The €20 Billion Problem in Germany’s Statutory Health Insurance
Health care policy experts in Germany are discussing a bizarre problem: What to do with €20 billion of accumulated reserves in the Statutory Health Insurance System?
Of course, the availability of money creates the usual suggestions. Providers want their share of the cake through higher payments—for example, the chairman of the National Association of Panel Physicians, Andreas Köhler, called for a 10 percent increase in fees. Politicians—depending on political persuasion—suggest lowering contribution rates, making refunds to members, or reducing co-pays. Sickness funds prefer to bunker the money for rainy days. And the Federal Minister of Finance, Wolfgang Schäuble, wants his share in order to consolidate the federal budget. As it seems, Mr. Schäuble will carry the day.
But how did this situation arise in the first place? In Germany, as in most other countries, the discussion in health care usually is more about deficits than surpluses. The reason has much to do with recent changes in the way health insurance is financed in Germany.
Different Concepts of How to Deal with Rising Health Expenditures
Traditionally, German sickness funds have set their own contribution rates, drawn on wage income up to a threshold—a kind of payroll tax. The last decade saw a rapid increase in these contribution rates, the average rate increasing from 13.6 percent in 2000 to 14.9 percent in 2008. The political parties developed divergent responses to this rise. The Bürgerversicherung (civic insurance) concept of the Social Democrats and Greens is based on widening the revenue base of statutory health insurance, by extending its reach to so far exempted groups such as civil servants, self-employed, and high-income employees and including other sources of income, such as rental or capital income. Christian Democrats and Liberals, on the other hand, prefer a complete decoupling of health care cost from income by switching from a payroll tax to a flat-rate premium—a concept called Gesundheitsprämie (health care premium).
The differences between both concepts are often overstated. To ensure affordability, Gesundheitsprämien are to be supplemented by means-tested subsidies for low income households—on the one hand alleviating charges of social injustice, but on the other hand bringing back income-related financing with all its problems through the back door. And the Sachverständigenrat, Germany’s equivalent to the Council of Economic Advisors, suggested a mix of both concepts it called Bürgerpauschale. Anyway, in 2007 a grand coalition of Social Democrats and Christian Democrats had to find a compromise after both parties fought an election on divergent manifestos in health policy. What they came up with had at first sight nothing to do with either Bürgerversicherung or Gesundheitsprämien. It was the introduction of a Central Health Fund.
As of 2009, the individual contribution rates of sickness funds were replaced by a uniform contribution rate set by the government. The revenue from this uniform rate does not flow directly to the sickness funds, but to the Central Health Fund. There this revenue is complemented by a federal subsidy drawn from general revenue. Sickness funds receive risk adjusted payments from the Central Health Fund. If these payments are insufficient to cover expenditure, the sickness fund has to charge an additional flat-rate premium. In the case of overpayment, however, the sickness fund can make a refund to members. As soon as an additional premium is charged on average, means tested subsidies for low waged members become available.
What seems like a rabbit conjured out of a hat actually is an ingenious balancing act of different political interests. For the Christian Democrat side, this concept means a freeze of employer contributions. Future health care expenditure increases will lead to rising additional premiums, leading to a slow but constant transformation of health care financing from payroll to flat-rate premiums. For the Social Democrats, the tax subsidy means a broadening of the revenue base, since general revenue is drawn from all sources of income and is also paid by those who opted out of the statutory system. Furthermore, in due course, the construction of the Central Health Fund could facilitate the inclusion of private health insurance.
The Central Health Fund guarantees the sickness fund a level of payments that is set at the end of the preceding year. Payments come in equal monthly installments, ending the cyclical nature of sickness fund receipts. To enable the Central Health Fund to do this, it needs a liquidity reserve. The idea is to reduce uncertainty on the revenue side, enabling sickness funds all the more to concentrate on controlling expenditure. This construction actually played out well during the financial crisis of 2009: Payments to sickness funds were stable, and the Central Health Fund weathered the shortfall of revenue, incurring a deficit of €2.5 billion. At the same time, it allowed temporarily reducing the contribution rate and replacing the lost revenue with additional subsidies from general tax revenue in order to stabilize private consumption.
