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Lecture #711 on Health Care

July 9, 2001

Perspectives on the European Health Care Systems: Some Lessons for America

By , , , , and

Introduction1

Robert E. Moffit: We Americans may enjoy unprecedented prosperity and undisputed military power, but we have no monopoly on wisdom, and we can certainly learn from the rich, practical, day-to-day experience of other nations. This is especially true in the complex and difficult area of health care policy.

Meeting America's Challenge
President George W. Bush and leading Members of Congress from both political parties have declared their intention to reform Medicare, the huge government health insurance program that covers 40 million senior and disabled citizens. They also have proposed to improve substantially the functioning of the broader private health insurance market with a view to reducing the large number of Americans who are without private insurance coverage while expanding consumer choice of health care plans and personal control of health care decisions.

The "Single Payer" Response
However, a significant group of public officials, in Congress and in the states, as well as several prominent American health policy experts, are suggesting a very different approach. In contrast to the President's bipartisan approach, they would prefer that the United States adopt a health care system based on the European, or Canadian, model: government management of the financing and delivery of health care services. Under such a scheme, perhaps most often described as a "single payer" system, the government is the universal insurer of health care for all citizens, and the government insurance is financed by general taxation.

Proponents of the "single payer" model or European variations of government management of the health care system often argue that changing to such a system would solve America's major health care problems. They say it would guarantee a superior performance from providers for Americans who are currently benighted by private insurance arrangements run by crass, insensitive, and overpaid health insurance profiteers. They say such a change would ensure a far more equitable, fair, and rational delivery of medical services to the American people.

The Big Question
But do we want the government to control the financing and delivery of health care? From the congressional debate on the "patients' bill of rights" for private insurance to the reform of the Medicare and Medicaid systems, this is, at bottom, the fundamental policy question. We know well the weaknesses and the distortions that afflict the private employment-based health insurance market. Government management of the health care system on a universal basis is another matter.

For Americans, the good news is that we do not have to rely on the noble intentions of public officials, the promises of superior performance by government officials, or the abstract formulas of public administration theory. On the crucial issue of how government institutions behave in practice in the management of health care systems, we have access to a more than ample body of experience.

The European Experience
Recently, The Heritage Foundation, in conjunction with the Centre for the New Europe (CNE), a prominent European public policy institution based in Brussels, Belgium, 2 held an international conference in Washington on precisely what Americans can learn from the European experience in health care and pension policy. With the kind assistance of Hardy Bouillon, President of the Centre, the presentations at the Heritage-CNE forum offer American policy experts a keen idea of:

  • What works and doesn't work in practice,
  • What steps are being taken to improve European health care systems, and
  • What key lessons the European experience holds for Congress, state legislators, and the American people with respect to the reform of public health care programs.

The advice comes from an impressive array of European health care policy experts: Philippe Manière of France, David Green of Great Britain, Paul Belien of Belgium, Johan Hjertqvist of Sweden, and Friedrich Breyer of Germany.

Some Surprises
Americans will probably be surprised to learn from the remarks that follow that Switzerland's health care system relies almost entirely on a system of private insurance. They might be surprised to learn that there is a growing reliance on the private sector in the financing and delivery of health care in Europe, particularly in the Netherlands, Germany, and Sweden. Even the labor government in Britain has entered into an agreement with representatives of the private health care industry to improve health care delivery in certain vital areas.

Reforms in Europe, where they are diligently pursued, have taken on a certain urgency. A major factor affecting recent health care policy making in Europe, including Privatization efforts, is the rapid aging of the European population. Continental Europe is comprised largely of countries that have rapidly aging populations. Although life expectancy has increased, fertility rates have decreased, and much of Europe faces demographic stagnation. This unfavorable ratio of old to young persons is far worse in major European nations than in either Canada or the United States.

The unfavorable shift in the demographic balance is particularly rapid in France and Germany, and will impose tremendous financial pressures on their existing health care-social security arrangements. America's Medicare and Social Security reformers should take note.

Some Lessons
For Members of Congress and state legislators, there are some valuable lessons from the European experience that should be less surprising.

  • If you insist on government management of the health care system, do not expect freedom from waste, inefficiency, or inequity in the delivery of care (look at France).
  • If you want to promise citizens a national or state program of universal insurance coverage, don't expect that you will be able to deliver universal access to high-quality health care. You won't and you can't (look at Britain).
  • If you want to fix prices for medical services, prescription drugs, or other medical devices, don't expect demand for these goods and services to be met or investment in research and development to continue apace. It won't (look anywhere).
  • If you insist, with a straight face, that in a government-run health care system, all of your fellow citizens will be treated equally -- regardless of their class, station in life, or disease condition -- you are not merely enthusiastic or well intentioned. You are lying.

Health care policy is complex and difficult. In the reform of America's public health programs, and in creating new opportunities for individuals and families in the private markets, policymakers at the state and federal levels should learn as much as they can about what works and what doesn't in every health care system. In that way, they can better determine what should and should not be done here. The experts assembled by the Centre for the New Europe who came here to speak are an excellent resource.

Robert E. Moffit, Ph.D., is Director of Domestic Policy Studies at The Heritage Foundation.

The Coming Crisis in France
Philippe Manière

France's health care system is typical of those of most European countries: It is a state-oriented system that operates with little concern for the economic dynamic of supply and demand or efficient management. As the client base of the system increases, without innovative policies to augment finances, curtail waste, and more effectively target services, a crisis is increasingly more imminent.

Problems in France's System
France's health care system is the epitome of mismanagement, riddled with opportunism. In France, about half of all the hospitals (and all the largest ones) are state-owned. They are run on the assumption that people will not pay. With high rates of refunds to patients, the system provides virtually free care, attracting clients from beyond the country's borders. It has been said that people from developing nations take cabs directly from the Charles de Gaulle airport to hospitals in Paris and that they can expect that even their taxi fare will be taken care of through French largesse.

Mismanagement of Hospitals
Mismanagement and waste compound the burden of the health care system. The majority of France's state-owned hospitals are managed in a way that is reminiscent of the old U.S.S.R. For example, in the average French public hospital, it is not uncommon for every window to be open, even in winter, because the heating system for the building cannot be regulated. With the only options being no heat or unbearably high heat, everyone opts for the latter and lives with open windows. Predictably, this is not very cheap.

Hospital staffing brings an added fiscal burden. No tasks are outsourced, since outsourcing is something that unions strongly oppose. The staff of an average French hospital includes carpenters, electricians, cooks, and people in charge of laundry.

Rising Expenses
Nearly all of the doctors outside of hospitals are "chartered" -- that is to say, their fees and the cost of their prescriptions are systematically refunded to the "assuré sociaux" who have national health care coverage, i.e., virtually every person in France. Any doctor who has a diploma has a right to be chartered upon simple request: The government cannot legally refuse to charter him. In other words, a diploma guarantees a right to public expenditures.

Meanwhile, the French can consult with as many doctors as they wish, as often as they wish, receiving refunds for their medical expenses that are as high as 70 percent to 100 percent. Any unpaid balance is paid by the mutual companies that most employers subscribe to for their employees. A patient does not pay for his doctors, and there is no gatekeeping for doctors' visits, whether to general practitioners (GPs) or specialists.

As might be expected, under this system, there are people who consult with doctors as often as five times a week. This is especially true of older people because they have plenty of time and enjoy being able to talk about their problems with someone.

When the demand for doctor care is met by a guarantee of unlimited services, with no costs and no constraints, the result, of course, will be a boom in health care consumption, and that is what France is experiencing. There is currently a 5 percent to 8 percent increase in expenses per year in real terms, resulting in enormous deficits and even greater problems when the rate of unemployment rises. When employment rates improve, the deficits are eased because more taxes come in. But as soon as employment falls again (which is not so uncommon in France), deficits come back, and they are here to stay as long as the system is not changed. In a futile effort to deal with this imbalance, the government issues continual prorogations of temporary taxes to pay for the deficits.

Cultural Factors
France's health care system was created in 1946-1947, just at the end of World War II and a time when the people who were in charge of France were given unlimited legitimacy because they had opposed the Germans. As a result, the historical legitimacy of France's state-oriented system makes it very difficult to challenge or change today.

"Unblocking the Money"
The system is also immune from criticism, in spite of waste and mismanagement, because it is rooted in the economic culture of France, where there is a general belief that the government can always step in with needed funds when a problem arises. When people talk about addressing deficits, they talk about the state "unblocking" money. This phrase -- to "unblock" money -- is very common in the French political and media arena. There is an underlying assumption that there is some huge amount of money that is typically blocked by evil politicians and (thank God) can be unblocked during times of crises, such as a flood or hurricane. Most of the people I know in France cannot seem to understand that there is no money "blocked" anywhere and that the government needs to raise money before it can give it away.

