Health Insurance Reform in Germany. Moving to an Universal, Flat Rate System?

Seminar Paper, 2014

37 Pages, Grade: 1,30




II. List of abbreviations

III. List of figures

1. Introduction

2. Status quo of the German health care system
2.1 Set-up
2.2 Challenges

3. Universal system
3.1 Definition
3.2 Discussion
3.3 Economic impacts

4. Flat-rate system
4.1 Definition
4.2 Discussion
4.3 Economic impacts

5. Universal, flat rate system

6. Conclusion

IV. References

V. Appendix

II. List of abbreviations

illustration not visible in this excerpt

III. List of figures

Figure 1: Youth, elderly and total quotient with age limits of 20 and 65 (Statistisches Bundesamt, 2009, p. 20)

Figure 2: SHI expenditures and average SHI contributions, 1950–2005 (Porter & Guth, 2012, p. 9)

Figure 3: Citizens Insurance: relative deviations from the baseline scenario for labour market variables in % (Distelkamp, Meyer, & Wolter, 2005, p. 13)

Figure 4: Employment effects of a wage restraint policy (Althammer, 2002, p. 56)

Figure 5: Figure 2: Health premium: relative deviations from the baseline scenario for labour market variables in % (Distelkamp, Meyer, & Wolter, 2005, p. 14)

Figure 6: Health expenditure as a share of GDP, OECD countries, 2011 (OECD, 2013)

Figure 7: SHI - Figures and rules of thump (1) (Bundesministerium für Gesundheit, 2013a)

Figure 8: SHI - Figures and rules of thump (2) (Bundesministerium für Gesundheit, 2013a)

Figure 9: Age structure of the population in Germany (Statistisches Bundesamt, 2009, p. 15)

Figure 10: Health expenditure per capita by age and year (Bundesministerium für Wirtschaft, 2013, p. 33)

Figure 11: Economic incidence of an increasing contribution rate in SHI using the QUERU model (Farhauer, Borchardt, & Stargardt, 2004, p. 8)

Figure 12: Average annual growth rates of key variables of the SHI in the baseline scenario (Distelkamp, Meyer, & Wolter, 2005, p. 12)

Figure 13: Employment effects of universal health insurance and health premium model in comparison - deviations from the baseline scenario in % (Distelkamp, Meyer, & Wolter, 2005, p. 15)

Figure 14: Number of insured by SHI and PHI (Augurzky & Felder, 2013, p. 25)

Figure 15: GDP, employees and welfare (Augurzky & Felder, 2013, p. 26)

Figure 16: PHI and SHI expenditures and SHI contribution rate (Augurzky & Felder, 2013, p. 27)

Figure 17: Change by rising the income threshold to the level of pension insurance; compared to BAU (Augurzky & Felder, 2013, p. 29)

Figure 18: Changes by rising the capital returns tax; compared to BAU (Augurzky & Felder, 2013, p. 33)

Figure 19: Changes by prohibition of new PHI-business; compared to BAU (Augurzky & Felder, 2013, p. 40)

Figure 20: Changes by closing the PHI; compared to BAU (Augurzky & Felder, 2013, p. 43)

Figure 21: Reform options - development of indicators (baseline scenario) (SVR, 2012, p. 18)

Figure 22: Reform options - development of indicators (slow increase in costs and strong increase in costs) (SVR, 2012, p. 26)

Figure 23: Development of macroeconomic variables in different health care reform models (baseline scenario) (SVR, 2012, p. 20)

Figure 24: Development of macroeconomic variables in different health care reform models (slow increase in costs and strong increase in costs) (SVR, 2012, p. 28)

1. Introduction

In international comparison, Germany ranks 4th among OECD countries in health expenditure as a share of GDP in 2011. It amounted 11.3% of GDP in 2011 which is 2%-points above the OECD average of 9.3%. Only the United States (17.7%), the Netherlands (11.9%) and France (11.6%) are spending more on health (figure 6). In addition, German health expenditure increased, in real terms, at a rate of circa 2% p.a. on average in 2000-2010, but slowed down to 1.1% in 2011. However, expenditure continues to grow (OECD, 2013).