Theory and Practice: Establishing Additional Premiums
Whereas the Central Health Fund has established itself as an important element of health insurance financing and many early critics have become reconciled with the construction, the other element—additional premiums and refunds—has not played out so well. The main problem is that the Central Health Fund started by covering 100 percent of expenses in the year 2009. Of course, this applies only on average, and the financial circumstances of individual sickness funds differ significantly. After all, the (improved) risk adjustment scheme still leaves substantial parts of expenditure variation between sickness funds unexplained.
But with the uncertainty at the beginning of the new system, all sickness funds decided to start without additional premiums. In the course of the year, the different financial position of sickness funds made itself felt, and in July 2009 the first sickness fund had to start charging an additional premium of €8 per month. Others followed on 1 January 2010. Their experience with this new financing instrument has been devastating. With the uniform contribution rate mostly being deducted by the employer, the public perception was that these sickness funds charge money for things other funds do for free. Politicians did not help by calling these funds inefficient and in some cases even encouraging members to switch to a “free” fund.
Sickness funds with additional premiums quickly lost members—in one case 40 percent of members in a matter of a few months! This was a financial disaster, and the sickness funds concerned had hardly any other chance than to find a more solvent sickness fund to merge with. The number of sickness funds (excluding farmers’ funds) fell from 206 funds at the end of 2008 to 136 funds currently. Two sickness funds were in such dire straits that they could not find any other fund willing to merge with them. These funds went insolvent and had to be closed.
Normally, the closure of a fund should not be a problem. Guaranteed issue and open enrollment applies to German sickness funds, so the members of these funds can switch to any other sickness fund, which is obliged to take them. There are provisions in the law to provide for a seamless transition of claims and payments. But, in fact, the first insolvency turned out to be everything other than seamless. Members of this fund had problems finding a new one. One fund claimed that switching was only possible if the applicant appeared in person at a remote branch office with reduced opening hours in the outskirts of Berlin; another large fund apparently closed all branch offices in the area where the insolvent fund was active for “renovation”; calls went unanswered, etc. These activities are clearly illegal, and the supervisory authorities stepped in. But the damage was made, and parliament reacted by making the CEO of a sickness fund personally liable for any such activity in the future.
Avoiding additional premiums has thus become the overarching aim of all sickness funds. They reduce non-mandated services, and avoid any projects with upfront investments—including most innovative managed care strategies and attempts at “bending the cost curve.” This does not only apply to funds whose payments from the Central Health Fund do not cover expenses; overpaid sickness funds, too, are stingy on expenditures and try to build up reserves in order to avoid additional premiums in the future.
But still, additional premiums were on the way to being established. 2010 turned out to be a tough year for the funds financially, and by the end of the year fifteen funds charged additional premiums. All now depended on the outlook for 2011. That is when politics stepped in again.
Hardly Established, Already Abolished
For additional premiums to work, they have to be universal. As long as they are levied only by a few funds, the competitive pressure is too hard. The perception of an additional premium of €8 compared to €0 is markedly different from, say, €38 to €30. The perspective for 2011 was expenditure, as usual, rising faster than revenue. The government predicted the gap to be €9bn—probably an exaggerated prediction in the first place. This chasm could have been greeted as a chance to establish additional premiums universally. But instead, the government addressed this gap as “deficit” that had to be closed. It enacted a package of spending cuts, an increase in the contribution rate from 14.9 to 15.5 percent, and an increased subsidy of €2 billion from the federal budget. The result was a very generous financial endowment. This was all the more surprising, as the government was in the meantime composed of Christian Democrats and Liberals, both at least officially committed to a transition to flat-rate premiums.
But additional premiums proved to be very unpopular in the general public, so the position of the supporting parties seemed to be more like: “additional premiums—yes, but please not this year.” Hence the strategy of swamping the system with money to avoid additional premiums was created. And the strategy was highly successful, too: Revenue, mostly due to the higher contribution rate, rose by 5 percent, and expenditure, mostly due to cuts in pharmaceutical expenditure, only 2 percent. Most sickness funds ended the financial year 2011 with a surplus, and the outlook for 2012 is positive, too. Overall, sickness funds ended with a surplus of €4 billion and the Central Health Fund with €5.5 billion. By today, most sickness funds that had to charge an additional premium were able to abolish it. This, of course, raises the competitive pressure for the few remaining funds left with addition premiums. It is not unreasonable to assume that in the course of this year the additional premiums, never universally adopted, will be universally abolished.