In the United States, when funding is discussed, it is not uncommon to hear that "the taxpayer will pay" for it. In France, it is said that "the government will pay" for it. There is a broadly based misconception that there is a pool of money somewhere that can be tapped without limits. In such a cultural environment, it is very difficult to implement reforms and to convince people that, in funding a social system, it is crucial to balance accounts.

"Medicine Liberale"
In France, physicians and other medical professionals form a powerful lobbying bloc that opposes any restriction of medical consultation. They invoke a right to what has been called "medicine liberale" -- the belief that all people have a right to consult any doctor. There is, also, a widely held belief that any Privatization or entry of competition in the arena of health insurance would only promote the interests of insurers and health care providers at the expense of their clients' health.

This attitude is central to the problems faced by France and continental Europe as a whole, and it is a factor that should not be underestimated by scholars and researchers. Many choices made collectively by the European people cannot be understood from a U.S. perspective.

This element of French culture is what I call an assumption of a "disjunction of interest." In the United States, most people do not think of it as impossible that what is in John's interest may also be in Peter's interest, but in Europe, there is a broad belief that there can be no common interest with the exception of the unifying entity of the state. As a result, any private agent who strives to reform a state-owned or socialized system (even one that clearly does not work) is treated with suspicion. The worst offense is to pursue private interest. This explains the French people's acquiescence with high taxation and their resistance to reform -- the fear that reform would be in the interest of some particular category of the people.

Wide-Ranging Effects
The devastating effects of such a system are far-reaching. Pharmaceutical companies and hospitals, for example, are becoming more and more constrained. Rather than addressing the need to reform the system, the government opts for a quick fix -- imposing homothetic price cuts. According to this lazy solution, the organization in charge of managing the health care simply tells all the producers of pharmaceuticals that, because expenditures are too high, they must cut all their prices, for example, by 5 percent.

This blanket policy is irresponsible. In certain fields of medicine, more investment is needed to support research and development. In other fields, there may be so much waste that prices should be cut not only by 5 percent, but by 30 to 50 percent. But to develop a well-targeted policy would require investigation and reform, which seems to be unthinkable to those who are currently managing the system.

As a result of failed policies, certain hospitals are now experiencing labor shortages. Recently, a hospital in Lyon was so desperate for nurses that there was consideration of importing nurses from Greece and Portugal. Fortunately, just in time, the hospital recognized that this would have been a recipe for disaster, given that nurses in Greece speak Greek and nurses in Portugal speak Portuguese while, typically, the people who are in French hospitals are French and speak only French.

The research and development area of pharmaceuticals has suffered from the cash-strapped health care system. Whenever a new drug arrives on the market, negotiations are made to determine the rate of refund that the health care body will accept. In comparison with other European countries, France's rate of refund for prescription drugs is very low. As a result, research and development is not funded and France's pharmaceutical industries, which ranked third in the world in 1975, have not produced a cutting-edge product within the last 20 or 25 years.

On the other hand, there are some companies that have learned to play the system to their advantage. In order to help the small laboratories (that never invent a thing) to make a profit and keep their people employed, the state has agreed to offer refunds for products that would be considered ineffective in any other country. There is, for example, a very popular drug in France that women use for "jambes lourdes" (heavy legs). This product is used in no other country because it has virtually no effect. Yet the people in France who use it have their costs refunded by the state. This is nothing less than a "gift" from the French state to the small pharmaceutical company that produces that product. In other instances, it has been reported that some pharmaceutical industries have made arrangements with the state to purchase official authorizations to market a product.

Another perverse effect of a system that promotes irresponsibility is that people abuse medicine and drugs simply because they are "free". people who visit their doctor, or multiple doctors, five times a week receive many prescriptions, which they often use together. Honest doctors would warn their patients of the dangers of mixing medicines. When two or three drugs are combined, it is difficult to predict what may happen, but when five to seven drugs are taken together, it is impossible. The only certainty is that the person's health will not be improved. In many cases, people suffer serious disorders only because they are taking too many drugs. Were they to quit taking all but the one or two drugs that were truly necessary, many of them would recover.

Finally, the system's waste of massive amounts of money and energy is having a very negative effect, not only economically but sociologically as well. Everyone is aware that the system cannot be sustained, but there is no reform. Therefore, French people tend to feel less confident and more reluctant to spend, invest, or create; they know a crisis in the health care system is inevitable.

Stubborn Allegiance
In spite of all that has been said about the flaws and failures of France's health care system, France miraculously appears to thrive. It is still a very wealthy country with quite robust economic growth and -- if one makes the reasonable assumption that half of the officially unemployed are happy not to work -- even its unemployment rate is acceptable. France ranks first, before Japan, in terms of per-capita exports, and it is the fifth richest country in the world in terms of GDP. It seems that a situation that should be hell is almost paradise.

LESSONS FOR U.S. POLICYMAKERS

As Philippe Manière explains, France's health care system faces an impending crisis. His overview here offers America's health care reformers some valuable lessons.

Lesson #1: Universal coverage does not mean universal access to quality care. In France, health care is non-negotiable; it is simply unacceptable that a person should suffer from the lack of care. Although people should have access to some form of health care coverage, the result of France's guarantee is a cash-strapped system riddled with abuse.

Lesson #2: Making across-the-board price cuts on pharmaceuticals to save money can have adverse effects. In France, such cuts tend to restrict research and development and to reduce the availability of cutting edge drugs, while other areas of medicine requiring significant reform are overlooked.


How can this be? Perhaps because the French have perfected the art of running while shooting themselves in the foot.

France cut its work week by 10 percent, for example, a step that should have devastated its economy. But it did not because, almost instinctively, employees increased their productivity. Like France's prosperity in spite of health care and pension systems that seem doomed, this outcome is not one that would have been predicted.

The French suffer with a system that is riddled with overconsumption, fraud, and waste because it is a system that is more aligned with the spirit and culture of the people than others might be. The people of the United States and the French may not be willing to make the same sacrifices toward the same ends.

Not long ago, I spoke with a taxi driver in the United States who told me of a friend who had a very serious kidney problem but was unable to have surgery because he had no money. The French would prefer a system that can be abused and overused to one in which people who are in need of treatment do not receive health care because of their financial situation. Very few Frenchmen and Europeans would sleep well knowing cases such as the one the taxi driver spoke of. Their health care system may not be economically efficient; it may even be absurd; but it is apparently the system that the French are most comfortable with.

Philippe Manière is editor in chief for economic and scientific affairs of Le Point, a weekly newsmagazine in France, and head of Le Point-Edition Affaires, a joint venture with Business Week. He serves on the Board of the Centre for the New Europe in Belgium.

A British Perspective
David G. Green, Ph.D.

Britain's National Health Service (NHS) was founded in 1948 at about the same time that the Communists took over China and introduced a similar centralized health care system. In 1998, the Chinese government began introducing a new system, which was based on social insurance, and in April 2001, it ended the old system. Hospitals are now encouraged to compete, and consumers are expected to pay. The first $240 of expenses is paid from a social insurance fund; thereafter, individuals must pay half the cost out of pocket. A mutual fund exists for those with exceptionally high expenses.

China's experience helps us to understand that many countries are trying to solve similar problems underlying health care. Its approach is not ideal, not least because insurance works best when it covers expenditures that are not easily predicted for any one individual; but China's approach does recognize the value of competition and price-conscious consumer choice. France's social insurance system is based on personal responsibility combined with solidarity across classes. Moreover, there is an understanding that free care would lead to irresponsible demands. By comparison, Britain's National Health Service recognizes the value of neither competition nor choice.

Providing Quality Care for All
The biggest challenge in providing quality health care to all is the result of the competing interests of two groups in the population: people who earn enough to be self-sufficient and who want some control because they have earned it, and those who are not self-supporting. Among those who are not self-sufficient, there are degrees of dependency.

Before governments took responsibility for the poor, it was generally accepted that health care was not exactly like other consumer goods. The provision of medical care has always had a moral dimension. Just as decent human beings would not let someone else starve, neither would they let someone die or suffer because of a lack of health care.

Before it became a government responsibility, doctors provided free care for the poor, or charities paid the doctors. Some hospitals and doctors charged according to income. Provident associations were created for people on low incomes: They paid what they could afford, and donors paid the rest. Friendly societies organized pre-payment schemes along mutual lines.

