public charity has been phased out.

• The healthy and wealthy pay into the social insurance funds payroll taxes or premiums higher than their actuarial costs, to provide extra cash for the bad risks.

• Governments use general tax revenue-based on progressive income and business taxes-to subsidize the social insurance carriers.

• In a few countries (such as France, Belgium, and Holland), the health insurance carriers with extra cash transfer some insurance revenue to the carriers with deficits.

• Price-cutting competition that would enable the rich and healthy to keep their cash and that would underfund the system is reduced by law or by regulation.

The trend is toward making the social insurance system a single pool. Any person (no matter how old or how unhealthy) can pick any carrier. No social insurance fund can reject an applicant, can charge an extra risk-related premium, or can force out a longtime subscriber after retirement. Each carrier is expected to raise enough cash to cover the bad as well as the good risks; only after that can it cut premiums or add extra benefits as competitive tactics to attract the healthier, richer, and more profitable subscribers. If a carrier faces deficits because of its portfolio, it is merged or subsidized. Party politics (and, ultimately, the configuration of interest groups) determines the timetable: this trend was achieved long ago in some countries with statutory health insurance (such as France and Belgium), is being implemented only now in Holland, and still has not yet been fully adopted as public policy in Germany.

COST CONTAINMENT

Government can announce and enforce levels of costs where its general budget pays all providerssuch as in Great Britain, Sweden, and Canada. But it cannot dictate total spending so easily in countries with statutory health insurance, since the carriers are autonomous, the providers are private, every subscriber is guaranteed access to all benefits without waiting, and doctors have complete authority to decide patients' needs and to prescribe care.

For many years, countries with statutory health insurance let patient demand, doctors' judgments, and provider prices determine costs. Payroll taxes were steadily increased, the earnings ceilings for the payroll taxes were eliminated in a few countries (France and

Belgium), and governments added subsidies to cover the deficits resulting from full coverage of the elderly and unemployed. Costs had to be controlled, since the payroll taxes became burdensome and governments had to curb their subsidies. But government had limited power over health insurance, carriers, and providers. Therefore, an elaborate system of negotiation among government Ministries, payers and providers has evolved to set and implement expenditure targets. Procedures differ among these countries, but all have multi-centered negotiations.

Setting Expenditure Targets

An "expenditure target" is a voluntary agreement among payers, providers and government to try to hold health care spending at a specified level for a specified time. A target may refer to all health care, health care traditionally covered by third parties, or a specific health care service (such as physicians, hospitals, pharmaceuticals, or laboratory tests).

An expenditure target states fiscal or budgetary goals that providers and payers voluntarily try to achieve. Expenditure targets are frequently agreed upon in order to obviate the need for government controls. An "expenditure cap," on the other hand, is a fixed amount of money allocated to a particular sector or to individual providers by government or by insurance carriers.

Expenditure targets are used to contain costs in European statutory health insurance. Expenditure caps are used in systems entirely financed by government, as in Canada, Great Britain, and Scandinavia. One of the few uses of fixed caps under health insurance is the payment of doctors in Germany from time to time, to be mentioned below.

The setting of expenditure targets-like everything else in European health insurance-results from negotiations among all the interested factions:

• In Holland, Belgium, France, and many Swiss cantons, the guidelines are negotiated among the Ministries of Social Affairs, Health, Budget, and Finance. Each Ministry is influenced by various interest groups in the population and by different factions in the governing coalition: Social Affairs (which usually directs the social security system) speaks for the trade unions, the health insurance carriers, and the left wings of the political parties in the governing coalition; Health speaks for providers (particularly hospitals), the workers in health, and patients; Budget must balance the demands from all Ministries, from all existing

government programs, and from the governing coalition's new proposals; Budget must minimize public subsidies to health insurance; Finance tries to avoid raising payroll and other taxes; Finance in practice represents business interests in expenditure and social policies. Each Ministry develops its case for higher or lower health spending with the help of its own statisticians. Once viewpoints diverged and Prime Ministers often had to mediate. But now everyone agrees that increases in payroll taxes and public subsidies should be avoided, all the Ministries agree on basic facts (particularly the expected yield of the payroll taxes next year), and all the Ministries agree on this expenditure target.

• In Germany, a standing forum represents all the interest groups, viz., the associations for doctors, hospitals, dentists, and pharmaceuticals; the business associations; the trade unions; the health insurance carriers; and others. It meets at least once a year and is called the Konzertierte Aktion im Gesundheitswesens. A staff from the Ministry of Labor provides data, particularly about the expected yield of payroll taxes. A committee of neutral experts-chiefly university professorsprepares options papers and special reports. The forum negotiates annual expenditure targets in all health sectors, usually within the expected fiscal capacity of the payroll taxes.

Hospitals

Payment under statutory health insurance in all countries uses all-payer rates. Since every hospital has its unique costs, it has its own rates, calculated to provide enough revenue to cover its budget, approved prospectively by the following methods:

• Germany's model of private negotiations is extended to the determination of its hospital rates. Every German hospital seeking reimbursement under statutory health insurance must fill out a retrospective cost report and a prospective budget every year, covering the hospital's entire business. The required information is specified in a law of Parliament. The forms are written by the staff of the Ministry of Labor, after consultation with the national association of hospitals and the national associations of health insurance carriers. Each hospital (backed up by its provincial hospital association) submits its proposed prospective budget for next year to a joint bargaining committee of the local health insurance carriers. They argue over the hospital's performance and needs. Usually they compromise over a daily rate that will cover the

hospital's costs next year and that binds all the carriers. In case of deadlocks, the hospital and carriers create an arbitration committee, which usually awards an increase pursuant to the expenditure target recommended by the Konzertierte Aktion.