With regard to these figures, health care is one of the most important sectors in Germany. With more than 6 million employees and a gross value added of almost € 268 bn in 2013, it represents 11% of the German economy (Bundesministerium für Wirtschaft, 2013, pp. 3-5). While expenditure is on the rise, the number of contributors who finance the health care system decreases. As a result, the question of how to finance the growing demand for health services occurs (Augurzky, Felder, Krolop, Schmidt, & Wasem, 2010, p. 6). In particular, a closer look at the statutory health insurance (SHI) is necessary as it financed 57% of total health expenditure in 2011 (Bundesministerium für Wirtschaft, 2013, p. 49).

Since the report “Achieving financial sustainability for the social security systems” by the Rürup-Commission, two major reform proposals are discussed: the citizens' insurance (“Bürgerversicherung”), a universal system of health care, and a system of flat-rate health premiums (“pauschale Gesundheitsprämien”) (Bundesministerium für Gesundheit, 2003, pp. 143-176).

These approaches are intensively discussed by politicians and economists who search for an appropriate solution for a health care reform. Therefore, the following question should be answered by this seminar paper: Should we move to a universal, flat rate system?

In order to develop an appropriate recommendation, the following questions appear: How does the current health insurance system in Germany look like? Which problems does this system face? What contribution do the two reform proposals provide for a solution of these challenges? Which are the main arguments in favour and against these approaches? Are there any economic consequences of their implementation? What could be a final solution?

According to these questions, first of all the German health insurance system is presented. Initially, the main aspects of the current system are explained (2.1). Hereafter, the main challenges of health care provision are described (2.2). In both paragraphs, the focus is on the SHI. After that, the two leading reform proposals are presented. At first, the citizens’ insurance is defined (3.1) and its main arguments are discussed (3.2). Afterwards, its macroeconomic effects are analysed (3.3). Similarly, the flat rate system is defined, discussed and analysed (4.1-4.3). Hereafter, a combination of the two reform proposals is presented (5). Finally, the conclusion sums up the main elements of the seminar paper and tries to answer the general question if Germany should move to a universal, flat rate system (6).

2. Status quo of the German health care system

2.1 Set-up

Around 90% of the German population are members of the SHI and are entitled to receive health benefits (GKV Spitzenverband, 2013). The provided benefits of the SHI include: Benefits for illness prevention, benefits for early recognition of diseases, benefits for medical treatment, benefits in monetary form (i.a. sick-pay), maternity benefits, travelling allowances and funeral allowances (Lampert & Bossert, 2011, pp. 363-367).

The SHI is an obligatory insurance for most employees in Germany. People who are liable to insure are i.a. employees with a monthly pre-tax income higher than € 450 up to the social security ceiling (2013: € 4,350) (Bundesministerium für Gesundheit, 2013). Additionally, an obligatory membership also exists for students, farmers, pensioners and unemployed. People insured within a family health insurance as well as civil servants, judges, teachers and the most self-employed are non-compulsory insured persons (Pilz, 2009, p. 112). The last-mentioned people, however, are often privately insured. There are 42 private health insurances (PHI) in Germany with roughly 9 Million members (PKV Spitzenverband, 2013). Furthermore, the PHI calculates their member’s contributions, in contrast to SHI, according to the individual risk (GKV Spitzenverband, 2013).

The German system of SHI consists of different insurance companies which are public corporations and have the right to self-government. SHI benefits are largely financed by contributions which are paid by employers and employees. A Health Fund and a uniform contribution rate for all insured (since 2011 15.5%) were established in 2009 (GKV Spitzenverband, 2013). The employers’ share, however, only amounts 7.3% and is fixed by law (SVR, 2013a, p. 392). The income-related contributions are calculated until a contribution assessment ceiling which currently is a monthly pre-tax income of € 4,050 (2013: € 3,937.50). Monthly earnings above that limit are not liable for contributions (Bundesministerium für Gesundheit, 2014).

All contributions are paid into the Health Fund. Every health insurance receives lump sum payments per insured person, which depend on the age and risks of its members, out of this fund. Insurances which cannot finance their expenses with the payments have to improve their monetary situation. Otherwise, the health insurance can collect additional contributions from its members (Lampert & Bossert, 2011, p. 368). The current monetary situation of SHI is respectable as it generates surpluses and has built up financial reserves (figures 7-8). This is mainly due to the positive economic development, the good situation of the labour market and a package of measures introduced in 2010. Therefore, the insurances do not have to raise additional contributions (SVR, 2013a, p. 392). However, the need for reform is not banned. The following paragraph will show why.