Today, government assumes the responsibility to provide health care, and the policy conundrum has been made more complex by political involvement. I will focus on one issue of overwhelming importance: how to decide what standard of care should be guaranteed to everyone. The standard will be lower than can be afforded by the rich, but it should not be obviously inferior to the standard generally available.

Health Coverage in Britain
One approach is to argue that all health care should be equal so that there is no difference between the standard of care enjoyed by the rich and the poor. Britain's National Health Service puts equality first, and successive governments have argued that ensuring equality requires public-sector payment and provision. NHS coverage is touted as being equal (uniform across the country and uniform between rich and poor), comprehensive, of the highest standard, and free at the time of use. Its aims are all superlatives, and part of the political problem is that if you criticize the NHS, it is very easy to come under attack for being against "the best."

In fact, the NHS achieves none of its aims, with the exception of being largely free of charges. Ironically, it is this determination of successive governments to avoid charges that has made it impossible to achieve the other aims.

The social insurance systems of France and Germany are also based on solidarity across social classes, but in these countries, it was accepted from the outset that personal responsibility should be encouraged and that free care would lead to irresponsible demands.

Health Coverage in France
To qualify for health coverage in France, it is necessary to have paid a social insurance contribution. In addition, fees are payable at the time of use and can be claimed back from the insurer or waived for the poor. The outcome in France has been that a very high standard of care is available to everyone without the waiting lists that characterize the NHS.

France has a reputation for central direction, but French health care is based on a compromise between egalitarianism and liberalism. All citizens are said to be equal, yet choice and competition are fiercely protected.

In France, individuals can identify on their pay slips how much they are paying for coverage and thus can form a view about whether the cost is justified. Consequently, the standard of care guaranteed by the state reflects the personal preferences of people who are self-sufficient through work. It is this high standard of care that is made available to all. France performs well on nearly all health status measures; when the World Health Organization ranked the world's health care systems in 2000, France was at the top of the league.

Compulsory health insurance covers the whole population, and contributions are charged as a percentage of income. Until recently, employers paid 12.8 percent of salary and employees 6.8 percent; but complaints by employers that they were meeting too much of the burden led to reform. Employers still pay 12.8 percent, but employees pay 0.75 percent of their salary toward health insurance plus an additional general social contribution of 7.5 percent of their whole income, including interest, dividends, and other earnings. Most, but not all, of this general social contribution goes toward health insurance.

Altogether, this means that the total cost of health insurance is about 20 percent of payroll, including the employer's and employee's contributions. The insurers are non-government, nonprofit agencies, which owe their allegiance to employers and employees. In addition to their compulsory contributions, most employees pay an additional voluntary 2.5 percent of their salary to a mutual insurer.

The French have complete freedom to choose their doctor, whether a general practitioner (GP) or specialist. They typically pay their doctor's fee and then file a claim for 75 percent to 80 percent of the payment. Because requiring payment up front might deter the poorest people from seeking care, about 6 million people are not required to pay.

All patients, whether they are exempt from co-payments or not, may go directly to a specialist either outside or within a hospital. The French dislike GP gatekeepers. French national insurance makes no distinction between public and private hospitals, and patients have unrestricted freedom of choice. Public hospitals provide about 65 percent of the available beds.

No doubt, it will be said that the French government has been trying to control costs. It has, but it has done so under a system that deliberately encourages responsible consumer demand by requiring modest consumer payments. It also has a built-in safety valve of supplementary insurance, in case the wishes of the French government are out of sync with the preferences of the French people.

The result has been that, as the government has tried to lower expenditures since the 1970s, the French people have taken up the slack. In the 1960s, about 30 percent of the French people paid privately for supplemental health insurance. The proportion increased to 50 percent in the 1970s, and today about 85 percent of the people purchase private supplemental insurance.

To a central planner, the French system may look like a chaotic mess, but in reality it is a pragmatic blend of consumer choice, professional autonomy, central regulation, and a government-backed guarantee for the poor that exceeds the NHS standard by far. Like the Belgians, the Dutch, and the Germans, the French, in their own way, have discovered how to universalize the benefits of a competitive market. The NHS, in contrast, has universalized the drawbacks of the public sector.

Regulating Pharmaceuticals
I have argued that the French system of social insurance -- competition combined with supplementary insurance and out-of-pocket payment -- is better than the NHS. The French system of regulating pharmaceuticals is, however, one of the worst in the world.

In addition to national control through the national objective on health spending, known as ONDAM, the pharmaceutical industry in France is bound by the Pharmaceutical Sector Agreement and by complex procedures necessary to gain approval for reimbursement. These involve drug evaluation by the Transparency Commission and price regulation by the Economic Committee.

The appendix of the Sector Agreement lists the permitted rates of growth by therapeutic class. Companies can either negotiate and sign a "convention" agreement with the Economic Committee or have their drug prices fixed, and probably reduced, by public decree. If sales exceed the target, companies have to make "penalty payments" of at least 25 percent of the excess. These penalties are called "quantity discounts for everybody." In other words, companies can be punished for selling too much of a product.

The British system, by comparison, gives each pharmaceutical company a target profit for all its sales to the NHS. In addition, there are measures to reduce demand, the latest of which is the National Institute for Clinical Excellence (NICE) established last year to evaluate medical technologies, especially new and expensive ones. Although its name implies independence, it is a department of the NHS. The chief rationale for NICE was that it would end "postcode prescribing."

The central dilemma of the NHS was brought to public attention in December 1999 by a gentleman who lived on the Norfolk-Suffolk border and suffered from motor neurone disease. He was unable to obtain Rilutek from his own health authority; had he lived a few miles away in the neighboring county, it would have been provided. As it was, he had to pay personally for the medicine. The Secretary of State for Health responded to this situation on national radio, declaring that he would end the "lottery of care."

How likely is it that NICE will end the "lottery of care"? A recent NICE appraisal of the glycoprotein IIb/IIIa inhibitors in the treatment of coronary heart disease is a case in point. The medication was recommended by NICE for use by two groups, one of which is patients suffering from either high-risk unstable angina or mild heart attack. For this group, the total cost was put at £17m [approximately US$12 million] 3 a year -- a net increase in NHS expenditure of £14.5m to £16m [US$10 million to US$11 million] since about 5 to 10 percent of patients already were receiving the treatment. Despite the NICE recommendation, the decision about funding still lies with health authorities and the clinical judgment with each patient's doctor. Whether or not the use of this new generation of drugs will increase following the NICE recommendation remains to be seen.

NICE may also slow down the process of scientific discovery. The imposition of a national policy for new technologies may be ill-advised because it assumes that all relevant evidence can be assembled at an early stage in the life cycle of new therapies. In reality, it cannot. Moreover, if NICE recommends delaying the use of technologies because it feels that "all" the evidence is not available, as it has done in its appraisal of beta interferon for multiple sclerosis, Britain will find itself looking overseas for studies from which to learn and will be free-riding on the experience of other countries. Indeed, if all governments took the same view, no experience would emerge to be studied.

The British government is taking too narrow a view of cost-effectiveness. Legitimate questions include: Does a new technology achieve its clinical purpose more cheaply than any known rival? Does it produce offsetting savings elsewhere in the NHS? Does it produce savings or increase productivity in the wider economy? Does it benefit patients even if it does increase total net expenditure? Many new technologies may bring corresponding savings elsewhere in the NHS or in the economy, but others simply add to total costs by permitting patients to benefit in entirely new ways.

The NICE Web site has a section for frequently asked questions. One is, "Will the appraisal process include wider costs and benefits to society?" The answer: "Companies will be free to submit any relevant data, although the NICE appraisal process will focus on the health benefits achievable from NHS budgets." These controls result from attempts to impose a single payer and a single provider in the United Kingdom.

One final question remains: If price-conscious consumer choice and market competition are acceptable to both French socialists and Chinese communists, why are they not acceptable to everyone?

David G. Green, Ph.D., is the founder of CIVITAS: the Institute for the Study of Civil Society in London. From 1986 until 2000, he served as Director of the Institute of Economic Affairs' Health and welfare Unit.

LESSONS FOR U.S. POLICYMAKERS

The question of regulating pharmaceuticals aside, the experience of the French health care model offers three important lessons for anyone seeking how best to provide quality health care for all citizens in a market-based system.

Lesson #1: Aim to make the market serve everyone, whether they are self-supporting through work or not. Governments should confine themselves to what they can do best and leave the rest to civil society. This implies that:

-- Governments should not try to be the single payer, because this will result in rationing; and

-- Governments should not impose a single provider, because this would mean that consumers could not escape bad service and incentives to raise standards would be diminished.