• In most countries with statutory health insurance (such as Holland, Switzerland, France, and Belgium), the hospital's rates are set by investigators employed by government. They are impartial experts respected by all; they are essential because of the complexity of the subject and because they alone can compel production of the hospital's books in order to verify the hospital's statements of its financial needs. The regulator analyzes the hospital's prospective budget pursuant to detailed guidelines and expenditure targets sent down by the national Ministries. The local health insurance carriers also receive the hospital's prospective budget and retrospective cost reports, and they provide advice about the efficiency and quality of the hospital's past work, the hospital's need for its entire request. The hospital can appeal denials to the higher ranks of the regulatory commission (in Holland) or the higher ranks of the Ministry (in France, Switzerland, and Belgium).

Expensive high-tech programs can no longer proliferate around the country, fueling cost explosions. In most countries with statutory health insurance, government plays an important role by providing capital grants for new buildings and advanced new technology. Particularly in their early stages, governments try to limit the expensive programs to major centers with expert clinical staffs and high utilization. Duplication and low utilization are avoided. The rate regulators will not allow the social insurance carriers to pay the operating costs of unapproved programs.

Holland is one of the very few countries which (like the United States) allows its hospitals to borrow in the capital market, buy whatever they want, and amortize the capital costs in their operating budgets. Once the rate regulators were permissive. Now they are tightening approval of the operating and capital costs for high-tech.

Because government has limited power under statutory health insurance, because the hospitals are private or municipal, and because the hospitals have much political influence (usually in the political parties of the Center), hospital facilities planning is often weak. It is difficult to force hospitals to reduce beds or to close.

Doctors

The guidelines about costs are implemented as follows:

• Fees and other rules of practice under statutory health insurance are always negotiated every year between the medical associations and a joint bargaining committee from the associations of health insurance carriers. Because of the wording of the law and the need to win the cooperation of the doctors, government never dictates the physicians' pay. Most countries settle doctors' pay at the national level, but the Swiss negotiations occur in each canton. The fee schedules and other agreements apply to all payers except for the small market for private insurance and private out-of-pockets. Because rising utilization and service intensity have increased their medical services costs, the health insurance carriers now grant only small increases in fees. The carriers invoke the expenditure targets and argue that trends in utilization and service intensity threaten them with deficits. The annual negotiations over fees are often disputatious, but the medical associations usually settle, because they know that the sickness funds cannot grant more money than the probable fiscal yield of the payroll taxes, and because doctors' earnings rise as utilization and service intensity grow, even when the fees themselves (i.e., the "conversion factors") rise little. The medical associations can demand arbitration by government but usually don't: they will lose an appeal nowadays, since their incomes rise substantially from utilization and service intensity even when their fees rise little, and since all political parties (even the conservatives) and the government's finance officers expect such an affluent occupation to accept restraint.

Balance billing is illegal under statutory health insurance in some countries (such as Holland and Switzerland). It is allowed in a few countries under the social insurance contracts (such as France and Belgium). But it is infrequent: doctors usually extra-bill only the wealthier patients.

• Utilization and service intensity are difficult to limit. Doctors have full authority under the laws of medical practice and social insurance to prescribe whatever they think the patient needs, and the health insurance carriers are obligated to pay. Health insurance carriers collect the claims data, create statistical profiles, identify some deviants who seem to file too many claims, and employ control doctors to caution the overbillers. But these methods have been hesitant and ineffective. Health insurance carriers and medical associa

tions in some countries (such as France and Belgium) now try to implement effective utilization review as part of the joint negotiating machinery.

In Germany, the health insurance associations turn over both the money and the utilization review task completely to the medical association. The German method-used at times of strict cost containmentrepresents the only fixed expenditure cap over physicians' reimbursement under statutory health insurance, but it is administered completely by the doctors themselves. Under this system, the doctor is not guaranteed the same fee throughout the year. If utilization and service intensity rise faster than expected so that the account faces deficits, the managers reduce the fees for new claims. In countries with targets rather than caps, the insurance carriers pay all claims in full, reallocate or borrow to cover the excess over the expenditure target, and limit more strictly their conces

sions to the doctors in next year's negotiations.

Pharmaceutical Drugs

Governments play a larger role, since the health insurance carriers cannot cope by themselves with such a powerful and complicated industry. Although a smaller proportion of total health care costs than hospital and physician spending, drugs grow too.

• All governments license drugs to ensure safety. Some regulate prices for all citizens.

• Most countries with statutory health insurance have formularies limiting the number of drugs to be reimbursed under the programs.

• All countries require patients to pay some of the drug costs under social insurance, to discourage over-prescription and waste.

• Utilization is difficult to control, since all doctors have the right to prescribe what they think best, the newest drugs are very expensive, and the carriers are obligated to pay. At best, various regulations and financial incentives try to persuade doctors, pharmacists, and patients to prefer the less expensive generic substitute.

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