larly small business firms with weak market powerto furnish proportionately more of the providers' revenue. At the same time, the public sector is likely to shift financial responsibility for low-income, uninsured working Americans onto the shoulder of private business by mandating employer-paid health insurance. In return, the business sector-once again, particularly small business firms can be counted on to ask for mandated open enrollment and communityrating, on the underwriting side of health insurance, and for common fee schedules applying to all payers, on the reimbursement side. That system would occupy cells D, E and F in Table 1.

The remainder of this report provides a synposis of West Germany's health system, with primary emphasis on the insurance facet. The first section below is confined to the country's health-care delivery system. The West German health-insurance system is described in the following section. The last section concentrates on insights Americans might draw from the West German experience.

*Note: Technically, whenever the receipt of health care is paid for by a third party rather than by the recipient at point of service, it is financed out of a collective pool and is thus "socialized" financing. In this sense, private health insurance is just as much "collectivist" or "socialized" as is government-provided health insurance. Both forms of financing destroy the normal working of a market, because both eliminate the individual benefit-cost calculus that is the sine-qua-non of a proper market.

West Germany's health system is concentrated in rows D, E and F of Table 1. It is even further removed from bona fide socialized medicine than is Canada's health system, because both the production and the financing of health care in that country are pluralistic (although both facets are rather tightly constrained by Federal statutes). At this time, for example, only about 12 percent of total direct healthcare expenditures in West Germany is paid for directly out of public budgets. The comparable American number is 42 percent.

It is probable that the American health system will eventually stumble toward an arrangement that will resemble West Germany's in important respects, with a tightly regulated, private health-insurance industry taking the place of West Germany's sickness funds. The scenario might be the following. Given the emerging pressures in the American economy, both the federal and the state and local governments are likely to continue in their attempts to procure health care for publicly insured patients at fees below the providers' full cost, leaving private business-particu

THE WEST GERMAN HEALTH-CARE DELIVERY SYSTEM

West Germany currently has a population of 61 million. That population is, on average, much older than that of the United States. In 1985, for example, only 15 percent of West Germany's population was younger than 15 years; the comparable American figure was 22 percent. On the other hand, close to 15 percent of the West German population in that year was older than 65 years, compared with only 12 percent of the American population. Table 2 presents these and other demographic data.

If the much older West German population were served by an American-style health-care financing and delivery system, the country obviously would have to spend much more on health care than does United States at this time, because the average per-capita health expenditures of older persons exceeds that of younger persons by a factor of 2 to 3. In fact, however, West Germany somehow succeeds in spending considerably less on health care than does the United States, as is shown in Figure 1. Total direct spending on health services and supplies amounted to less than 8 percent in West Germany during 1986, but to over 10 percent in the United States. 2

2 These numbers differ from the 11 percent or so that "national health expenditures" in the United States are said to be taking of "gross national product." The category of “direct expenditures on health services and supplies" excludes certain public health activities of the government, medical research, and construction of medical facilities, all of which are included in the

Yet one does not often hear talk of rationing in West German health care-certainly not nearly as often as that issue is raised in the United States. West Germany has more physicians per capita than does the United States, and also more hospital beds. The country prides itself on its advanced, research-oriented pharmaceutical industry and on its reliance on high-tech medicine, which reaches into the practice of most private practitioners. There is some evidence that a variety of high-cost, high-tech medical technologies are more abundantly available in the United States than they are in West Germany. But stories of "patient-dumping" or of poor patients who are denied access to available health care simply for want of ability to pay-a regular feature now in America's daily press-are completely unknown in West Germany. Such stories would horrify West Germans and undoubtedly would bring swift remedial action by government.

The West German health-care delivery system represents a pluralistic mix of private medical practices and both private and publicly owned inpatient facilities among which patients typically may choose freely.

Of West Germany's roughly 150,000 active physicians (about 245 physicians per 100,000 populations, compared with a comparable number of 220 in the United States), about 67,000 or 45 percent work in private, office-based ambulatory practice among whom patients have free choice. These physicians are compensated for their services on a fee-for-service basis, according to a predetermined and binding fee schedule that is negotiated between regional associa

broader definition of “national health expenditures." The term "gross domestic product" refers to the total output produced within a nation's boundaries, whether by nationals or foreigners residing within these boundaries. By contrast, the term "gross national product" refers to the total output produced by a nation's citizens, within the nation's boundaries or abroad. In practice, the two national output measures do not differ substantially in magnitude.

PERCENT OF GDP

INDEX, 1975 = 100

150

UNITED STATES

80

81

WEST GERMANY

82

DIRECT HEALTH-CARE EXPENDITURES, 1975-86 AS A PERCENT OF GROSS DOMESTIC PRODUCT

UNITED STATES

75 76 77 78 79 80 81

• Excludes Administrative Costs, Research and Construction. SOURCE: Schneider, Sommer and Kececi (1987).

83

83

84

65

85

Under the strict, statutory dividing line between ambulatory and inpatient care imposed by German law, physicians in ambulatory practice do not follow their patients into the hospital after they have referred a patient there, as is the custom in the United States. Instead, all inpatient physician services are rendered by the 80,000 or so hospital-based physicians who are salaried employees of their hospital. Among these hospital-based physicians, only the chiefs have the privilege of seeing private patients on both an ambulatory and an inpatient basis.

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

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.

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

* 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 contribu tion 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 the average payroll contribution rate (the Beitragssatz) working members make to the fund.

to

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 work. ing 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 vari ous 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

5 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 contribu tion can be thought of as being paid out of the worker's gross wages.