Lesson #2: Take into account the special nature of health care, which is partly a moral necessity and partly an ordinary consumer good. The element that is like other consumer goods is vulnerable to overuse when provided free. This recognition implies two further aims:

-- To get as close as possible to ensuring that self-sufficient people are completely price-conscious and that dependent people are as price-conscious as possible, and

-- To ensure that people who are not self-sufficient should not receive an obviously inferior service.

One approach to meeting these goals is to make a political decision about the guaranteed standard. Another is to apply a market test. Some countries have tried to determine the services that should be guaranteed for all citizens through a "core services" committee. In the United States, Oregon introduced a list of prioritized services. Countries such as France and Germany, in essence, apply a market test.

The state cannot guarantee the standard enjoyed by the wealthiest people, so it cannot honestly promise an "equal service" without suppressing all private health care. But it can underwrite the standard chosen by people on middle incomes who are spending their own money. The assumption underlying this theory is that, once a health insurance market is functioning, we can expect a popular-choice plan to emerge. This plan should be the basis of the government guarantee. This may result in a work-incentive problem, but that can be addressed.

Lesson #3: Avoid a compulsory link with employers, which would make it more difficult to move toward a system based on responsible consumers. If someone else seems to be paying, personal responsibility is diminished. However, collective purchase of insurance through voluntary groups, including employers, is often efficient. One promising approach would be to introduce individual refundable tax credits.



A Belgian View
Paul Belien

The rising cost of health care is a problem which has plagued governments in Western Europe for almost three decades. The root of the problem is everywhere the same: Health care is financed on a pay-as-you-go basis. Because funds are not set aside for the future and are spent for immediate needs, the healthy, usually young, people of today pay for the needs of the sick, usually older, people of today. In turn, those who are young and healthy today will rely on future generations to pay for their needs when they are sick and old.

Problems arise when the number of young people in a society declines. Then there are only two ways to keep the system intact -- either by drastically increasing the financial burden on those at the paying end or by limiting the quality and the availability of health care for those at the receiving end.

When Costs Override Care
As the financial burden on the young has become intolerable, European governments have chosen the option of cutting back the quality of health care. Certain medical treatments or drugs are no longer available to persons above a certain age or to persons who are considered to be too sick, or they are not made available at all, at least for a certain period.

Gradually, health care in Europe is becoming a horror story. This is not an exaggeration. Many people, even in Europe, do not realize what is happening, because they are confronted with this problem only when they get sick or when they have become old and frail. At that time, one is often in a weak position, and it is too late to raise one's voice.

Economic Euthanasia
But people in the medical and nursing profession know very well what is going on. In a March 28, 2001, article about Belgian hospitals in the Belgian weekly magazine Knack, a nurse is quoted as saying, "I am ashamed of my work. I would not want to be nursed in my own hospital."

Another nurse complains that the number of beds in her department has recently been lowered in order to cut costs, although the number of patients has not decreased. The nurse explains what happens if an extra bed is urgently needed: "We drastically augment the level of morphine that we give to the very sick, or we inject them with pentothal." In other words, they kill them. The nurses and the doctors call this "euthanasia."

The nurse I just quoted does not like what she has to do. "It is not good for the patient whose life is being terminated," she says, "nor for the new patient who now lies in the free bed and who puts his trust in us."

As early as 1996, the president of the Flemish League of Physicians, Dr. Anton Malfliet, warned against "economic euthanasia and government decrees which allow the elimination of certain categories of people, while at the same time resolving the pension problem."

Denial or Restriction of Treatment
Another method currently used to cut costs is to restrict the access of patients to costly health care services. Sometimes these services are denied to all patients; sometimes, only to certain categories -- for example, the elderly.

I have experienced the impact of this policy in my own family when, several years ago, my grandfather needed an operation. Because he was over 80 years old, my grandfather was given an old antibiotic that has drastic side effects: It causes deafness. Though there were other, but costlier, treatments available, the hospital gave the old drug to my grandfather because of his age. They knew about the side effects, but it did not strike them as unreasonable or unjust to reserve the modern treatments for people of a younger age group and to give old rubbish to the elderly.

A recent study shows that while over 50 percent of patients in the United States receive the latest, most effective pharmaceuticals for arthritis, they are available to only 15 percent of patients in Germany and the United Kingdom. The same trend is revealed with regard to cardiovascular medicine. In Italy and Belgium, the threshold condition for receiving the most innovative and effective therapy is having a cholesterol level of about 290 as well as proof of a family history of heart trouble, even though established medical opinion holds that a cholesterol level of 190 is the appropriate threshold for treatment.

New medications are a critical component of health care, yet patients in many European Union countries have to wait years before they become available. In most European countries, pharmaceutical companies must not only get approval from the national departments of health, but must also obtain pricing and reimbursement approvals before they can introduce a new drug into the market. Because this can result in delays averaging 18 months, many breakthrough medications are simply unavailable for extended periods of time. A study conducted by Europe economics revealed that, from 1995 to 1997, more than half of the new medications surveyed were unavailable through pharmacies in Portugal, Italy, and Greece. More than one-third were unavailable in Belgium, France, and the Netherlands.

The delays serve an economic purpose: Because the new products are more expensive than the old ones, by delaying access to the new drugs, the governments save money. Though European politicians try to save money by cutting services across the health care sector, pharmaceuticals are frequently targeted because cutting drug expenditures is relatively easy.

The Problem with Politicized Health Care
When politicians become involved in the health care sector, the inevitable consequence is the politicization of health care. For example, in June 1999, multiple sclerosis patients in Belgium had to fight very hard to get the government to reimburse a new drug, to the point of holding public protest demonstrations in the streets. At the same time, AIDS patients who were demanding reimbursement for very costly medical treatment received an immediate response. The AIDS lobby was able to muster enormous influential support from the media and the political establishment.

Politically Correct Decisions
Simply put, some diseases are politically fashionable and some are not. If you suffer from a "politically correct" disease, you get state-of-the-art treatment. You are not so lucky, however, if you are a patient suffering from a politically unfashionable disease. Some sick people are "more equal than others" in a health care system that has become highly politicized.

Shopping for Foreign Services
Throughout West European states, there are varying degrees of delay in different facets of health care, depending on the different political options taken. For example, patients living in France and Belgium have to wait longer for new drugs than do patients in Britain or Germany.

In France and Belgium, however, the government tends to favor surgical remedies over pharmaceutical remedies. As a result, although access to new, innovative drugs is restricted for a person living in Belgium, it is easier for him to obtain access to certain surgical treatments than it would be, for example, for someone living in Britain.

This has led to transnational medical shopping. In January, a Belgian newspaper featured an article on the phenomenon of Englishmen travelling to Belgium for inpatient surgery. In the article, a surgeon relates that many German patients also come to Belgium for heart surgery.

However, travelling abroad for surgery or buying drugs that are not reimbursed by the official health insurance system are options that are open only to very rich people or to privately insured patients.

The Move Toward Private Alternatives
In addition to the statutory or official health insurance provided by the state or the sickness fund, an increasing number of Europeans have private insurance to cover medical treatment that is not provided by the official system. Hence, a two-tiered health care system is developing. One tier includes those who can afford to pay twice for health care -- once via their income taxes or payroll contributions and once via premiums to a private insurer. The other is made up of those who cannot afford to do this -- those who are trapped within the official system and whose access to quality care is constantly diminishing due to politically imposed budget constraints.

Opting Out of the State System
There are, however, three countries in Europe that allow their citizens to opt out of the official system and to take with them the taxes or wage contributions they make to the official system to purchase private insurance in the health market. These countries are Germany, the Netherlands, and Switzerland. There, citizens do not have to pay twice in order to acquire private health insurance. The systems of these three countries are important in that they may point the way to a solution for the current financial problems Western health care systems are experiencing.

Germany
Germany's system is the prototype of the European sickness fund health care system. The most interesting aspect of the German system, however, is that Germany allows people whose income is above a certain level to opt out of that system. They are no longer obliged to pay a percentage of their wages to the sickness fund; however, they must use that money to buy private health insurance.

Over 10 percent of the German population has opted out of the public system. The premiums these individuals pay for private insurance are calculated not on the basis of their personal health risk, but according to the average health risk of their age group (in five-year cohorts). Over time, the insurance premium is never increased as a function of the insured's age. The premium remains at the level set for the age of an individual when he first joined the insurance plan. The premium can only be raised to reflect general increases in health care costs affecting all age groups.