In order to improve the structures and the financial situation of the SHI, the Rürup-Commission developed two concepts for a reform in 2003: a citizens' insurance and a system of income-related health premiums (3-4). The federal government did not implement these proposals but passed a SHI Modernisation Act in 2003. The included measures had short-term effects and improved the financial situation of SHI over a period of time. Necessary long-term measures for more financial sustainability, however, were not realised until today (SVR, 2013a, p. 391).

2.2 Challenges

The challenges of the current German health care system are numerous. Increasing costs, unsustainable funding and a lack of quality and qualified employees make clear that a reform is necessary. However, the major problem of the health system are its high costs (Porter & Guth, 2012, p. 5). In particular, German health expenditure as a share of GDP is one of the largest worldwide and continues to grow (OECD, 2013). Therefore, costs and financing are focused.

In general, there are four main reasons for a financial reform: increasing demand for health with rising income (OECD, 2014, p. 151), demographic change, progress in medical technology and a lack of incentives (Pimpertz, 2013, pp. 6-10). In particular, demographic change and medical-technical progress have negative effects for revenue and expenditure. Moreover, the employment rate influences the revenue side of SHI. Demographic change is a two-sided effect. At first, there is a tendency of declining birth rates and second a trend towards higher life expectancy. Consequently, the population is aging and decreasing simultaneously (Farhauer & Borchardt, 2004, p. 5). Declining births and proceeding aging lead to changes in the age structure of the population. According to figure 9, 34% of all Germans will be 65 or older in 2060 (lower limit of “medium” population) (Statistisches Bundesamt, 2009, p. 15).

Thus, the relationship between the age groups will change. The next figure shows the rise of the elderly quotient, which is the number of people in retirement age in relation to the number of people in working age. In 2060, 67% of the German population will be 65 or older in relation to the population aged 20-64. This rise of the old age dependency ratio will lead to falling revenues as the average income of retirees is lower than the one of employees (Cassel, 2003).

Figure 1: Youth, elderly and total quotient with age limits of 20 and 65 (Statistisches Bundesamt, 2009, p. 20)

illustration not visible in this excerpt

In conclusion, demographic change leads to an aging population, a decreasing workforce and additional pensioners. Therefore, the system faces increasing costs and declining revenues.

In order to compensate this difference, the growth of contributions exceeded the growth of expenditure expressed in % of GDP (Porter & Guth, 2012, p. 8). Compare the following figure.

Figure 2: SHI expenditures and average SHI contributions, 1950–2005 (Porter & Guth, 2012, p. 9)

illustration not visible in this excerpt

Additionally, medical-technical progress has a life-prolonging effect which results in growing health spending (Farhauer & Borchardt, 2004, p. 11). With regard to figure 10, the majority of health expenditure is generated in the last years of life (Bundesministerium für Wirtschaft, 2013, p. 33). Thus, health spending is likely to increase due to rising numbers of older patients.

Besides this, income-related contributions are not growing fast enough in order to cover health spending. Since 1991, health expenditures per capita increased on average by 3.44% p.a., whereas the assessable income only increased by 2.36% p.a. (Pimpertz, 2013, p. 5). Contributions are currently calculated as 15.5% of wages. As a result, the maximum amount employees and employers had to pay per month in 2012 was € 536 in total. Since 1983 the contribution rate for pensioners, which is based on their retirement benefits, did not change and is still equal to the employees’ contribution rate. Moreover, a sustainable financing of SHI also depends on the employment rate and the average level of wages. This means, revenues would rise by increasing employment and higher wages (Porter & Guth, 2012, p. 8).

Moreover, the current financing of SHI is directly connected with labour. Therefore, increasing expenditures lead to rising contributions which increase labour costs. Consequently, the demand for labour decreases which supports unemployment. As a result, the decoupling of contributions and labour costs is often demanded (Farhauer, Borchardt, & Stargardt, 2004, p. 5).