So, what to do with the €20 billion? First of all, not all that money is available. The Central Health Fund has to hold a minimum liquidity reserve of €3 billion, it still carries forward the deficit from 2009 of €2.5 billion on its balance sheet, and sickness funds are legally required to hold minimum reserves of €4 billion. After all, sickness funds are risk-bearing entities subject to insolvency rules. Furthermore, the sum must be put in perspective. The remaining €10 billion would cover health care expenditures for less than three weeks. Any giveaways today would probably create higher expenditures tomorrow when the funds are no longer available.
The federal minister of health, Daniel Bahr, would like to abolish the €10 per quarter consulting fee (Praxisgebühr) for physician visits introduced by the previous government in 2004. But that would certainly mean lost revenue in future years. Furthermore, the high level of physician contacts is a severe problem in Germany. Admittedly, the Praxisgebühr has not been very effective in influencing physician utilization, and is extremely unpopular with physicians. But it should rather be a candidate for reform, not abolishment.
In its budget proposal for 2013, Mr. Schäuble suggests cutting the federal subsidy for sickness funds from €14 billion to €12 billion, effectively transferring €2 billion of reserves into the federal budget. The rationale is comprehensible, but that will further undermine the function of the federal subsidy. Originally designed as a stabilizing and formula-based element, it has become a stopgap, the sum constantly renegotiated according to the situation of the federal budget and the statutory health insurance budget, respectively. And the strategy could backfire. If the financing arrangements stay as they are, the lower reserves mean that the Central Health Fund will have to draw on federal money for the means tested subsidies earlier.
So, instead of considering possible uses of the money, the discussion should go toward finding a stable and functioning financial environment for sickness funds.
First of all, sickness funds need a functioning mechanism of price competition and revenue generation. The Social Democrats and Greens will be running in the next federal elections in 2013 on their Bürgerversicherung manifestos. Christian Democrats and Liberals will have to consider if they still want to go forward with the additional premium model, the actual implementation of which they did so much to impede. Furthermore, the federal tax subsidy should be based on a reliable basis to avoid it constantly be hampered with. But most of all, with all stakeholders committed to a competitive health insurance system, it is necessary to understand that reserves are an essential element of insurance.
 See W. Buchholz, “A Note on Financing Health Care Reform: A Simple Argument Concerning Marginal Tax Rates,” FinanzArchiv 61 (2005): 438-446.
 The model combines a flat-rate premium with an extension of coverage, see German Council of Economic Experts, Annual Report 2008/09, pp. 14f., http://www.sachverstaendigenrat-wirtschaft.de/fileadmin/dateiablage/Sonstiges/chapter_one_2008.pdf.
 Predictive ratios (relationship of payments to expenditures) range from 91 to 125 percent, see the Evaluation Report of the Scientific Advisory Board on Risk Adjustment, http://www.bmg.bund.de/morbi-rsa.
 Others welcome this high competitive pressure as it raises the price elasticity, e.g., P. Eibich, H. Schmitz, N. Ziebarth, “Zusatzbeiträge erhöhen die Preistransparenz – Mehr Versicherte wechseln die Krankenkasse”, DIW-Wochenbericht 78 51+52 (2011): 3-12; F.T. Schut, W.P.M.M. Van de Ven, “Structuur Duitse zorgpremies efficiënter dan Nederlandse…,” Economisch Statistische Berichten 95-4596 (2011): 662-665.
 A growing literature is devoted to analyzing behavioral and psychological aspects of choice in such settings, see e.g., M. Schlesinger 2010, “Choice cuts: parsing policymakers’ pursuit of patient empowerment from an individual perspective,” Health Economics, Policy and Law 5-3 (2010): 365-387.
 See the Monthly Report of the Deutsche Bundesbank, March 2012, pp. 7f., http://www.bundesbank.de/download/volkswirtschaft/monatsberichte/2012/201203mb_bbk.pdf.
 See German Council of Economic Experts, Annual Report 2011/12, p.21, who also predict that sickness funds will refrain from charging additional premiums in 2013, http://www.sachverstaendigenrat-wirtschaft.de/fileadmin/dateiablage/Sonstiges/chapter_one_2011.pdf.
 See Bundesbank, idem, p. 9.