This policy is an incentive for people to insure themselves at as young an age as possible. The younger the person when he or she enrolls, the lower the cohort's health risks are and the lower the premium will be. This system may seem good, but there is a problem. Like the government sickness funds, Germany's private insurers are predominantly financed on a pay-as-you-go basis. They, too, have almost no capital reserves. The payments of each cohort today are not set aside for their future needs, but instead are spent almost entirely on the contemporary needs of the insurance company's elderly clients.

Another fundamental flaw of Germany's sickness fund system is also present in private insurance: No money changes hands between the patient and the provider. Because German patients are not aware of what health care services actually cost, there is little sense of responsibility or incentive to economize.

Nevertheless, the German private system -- in which premiums are a function of the collective risk of an age group and are not raised from the time of initial purchase -- can provide an idea of what an equitable and fair capitalized private system could look like.

The Netherlands
Like the Germans, the Dutch also can leave the sickness fund system once they earn more than a certain income. The financial threshold is lower in the Netherlands than in Germany, and as a result, one-third of the population is privately insured.

In the Netherlands, private insurance is generally affordable to everyone because the highest risks (the so-called catastrophic health care needs, which are very expensive) are covered under a separate nationwide system. The Dutch have a compulsory government-regulated, single-payer system for expensive health risks and a sickness fund system for the other risks. Catastrophic health insurance is mandatory and paid for through income taxes. It covers very costly medical procedures and long-term care.

Such catastrophic care is financed by the Exceptional Medical Expenses Fund that all citizens pay into according to their income. In addition to long-term and catastrophic care, the fund also covers certain drugs and medical equipment. Though, in practice, this fund has been used for other things, the concept seems sound. Realizing that the costs of medical care for certain acute and chronic illnesses are exorbitant, the Dutch require all citizens to pay into a catastrophic pool. Non-catastrophic health risks are covered by the sickness funds.

In contrast with Germany, where individuals are free to leave the sickness fund and purchase private insurance when their earnings exceed a certain level, in the Netherlands, members are expelled from the public system when they reach a designated income level. In that event, they may buy private insurance, but they are not obliged to. Dutch private insurers offer a variety of services for their members; they provide patients with information about health care choices, and they create contracts with providers offering different types of care.

Switzerland
Switzerland has the least paternalistic health care system in Europe. It is the only country in Europe with a health care system that is based totally on private insurance.

Health insurance was made mandatory only in 1995. Premiums are not risk-related or linked to income, but are set on a per-capita basis with weightings for age of entry into a fund, regional cost differences, and sex. The government subsidizes poor individuals by paying a percentage of their premiums. These subsidies account for approximately one-third of health care funding by the Swiss Confederation.

Switzerland has also introduced a risk-adjustment system. All insurers in the market are required to pay a portion of the premiums or contributions they collect into a central fund. The relative financial risk of each insurer is then calculated, and insurers with a larger proportion of less healthy, high-risk members receive an amount from the fund that compensates for the higher financial risks involved in insuring their members. This type of risk-adjustment prevents a situation in which all low-risk people would flock to insurance companies that can keep their premiums low because of their minimal risks, while other insurers who have the majority of high-risk members would have to ask exorbitant premiums.

The Swiss health care system is self-managing. The health insurers set their own premiums, subject to the risk-adjustment system. Premiums differ from insurer to insurer, as do services they offer to patients.

The Swiss insurance funds have considerable freedom over the benefits packages they offer as long as they include the basic services outlined in the Health Insurance Law. However, even this law is relatively vague in its specification of required services. This has led to a considerable range of options for consumers. Thus, it is the responsibility of the Swiss people themselves to purchase health insurance coverage that best fits their needs.

Copayments are the linchpin of the Swiss health care system. They apply to primary care as well as hospital care and cover about one-third of the annual health care expenses. Copayments have the intention of discouraging over-consumption of health care services. Their levels are set by the government, and in most cases, the government does not allow citizens to insure against copayments.

Patients currently pay all their costs of ambulatory care up to the level of a deductible, which is currently around 150 Swiss francs per year (US$125), and then 10 percent of the costs above this level. There is, however, an annual maximum level of copayments. For adults, this is set at 500 Swiss francs (about US$420). Insurance funds are free to offer their customers higher annual deductibles in return for lower premiums.

For hospital care, patients have to pay the boarding costs for the duration of their stay in a hospital. It is possible to insure against copayments for these expenses, but not for primary care. There is also a copayment of 10 Swiss francs per day that patients are required to pay for hospital treatment costs. Citizens are not allowed to insure themselves against this type of hospital copayment.

Because one-third of Swiss health care is financed through direct patient copayments and it is illegal to insure oneself against most of these copayments, Swiss citizens have to rely, to a large extent, on their private savings in order to prepare for future health risks. As a result, the Swiss health care system relies heavily on capitalization. Because they have to pay a significant portion of health care costs themselves, the Swiss must set aside money for future needs. They find themselves "empowered" by a system in which they must make rational choices and informed decisions.

This system works so well -- even for the poorer and supposedly less educated segment of the population -- that it has led to remarkable results in comparison with other European nations. In terms of health care outcomes, Switzerland ranks among the top countries, and its position is improving among the other European countries with regard to nearly all health indicators. Though health care is privately financed in Switzerland, health does not appear to be related to wealth. One explanation may be that the Swiss system stimulates preventive action, encouraging people of all economic strata to adopt lifestyles and behaviors that reduce risks to their health.

As in all other countries, health care costs in Switzerland have also risen rapidly over the past decades. According to the Swiss authorities, development of supply (expanded facilities, growing specialization, and greater use of technology) is the fundamental factor in this increase. The impact of the aging population would not be very significant.

Cost Considerations
Private insurance-based health care systems are often criticized because premiums take into account individual risks and, as a consequence, can differ substantially. Germany, the Netherlands, and Switzerland have each reduced such inequities in their own way. In Germany, premiums are set as the average for risk pools of five-year age cohorts; in the Netherlands, very costly catastrophic chronic and acute medical risks are taken out of the private system; and in Switzerland, the government provides subsidies to groups with higher health risks.

The Benefits of Privatized Systems
Apart from the few private insured health care systems of Europe, European experiences offer little sound advice for reforming health care systems. It is true that the private insurance-based systems also have their problems, but there are at least three important arguments to make in favor of privatized and capitalized alternatives.

First, they constitute very interesting laboratories for health care reform. They are consumer-driven, and they provide an opportunity to experiment with interesting ideas, such as medical savings accounts (MSAs) and bonuses.

Second, in markets with an unrestricted supply of services and spontaneous competition, prices tend to go down because of consumer influence. For consumers to demand, choose, and pay for a service, that service must be good and reasonably priced.

Third, capitalization, even if it is only partial, can help the health care sector become one of the most important growth sectors of the future. Today, there are no adequate financial reserves available in the health care system. Without these reserves, economic growth is impossible. In a capitalization system, the money which is put into the system today is set aside for future needs. In the meantime, these savings will be invested and, as a consequence, will generate new capital.

There is another aspect of the problem that is seldom discussed but has broader implications. This is the fact that the health care sector is, in many countries, the largest single employer and the source of some of the most satisfying and rewarding jobs in our society. From high-tech careers to the caring professions, from research and development to the simplest nursing tasks, the health care sector is one of the key elements contributing to the economic prosperity of our countries; and as the population ages, even more economic activity will reside in this sector.

Ordinarily, the prospect of future economic growth of this kind would be a source of great exuberance. However, because health care in the Western welfare states is organized as a function of government, the cost of providing it is viewed as a problem. Indeed, with the current systems in place, and with the current sources of funding, and given the aging of the population, there is an enormous shortfall in health care funding which is constantly growing.

The present government policies to cut health care spending are wrong because they block the most important source of economic growth that can be anticipated from the changing structure of the population and the resulting changes in the life-cycle structure of economic demand. The present policies are also self-defeating. The attempts to choke off a natural development and expression of consumer needs will lead to an increasing pursuit of health care options outside the official national system.

The present policies even lead to an exacerbation of the existing problems. Indeed, to the extent that they are successful at slowing domestic spending on health care, they will slow the growth of the economy and the expansion of the government's tax base, making the maintenance of health care programs even more difficult.

In order to achieve patient empowerment, we need competition in health care services as well as an unrestricted supply of these services. All this has been lacking from the so-called market reforms in Europe. These reforms were actually a form of managed competition or the creation of internal markets within a global budget in order to control costs. However, if one does not allow economic growth and expansion, the market becomes a perversity and consumers lose their options. In managed competition, consumers have no say. The competition we currently see in European health care systems is a competition to cut costs by lowering the quality that is provided, or to attract healthy patients and discourage the sick. This is a parody of health care and of markets.