In addition, the role of PHI within the health system is discussed. Only high-earning employees, self-employed, and civil servants are allowed to become privately insured. Although PHI members often pay lower premiums, they are better treated as SHI members because of higher reimbursement rates for equal services. Moreover, health providers face no budget constraints concerning the number of treated PHI members. Therefore, there is the growing impression that German health care is turning into a class-divided system (Porter & Guth, 2012, p. 10).

Because of these challenges, the so-called Rürup-Commission presented a citizens’ insurance (universal system) and a system of flat-rate health premiums (flat-rate system) as two reform options for the German health care system (Bundesministerium für Gesundheit, 2003). These proposals and their combination will be defined and discussed in the following.

3. Universal system

3.1 Definition

According to the Rürup-Commission, the “citizens’ insurance” is a universal health system which covers the entire population. The redistribution function is an essential element of this proposal as it is financed by income-related contributions. Furthermore, the tax base is widened on the total income, the insurance limit is abolished and the income threshold is raised. Therefore, private insured persons as self-employed and civil servants will become members of SHI and capital and rental income will be liable for contributions. Additionally, contributions are paid by employees and employers and the PHI has to concentrate on supplementary insurances as basic care is only provided by SHI (Bundesministerium für Gesundheit, 2003, pp. 148-149).

A universal system is especially discussed by the left parties in Germany (INSM, 2011). The approaches of SPD, Bündnis 90/Die Grünen and Die Linke often do not represent a consistent concept but a set of different reform measures (Augurzky & Felder, 2013, p. 10). Therefore, the following discussion and analysis are based on the Rürup-model.

3.2 Discussion

According to its supporters, the citizens’ insurance solves the problems of SHI in the following way. A sustainable funding is reached by the expansion of the insurance base and the tax base. The last measure is crucial as earned income will relatively decrease, however, income out of property generates higher growth rates in the long-term. Moreover, labour costs will be reduced because the contribution rate will fall due to additional revenues. Solidarity and social justice are strengthened as the entire population has to be insured, PHI is restricted to supplementary insurances and the total income is liable for contributions. The last element can be reached without additional bureaucracy by the tax authorities. The quality of care will be increased by competition of the insurances and higher standards. Finally, contributions are calculated according to the ability to pay principle (Bundesministerium für Gesundheit, 2003, pp. 149-155).

However, these arguments lead to controversial reactions. The following discussion concentrates on these aspects: the change of the income threshold, the expansion of the tax base, the prohibition of new PHI-business, the closure of PHI and general effects of a weakening of PHI.

At first, an increase or abolition of the income threshold would strengthen the redistribution function of the health system and would intensify the tax effect of its contributions. In contrast to this, the health system should efficiently provide health services instead to pursue distributional aims. Similarly, Augurzky et al. demand a shift of the redistribution function to the tax system (Augurzky, Felder, Krolop, Schmidt, & Wasem, 2010, p. 9). Especially to abolish the income threshold in total would increase the burden of higher incomes as the marginal tax rate for incomes above the income threshold would raise. This would be an incentive for high income earners to work less (Pimpertz, 2013, p. 18) or to emigrate. However, if the increase of the income threshold will lead to lower contributions, the incentives for lower incomes (below the current income threshold) to work would rise. Since lower incomes are usually less productive, it is not clear whether the positive incentives for low-incomes would compensate the negative incentives for high-income earners (Augurzky & Felder, 2013, p. 28).

The expansion of the tax base would mean that all forms of income, particularly capital income, are liable for contributions. According to a “two-pillar model”, earned and capital income would be considered separately and for contributions. As a result, capital income above the income threshold will be used for health financing, however, it is not a fairer approach. In this model, insured with a combined income (earned and capital income as total income) will face disadvantages compared to insured with a concentrated income (earned or capital income as total income) (Augurzky & Felder, 2013, pp. 30-31).

In addition, the enlargement of the tax base causes practical problems as SHI and employers, who often transfer the contributions to the health insurances, do not have these information. As a result, only the revenue offices could calculate the individual contributions. Besides general problems with measuring capital income, the tax authorities do not have full access to the taxpayer’s capital income. Moreover, the redistribution function of the health system would be widened. As a result, a system of double taxation and more bureaucratic structures would be created. Thus, the redistribution of income should be managed by the tax system and its transfer mechanism. Furthermore, an additional burden on capital income would lead to less investment (Pimpertz, 2013, pp. 16-17) with a negative impact on economic growth. Finally, SHI will be less attractive due to this measure which could be the reason for a suggested abolishment of PHI (Augurzky & Felder, 2013, pp. 31-32).