Markets and market mechanisms only make sense within a capitalist system -- a system that is driven by capital. The problem with European health care systems is that capital is running dry. In all of the European systems, even the present private ones, today's healthy and young foot the bill for today's sick and elderly.

Today, there are no adequate financial reserves available in the health care system. Without such reserves, economic growth is impossible. Therefore, we should transform our health care systems from pay-as-you-go systems into systems financed by means of capitalization. In a capitalization system, the money put into the system today is set aside for future needs. In the meantime, these savings are invested as capital and, as a consequence, generate new capital. Only this "capitalist" approach will allow the health care sector to expand.

Privatization of the health care sector can only be an answer to the current problems to the extent that it implies capitalization and, hence, an expansion of the health care economy. If, as is often the case today, privatized health care is also financed on a pay-as-you-go basis, private health insurers will also try to ration quality health care and restrict access to it. To simply replace the state with an insurance company is not a viable alternative to the current health care crisis, nor will it empower patients. If health care is rationed and patients' access to a treatment or a drug they need is blocked because of budget limits, it is hardly relevant to them whether the rationing authority is the government, a sickness fund, a health maintenance organization, or an insurance company.

LESSONS FOR U.S. POLICYMAKERS

The most valuable lessons to be learned from the health care systems of Europe can be found in recent experimentation with privatization.

Lesson #1: Move toward a funded system of health care financing. The pay-as-you-go financing underlying government systems makes healthy, usually young, people pay for the needs of older, usually less healthy, people. That appears rational, but it invites another set of problems.

When the number of young people in a society declines, there are only two ways to keep the system intact: increase the burden on those at the paying end or limit the quality and availability of care for those at the receiving end. In Europe, this often has meant the restricting or denial of the best care available based merely on the age of the patient. Only under a system that allows capitalization-reserving and creating funds for the future through private investment-will the health care sector expand to meet the needs of the future.

Lesson #2: Privatize health care delivery systems as much as possible to foster innovation and competition. Privatized health care systems are preferable to government-run and -regulated systems because they allow more experimentation, and because they can adapt more easily to any challenges the future may bring.

A privatized health care system is preferable to a government-run and -regulated system because it has one big advantage: It allows more room for experimentation. Privatized health care systems are better equipped for the future because they adapt more easily to challenges and allow for the introduction of innovative strategies. However, the most crucial element in patient empowerment is capitalization. Capitalism is the medicine that we need.

Paul Belien, a Belgian lawyer, is Research Director for the Centre for the New Europe. He previously worked as a journalist for the financial-economic weekly Trends in Brussels.

A View from Sweden
Johan Hjertqvist

In discussing future developments in the health care system in Sweden, it is important to consider three factors that will influence the decisions: values, relations, and recent challenges. Health care of tomorrow will be essentially a relations-based set of services. Every reform and every new system in health care must be designed on the basis of dialogues with its consumers, the patients. Any attempt to reform the health care system that ignores this fact is destined for failure.

Today's challenge in Europe involves three strong forces that are driving a movement toward change: values that are becoming more individualistic, the demographic reality that there will be more older people and fewer younger ones in the future, and new perceptions regarding the way that services can be delivered.

Changing Values About Health Care
In terms of a transition in values in the Western world, the United States is five to 10 years ahead of Europe. Sweden is following fairly close behind the United States -- a fact that may surprise those who look upon Sweden as an old-style, socialist welfare state. Values are changing -- not only among young people who are looking to address their health care needs, but also among the baby boomers who are, step-by-step, moving into a situation where they will have increasing needs for health care services.

Today's patient is far from yesterday's stereotype, who was docile, uninformed, and in a relatively weak position compared to that of the doctor. The characteristics of the new consumer are dramatically different. Today's patients are well-informed and demanding. They think critically, and they are building powerful networks.

It would not be unusual for a young person today who is first meeting his or her doctor regarding a particular illness to begin by saying, "Before I came to this meeting, I had a chat with a user group on the Internet, and we discussed relevant therapies. A couple of my friends who live in Australia and Germany told me that they were treated with a certain kind of very efficient drug. Now you are offering me another drug, which is second-class and is not even in use in those countries any longer. Why?"

From a doctor's point of view, a confrontation with this kind of patient activism would be a nightmare, but that is the direction of change in values and perceptions. Well-informed and articulate patients-consumers will be far more demanding. They will, of course, ask for a variety of services. They will demand freedom of choice and won't accept gatekeeper mechanisms. They will demand the right to a second opinion and will be members of powerful health care consumer groups.

Throughout Europe, changing values have also had an impact on health care employees. Health care institutions are meeting ever-growing complications when they try to recruit employees -- not only doctors and nurses, but all levels of personnel. Not very many young people are attracted by a sector that is often described in the mass media and public debate as being plagued with problems. Patients are waiting in the corridors for days, nurses have suffered mental breakdowns, doctors have committed suicide because of heavy stress, and the pay is generally poor.

This is exactly what would be expected from an old-fashioned crisis sector that tells the world it is (or at least wants to be) run like a competent business when, in fact, daily evidence shows just the opposite. Today's employees ask for modern organization in the workplace and reasonable, individually assigned wages that are related to their competence.

Demographic Changes Affecting Health Care
There has been talk about an "aging" or "dying" Continental Europe. Of course, somebody will have to survive -- or there will have to be an enormous immigration to this part of the world -- if our patients and senior citizens are going to receive the care they need.

Demographic changes have had a powerful impact with regard to recruiting employees as well as the demand for services. A rapidly increasing number of very old patients suffering from severe illness will dramatically increase the complexity of care. Today, doctors can successfully perform coronary operations on people who are as old as 85. This medical capacity, coupled with a change in values in which patients are demanding their rights, makes it more and more difficult to deny treatment to anybody with critical needs.

At the same time, a demographic shift will result in strong restrictions with regard to financing health care. When every man and woman in the European workforce is expected to carry two senior citizens on his or her shoulders, things will get tough. Tax competition is on a global playing field, and overburdened taxpayers can emigrate -- even from Sweden, the home of high-tax addicts.

Changing Mindsets in Europe
All of the above factors will influence the future of health care in Sweden and many other countries in Europe. It can safely be said that the old welfare state is on the run. There is word from all sides that confusion reigns. Conflicts have emerged with trade unions as signs of future changes and present realities confront old thinking about pensions, health care, and the labor market. A new brand of welfare society is emerging, leaving the traditional European welfare state behind. In Sweden, the Social Democrat government is beginning to accept this development as a tool to engender public efficiency, improve the quality of services, and meet the expectations of the middle class -- if not officially in party manifestos, in reality in its response to changes.

Last year, the Swedish Parliament passed a bill welcoming private providers in primary care and nearly all other kinds of health care services with the exception of emergency care.

What's most important is for Europe to change its perspective regarding the economics of health care. Traditionally, European politicians frown on any move toward the free market and declare that health care must be strictly rationed. They are afraid of over-consumption. They're afraid of new expensive drug therapies.

From the perspective of most European governments, a successful year is one in which there was a zero increase in health care costs. Very seldom do these politicians relate costs with outcome, as any business would.

From a rational business point of view, every cost increase should be accompanied by progress achieved. But within the health care system, that kind of expectation is seldom met. A "square-minded" perspective rules. A change of mindset with regard to costs and quality of service is a condition for the new system of health care to take shape, opening the gate for a more consumer-related approach within the welfare industry. The old-style point of view cannot address value-driven demand.

Individual well-being and quality of life are the number one priorities of more and more people. A clear demarcation between being sick or being well is being replaced by another, more relative view. Today, many people expect that, in spite of a chronic disease, an individual should still enjoy a high quality of life, with access to the kinds of therapies and medications he needs.

It is a bit early to predict where these changes will lead. In terms of pensions, a number of countries have entered a period of reform, but others have a lot of mental homework to do before they are ready to engage in that kind of "reinventing process." The situation is the same with regard to health care. Some nations will be able to move relatively easily in the right direction. For others, this process will involve a lot of pain and effort. Because health care is influenced by culture and local traditions, change will occur in different ways and at a different pace in different countries.

Recently, the political leadership of the European Union declared that Europe will be the number one arena for economic growth in the near future. That assumes that, in just a couple of years, Europe will outrank Asia and the United States -- an awesome challenge. It's rather hard for that kind of declaration to be trusted if such massive service industries as pension and health care are bound by a barrage of regulations. If European Union leaders such as Lionel Jospin and Gerhard Schröder are serious about the target they set for economic growth, they are going to have to confront this fact.

New Perceptions About Service
The primary problems facing the European health care system are economic restrictions, a shortage of workers, and an aging population. But an untapped solution may already exist.

Thirty years ago, every large company had one person who was appointed as a computer manager -- a technician in a white coat who was supposed to solve all computer problems of the entire company. Today, that position exists in very few companies. Instead, everybody has his or her own personal computer, and employees are expected to handle most computer questions on their own.

This development illustrates what might be called the "democratization of competence." This is an integral part of service production strategy. The machinery is simplified, and the potential of the workers is maximized. This means allowing people to grow in competence and to take on more complex work.

In any modern car factory, a number of workers, male and female, will be working on very complex assignments. These employees have not graduated from institutions like the Massachusetts Institute of Technology. They have basic training. Yet they have proven their competence to perform the entire gamut of the company's operations, such as planning the production, communicating with subcontractors abroad, and checking the quality of the goods. These are tasks that, just a few years ago, were within the domain of "experts in white coats."

This shows that people have enormous potential to develop their skills. It also tells us that procedures can be simplified and that various support systems can be utilized. This paradigm has important significance for the arena of health care, which is still a very bureaucratic and hierarchic operation. Employees are categorized not according to their individual competence, but with regard to their designated position.

Much of the strain on the health care system can be reduced if the competence of individual employees is maximized and their potential for growth and development is realized. Nurses can take care of many of the tasks of that doctors now perform. Within other categories of personnel, there are people who can take on many of the tasks that nurses do today. Even patients can take a much more active role in addressing their health needs through self-treatment, self-medication, and patient networks.

Reforming the System
The key to reforming and salvaging the health care system is to focus on results and outcomes rather than on budgets or procedures. New methods of service delivery and innovative assessments of the roles of patients and personnel could dramatically increase the overall efficiency and capacity of the system. A health care organization that is truly based on competence could serve its clients without having to recruit between 20 and 30 million new employees (the number that was considered necessary to meet the health care needs of Western Europe in the next generation).

Options for Reform
Given the projections for the future, two options are possible for meeting the health care needs of Europe:

  1. Organizing the entire system according to a competency-based paradigm, or
  2. Eliciting a massive immigration of a largely unskilled workforce from the Third World.

There is also the possibility of a mix of these two strategies. Within the next 10 to 15 years, most European countries will adopt an approach that involves some form of individual savings accounts, voucher systems, or another mechanism that gives the consumer the final purchasing power over health care services and elderly care. There is no reason why those decisions should be entrusted to HMOs and other entities when consumers are capable of making their own choices.

The Stockholm Approach
Stockholm has adopted an interesting approach to health care reform. Two million people live in the Stockholm region where the Greater Stockholm Council serves as the regional health care authority. In Sweden, health care is almost completely paid for by taxes. Patients pay a minimal out-of-pocket fee that is little more than $10. Everybody has access to all services, regardless of where they live and whether or not they are employed.

In the early 1990s, in an effort to meet the demand for services and shorten waiting lists, the center-right political majority in the Council decided to start replacing the traditional welfare state delivery system with a health care services market approach while retaining the elements of universal access and tax financing. The process started by contracting out technical services, ambulance services, laundry, cleaning, and other non-medical functions. In the next phase, a number of contractors competed for contracts to provide X-ray and laboratory services. The third wave opened up competition among the providers of primary-care services.

The Timbro Policy Group in Stockholm is conducting a four-year research project to determine how emergency services -- the "heart of health care" -- can be made competitive beginning in 2004. According to their plan, the large emergency hospitals in the region would become Council-owned corporations with professional boards. In 1998, one of the hospitals in the region, St. George, was bought by Capio, Inc., a major private Swedish health care company.

While it has accepted private, for-profit providers in the primary-care arena and for other services, the Social Democrat national government strongly opposes profit-making in emergency care. A two-year moratorium has been imposed by the Parliament to give the government time to develop a system to regulate ownership of emergency-care hospitals.

The Stockholm region will be the main battleground between Social Democrats and the center-right parties in the general elections next year. This health care experiment provides a symbol that suits both camps well and can be used to contrast the goals of each -- promoting freedom of choice or defending the old solidarity.

The service-delivery market reform in Stockholm builds on a purchaser-provider relationship. All 2,200 producers in the system -- public and privately owned -- are paid by the same mechanism, which rewards productivity. (Even if Sweden officially denounces every American influence, many of the technical aspects of this system, such as the payment structure, have been imported from the United States.)

LESSONS FOR U.S. POLICYMAKERS

What should U.S. policymakers take away from Sweden's efforts to ensure that adequate health care is available to all?

Lesson #1: Remember that health care consumers today are far different from those of the past. They are well-informed, through such vehicles as the Internet and patient support groups, and they want freedom of choice and quality services. In an industry that is consumer-driven, traditional service provision by the welfare state will be less and less acceptable.

Lesson #2: As patients demand better services and aging populations need more service, the pressure on the system will increase rapidly. With a smaller workforce anticipated for the future, the ability of health care personnel at all levels to maximize their potential and competence should increase. New paradigms for service delivery will be needed. As the Stockholm project shows, a market-based approach that includes privatizing hospitals and outsourcing tasks-from ambulance service to laboratory services and emergency care-can increase the quality of health care overall.

As a result of this competition and the number of private service providers, services have increased dramatically in the Stockholm area while long waiting lists continue to plague health care in most other parts of Sweden. In fact, there is a direct correlation between a monopoly of old-style health care and long waiting lists. Outside the metropolitan region, patients must wait for up to one year for cataract surgery and two years for hip surgery.

In the Stockholm region, health care employees are actively encouraged by the Council to become entrepreneurs. Many start their own enterprises, working as contractors for the Council. It is interesting that the nurses union and the doctors union are key supporters of this development. They recognize that there is a much greater possibility of raising the wages of their members when there are a number of employers rather than a single employer who holds a monopoly on services, as in the old system.

Finally, health care consumers in Stockholm are supported by new information systems. The politicians have opened new opportunities for comparing the quality of care providers and services, releasing pressure for reform from below and creating an alliance between elected and electors to force the administration to change -- an interesting concept.

Johan Hjertqvist, a Swedish health care consultant and adviser to the Stockholm City Council, is project manager of health care for Timbro, a Swedish think tank that focuses on enterprise.

Analytical Approaches to Projecting
Health Expenditures
Friedrich Breyer, Ph.D.

One important factor in estimating the projected amount of health care spending for Europe and, in particular, Germany is the impact of population aging. How big a financial problem will health care be in Europe in 2030 and 2040? What percentage of the payroll will need to go into health insurance contributions at that time? There are various methods of answering these questions that yield sharply differing projections. I will discuss two: the accounting method used by the German government and a regression analysis.

The Federal Ministry for Health in Germany commissioned the PROGNOS Institute, a consulting agency based in Basle, Switzerland, to produce a forecast for 2030. According to the system adopted by PROGNOS, health insurance expenditures by 2030 will rise from their current level of 13.5 percent of payroll to a 16 percent payroll tax. people were fairly relieved with this modest 2.5 percentage point increase, which seemed a normal development.

In contrast, my colleague Professor Volker Ulrich from the University of Greifswald, Germany, and myself calculated expenditures by 2030 and 2040 using a different (and we believe more accurate) method of calculation yielding significantly different, and troubling, projections. We projected that the contribution rate -- the amount of payroll going toward health care contributions -- would increase from over 13 percent in 2000 to 20.7 percent in 2030 and rising to 23.1 percent in 2040.

The contribution rate, expressed as a fraction, has as its denominator the tax base, which is equal to labor earnings. These are determined by birth rates and net migration, labor force participation, and labor productivity -- the realm of the labor economist. I am not a labor economist; I am a health economist, so I basically accept the existing forecasts of the denominator and will instead address the problem of assessing the numerator, health spending.

The major determinants of health spending in the future will be population aging and medical progress. The denominators for both methods of projecting 2030 contribution rates are the same. The difference in the projections themselves is due to different calculations of the numerator.

Germany's Projections Using the Accounting Method
PROGNOS, in developing the projections that are now used by the Federal Ministry for Health, used what I will call the accounting method.

In the first step, it looked at present age-expenditure profiles. On average, the sickness funds will spend a different amount of deutsche marks per year on health care for a typical 20-year-old than it will for the typical 60-year-old, and so on.