Moreover, a fragile position of PHI would have several other consequences. The elimination of any PHI-activities would end all positive aspects of the competition between SHI and PHI. At first, SHI would lose the interest in a wide range of services equal to PHI in order to keep many insured within SHI. Also the income threshold is likely to increase resulting in more administration. As the existence of PHI supports the SHI to concentrate on providing health care, the redistribution function of SHI would be strengthened at the expense of reforms for more competition. Finally, without the presence of PHI the insured would have less freedom of choice with a negative impact on welfare (Augurzky & Felder, 2013, pp. 45-48).

Furthermore, the citizens’ insurance will still be financed by income-related contributions. Especially the employers’ participation is often justified with the solidarity principle and the argument that this supports the employer's interest in a health maintenance of its employees. The first argument, however, ignores the consequences of a changing contribution rate for labour demand and supply, not least the reactions of labour unions, and their economic impacts. Additionally, the last argument is not convincing because the continuation of payments to sick employees is already a much stronger incentive. The idea that the participation of employers in SHI financing would help to reduce health expenditure disregards the limited influence of employers' organizations in the field of health care (Wissenschaftlicher Beirat, 2010, p. 9).

Another argument in favour of a universal system is the idea that the risks of private insured are better and therefore their new membership within the SHI would reduce the average insurance risk, resulting in financial relief of SHI. However, this argument is controversial as there is no clear evidence for a better risk pooling of PHI. Moreover, self-employed, civil servants and the age structure have to be considered. And even if the former privately insured will improve the risk structure of SHI, this measure would only be a short-term improvement and would also reduce the need for fundamental reforms (Pimpertz, 2013, pp. 12-13).

3.3 Economic impacts

In order to assess a universal system, its economic effects must be analysed and identified (Pimpertz, 2013, p. 11). Therefore, the following analysis shows the consequences of this proposal according to studies of Farhauer et al., Distelkamp et al. and Agurzky & Felder.

At first, the effects of a still income-related financing of SHI will be described. Farhauer et al. analysed the consequences of rising contributions for labour costs and the effects on employment with a QUERU model (figure 11). As the employees contributions are often considered as income taxes, the analysis is based on tax theory. In the model, the x-coordinate shows the employment rate; UR stands for “unemployment rate”. The LD-curve is labour demand, the LS-curve shows labour supply and the WS-curve displays the wage-setting behaviour. In point A full employment is reached. However, point B is realized with an employment rate of 1-UR* and a product wage of w0, as the wage-setting behaviour and the demand curve are identical in this point (equilibrium) (Farhauer, Borchardt, & Stargardt, 2004, pp. 5-9).

If the employers’ contributions increase, equivalent to higher taxes on labour, due to a higher contribution rate, the increasing labour costs lead to a shift of the demand curve to LD’. As a result, employment decreases to 1-UR’ and the new equilibrium wage is w1 (point C). Additionally, the employees will earn a lower real wage after tax because of the higher contributions. If the labour unions can shift the additional taxes (higher contributions) to the employers, the wage-setting curve would move from WS to WS’. This would result in a further decline of employment as 1-UR’ moves to 1-UR’’ in point D with a product wage of w2. The correlations show that greater labour-related contributions lead to higher wages and thus to increasing unemployment (Farhauer, Borchardt, & Stargardt, 2004, pp. 9-11).

With regard to this analysis, Distelkamp et al. examined the labour market effects of the citizens’ insurance referring to the Rürup-approach. Their analysis is based on the macroeconomic simulation and forecasting model PANTA RHEI (Distelkamp, Meyer, & Wolter, 2005, p. 5). The results of the simulation are compared to a baseline scenario which includes the status quo of the health system in 2004. Details of the baseline scenario are shown in figure 12. The following figure demonstrates the employment effects of the citizens’ insurance.


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Health Insurance Reform in Germany. Moving to an Universal, Flat Rate System?
University of Kassel  (Institut für Volkswirtschaftslehre)
Social Policy
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health, insurance, reform, germany, moving, universal, flat, rate, system
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