In the second step, PROGNOS extrapolated the age-expenditure profiles with the assumption that the rate of increase per year is the same as the rate of increase of productivity. This means that it excluded this as a cause of tax increase because productivity means wage growth, and if expenditures grow as fast as wages, then it can't be a factor in the increase in the payroll tax.

In the third step, PROGNOS multiplied this new age-expenditure profile by the age distribution forecast for the future and came up with a projected payroll tax of 16 percent for 2030.

There is, however, a systematic error in this method as well, although it is a downside error: Insofar as the future age distribution reflects lower death rates in older ages, you cannot use today's expenditure patterns because this exaggerates health care costs, since a large portion of expenditures occur in the last year of life. Everybody is in the last year of life only once, and if people die later, this means that fewer 70-year-olds are in their last year of life, so the standard expenditure for a 70-year-old in 2030 will probably be lower than it is now.

This is a "downside" error, but its impact is small compared with the error in the other direction that results from nullifying the impact of increased expenditures and thus nullifying medical progress.

Projections Using a Regression Analysis
The method used by us to forecast future health expenditures is based on a regression analysis. Basically, we are predicting the future increase by looking at what factors explain the development of health care expenditures in the past three decades. Our dependent variable -- the variable that we wanted to explain -- was total health care expenditure of sickness funds per capita in real terms. The explanatory variables were the following:

  • Age structure , which we measured very simply as the portion of sickness fund members who are over 65 years of age;
  • Real taxable income per member; and
  • The calendar year (as a proxy for medical progress).

We also looked at a few other variables -- such as the death rate -- because, as I said, a large share of health care expenditures occur in the last year of life. So there may be a relation between the death rate and expenditures.

To estimate the relationship, we used a time series of sickness fund data for the 26 years from 1970 to 1995. Altogether, we were able to explain more than 99 percent of the increase in health care costs in Germany during that period.

Our main findings from this analysis are:

  1. Income is a strong predictor of health expenditures. When income rises by 10 percent, health expenditures increase by 4 percent.
  2. Age structure is very important , of course.
  3. The time trend is very strong. This factor, which was virtually excluded by the PROGNOS Institute, adds a 1 percent increase in per-capita expenditures every year. This means that, even if income and age structure remained constant, per-capita health expenditures would increase by 1 percent every year. Such an exponential time trend of 1 percent each year makes a significant difference over a 30- or 40-year time period.
  4. The death rate is not a significant predictor of expenditures.

The Simulation . Using this regression analysis, we attempted to predict future expenditures. Here, we just plugged the PROGNOS forecast for taxable income, for the consumer price index, and for the age structure into our equation. As a result, we received projections for the development of the contribution rate to the Germany sickness funds in the next 40 years. The results are presented in the last column of Table 1.

You can see, based on the last year of our data analysis (1995), that we projected a contribution rate of 13.1 percent in 2000. Actually, the average contribution rate was 13.5. Also, according to our calculations, the increase in the next 20 years will be rather modest, to a level of 15.6 percent, since the real demographic change in Germany will occur after 2020.



So for the next 20 years, the only factor substantially affecting the contribution rate will be medical progress; but then, from 2020 to 2030, there will be an enormous increase in the number of elderly accompanied by an enormous drop in young people and working-age people. This will mean that there will be a dramatic increase in the contribution rate to 20.7 percent in 2030 and over 23 percent in 2040. In all, we estimate that we will see a 10 percentage point increase in the contribution rate within the next 40 years just for health insurance.

This projection is in striking contrast to the 2.5 percentage point increase by 2030 projected by the PROGNOS Institute. Our projection of the increase over that same time period is literally four times the projection used by the German government.

To give you another example, the German Bundestag -- facing an impending pension cost crisis -- recently passed pension reform in which the benefit level was cut considerably. Without the reform, the contribution rate for social security was forecast to rise to about 24 percent of payroll. Parliament instituted a reform to bring it down to 22 percent.

Here, we are talking about a 10 percentage point increase. Yet nobody in Germany is talking seriously about the long-term issue of health care financing. The major reason why is that the overnment believes that, by putting health care providers on a global budget, it can keep expenditures from rising.

The effects of this policy can be illustrated by the following metaphor. Suppose you have a pot of boiling water and you put a lid on the top. If you press down on the lid, the pressure of the boiling water in the pot will increase. Sooner or later, it will explode. This is exactly what is done when a global spending cap is put on the health care budget with the expectation that everything will run smoothly.

So, as expenses continue to rise, we will see more of what I would call "bad rationing" -- the type that is unforeseen and that people cannot prepare for or insure against -- because it comes unexpectedly, through waiting lists and in a haphazard way. Instead, we could follow the model implemented by the state of Oregon and ask what benefit package we could afford to pay for through the public purse in 2030, and what additional services people would have to decide to purchase privately. If Germany were to use this direct, explicit rationing approach, people could start building up supplementary insurance now, and over 30 years could build up the reserves they would need to pay for these additional costs.

Applying These Trends to Other European Countries
How does Germany's situation compare with that of other European countries? Take a look at Table 2. The first of the four columns shows the net reproduction rate at the end of the 1990s. The next two columns show the consequences for the old-age dependency rate at two different points in the future.

Column 1 shows the 1996 rate at which women are having daughters who live to their 15th birthday, the beginning of reproduction age. In essence, this rate measures to what extent a generation of women replaces itself. A value of 1.0 indicates that the population will be fully replaced. A value of 0.5 indicates that the succeeding generation will be half as large as the parenting generation.

As the table shows, all the countries in the European Union (EU) have net reproduction rates below 1.0 in 1996 -- even Ireland, a Catholic country that had above-replacement fertility rates throughout the 1970s and 1980s. The countries with the most extreme drop in fertility have been Germany, Greece, Italy, and Spain. These countries have a net reproduction rate that is not below 0.6, which means that the next generation will be only 60 percent of the size of the previous generation.

Columns 2 and 3 show what this net reproduction rate implies for the old-age dependency ratio -- the number of people over age 65 for every 100 people aged 20 to 65 in 2030 and 2050.

There is concern in the United States that there will be a demographic crisis when the baby-boom generation retires. As the table shows, in 2030 there will be 36.8 people over age 65 per 100 people of working age in the United States. The average dependency ratio for all EU countries in 2030 is 43.8, while Italy's will be 49 and Germany's 46.7.

Similarly, in 2050 the situation will be most extreme in Italy, Spain, and Greece, nations that have the lowest fertility rates today. So what I have described about Germany, demographically, appears to apply to Italy and Spain as well.

Another factor in evaluating the viability of a country's health care system is its "generosity," indicated in the last column of Table 2 as health expenditures in 1997 as a percentage of the country's gross domestic product (GDP). Germany again is at the top, with France and Italy trailing only slightly behind.

LESSONS FOR U.S. POLICYMAKERS

As the analysis by Friedrich Breyer indicates, the European experience with rising health care expenditures will compound as demographics change. Several lessons from this experience are worth noting here.

Lesson #1: Today's health care expenditure patterns are not accurate predictors of tomorrow's needs. Demographic shifts, such as those in fertility, often have dramatic effects on future contributions to a system and on future expenditures.

Lesson #2: Income and age structure are strong predictors of future health care costs. Without reform, for example, as the proportion of people in retirement rises compared with the number of working-age adults, a health care system will experience rising demands for services that become increasingly more difficult to meet.

Lesson #3: Technological progress in medicine is an additional cost factor. Rather than making medical services cheaper to produce, which is true for most other commodities, technological progress adds to the demand for health care and thus has an enormous potential to create exploding medical expenditures.

If I am asked to summarize the problems health care financing in Europe faces in the next decades, I will likely conclude from this analysis that the problems will be most severe in countries that already have very generous health care expenditures and increasingly high dependency ratios by 2050. As the table indicates in bold, these countries, especially Germany and Italy, have both a health care expenditure problem and a demographic problem.

Friedrich Breyer, Ph.D., is a Professor of economics at the University of Konstanz in Germany. He is the coauthor of Health economics (Oxford, 1997), an in-depth look at the economics of health care.

Show references in this report

Endnotes

1. This Heritage Lecture is based on the proceedings of a conference on "What Americans Can Learn from the Coming European Health Care and Pension Crisis," held at The Heritage Foundation on April 26, 2001. The conference was sponsored by The Heritage Foundation and The Centre for the New Europe. The remarks included here are based on the speakers' presentations.

2. For more information on the Centre for the New Europe, Avenue Louise 326, B6, 1050 Brussels, Belgium, visit its Web site at http://www.cne.be.

3. Based on the exchange rate on April 26, 2001.

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