The German system.

The essence of Germany's successful health care scheme is:

* A blend of government-mandated financing by employers/employees.

* Combined public and private provision of care by physicians.

* Controlled hospital expenditures.

* Administration by sickness funds, established by statue as not-for-profit organizations, to collect contributions and turn revenue over to regional associations of ambulatory physicians, to reimburse individuals or groups for services, and to negotiate fee schedules. In addition, the funds negotiate a per diem (approximately $180) rate with local hospitals. Salaried hospital specialists are paid out of this rate.

* All citizens have access to a comprehensive set of medical benefits and then have free choice of physician, regardless of ability to pay.

* Practitioners enjoy a substantial degree of professional autonomy.

West Germany is characterized by a market economy with an extensive social welfare sector, of which health care is a major component. National health insurance in West Germany is the oldest part of social security and had its roots in the 19th Century. Officially introduced in 1883 by Chancellor Bismarck, statutory health insurance, in the beginning, only covered workers and was restricted to specific types of services, mainly cash benefits in case of sickness. The development of a German statutory health insurance system is characterized by increasing coverage of the population and a decreasing number of insurance funds.

The extent of government interference with the insurance system is a crucial factor and the one that is often misjudged in regard to the German health system. In the sphere of health care, government intervention is considered necessary and acceptable in order to provide access to medical care for every citizen, regardless of income, social status, and residence. Pursuit of this goal is legitimized by considerations of social well-being and is facilitated by the high levels of income that prevail in Western Europe. Determination of policy is shared by the federal government, the state, and autonomous parties such as physician and insurance associations. Corporatism has been a significant mode of political organizations in Germany, with two prime attributes:

* The intermediary between the citizen and the government is a compulsory organization, usually based on primary occupational status. It is semipublic and self-governing and would be considered here to be not-for-profit, somewhat similar to the original Blue Cross/Blue Shield Plans.

* The organizations are granted statutory authority to control work-oriented aspects of their members' behavior and to administer government programs related to their members.

In addition to these official or "corporatist" bodies, there are organizations that represent the political interest of physicians but do not necessarily negotiate on their behalf.

The tradition of the decentralized national insurance system in Germany was disrupted in 1977, when the federal government intervened forcefully for the first time after a long period. A Concerted Action (KA), which restricted the autonomy of the system, was established within the framework of the health care cost containment act. Soaring health care expenditures-- growing between 1970 and 1975 at an average annual rate of about 20 percent-led to this intervention.

Ambulatory medical and dental services are reimbursed on a fee-forservice basis. The current fee schedule for physician services applied to members of the statutory sickness fund was established in 1978. Some 80,000 ambulatory care physicians belong to some 18 regional associations. From 1977 to 1989, the number of primary care physicians increased 31 percent, with no increase in population. Approximate physician earnings are $100,000, pretax and after expenses. These ambulatory physicians hold vouchers and serve as gatekeepers to specialists and hospitals. Fewer than 10 percent of them follow their patients in hospitals, although there is an increasing effort to permit hospital visitation by these physicians.

Another organization represents hospital-based doctors, who are generally barred from treating ambulatory patients. Only chiefs of services function much like our specialists, seeing both inpatients and outpatients. These physicians are salaried and are funded from hospital per diem operating costs. The chiefs supplement their income by seeing private patients, for whom they can bill for services. Hospital operating capital costs flow from a different revenue stream, subject to state review and approval.

In 1990, there were 26 medical schools in West Germany, graduating 12,000 physicians, 40 percent women. There are more medical school graduates per capita than in the United States. By statute, citizens who complete academic requirements can attend medical school. Medical schools are just now beginning to limit class size. Upon graduation, physicians have to join a regular medical association. There they assume the legal risk to treat sickness fund patients and bill for their services accordingly. Less than 10 percent of ambulatory physicians are able to enter practice in the first year, and a number of them remain unemployed, estimated at some 1,500 in Berlin. German patients average 11 office visits per year, versus 4 per year in the United States. House calls are performed. In our visit to a primary care clinic of nine physicians, we learned that they saw 400-500 patients per day. Four time a year, on a quarterly basis, doctors submit their bills to the regional physicians association and receive checks if profiles are compatible. There is a 1,700-page handbook that describes how to maximize allowable charges and avoid billing errors.

Annual negotiations between the physicians associations and the sickness funds result in a point value conversion factor that turns points into payments and is the key cost controller. In theory, if all doctors work to control utilization (limit volume), savings returned to the system would raise the value of the conversion factor. However, the boom in number of visits and procedures has led to a series of mechanisms by which German society can judge what resources to devote to health care and let the medical profession decide how to make the best of this constraint. Physician profiling is the main tool for volume control. Those much above the median have fee decreases unless they can convince reviewers that their case mixes are unusual. Some 7 percent of physicians are asked to explain their fees and/or their high usage each year, but only about 2 percent are sanctioned and have their payments reduced.

The West German health systems represent an attempt to achieve horizontal equity in the distribution of health care and fairly good control over total health care expenditures without a complete takeover of the health insurance system by the government. The chief policy instruments used to this end are:

* Statutory regulations with a network of self-regulating, self-financing sickness funds that observe substantially identical methods and schedules for compensating the providers of health care.

* Use of health insurance premiums, rather than taxes and transfers, to redistribute income from relatively healthier income groups to relatively sick or low-income groups.

Strictly speaking, the term "socialized medicine" should be reserved for health systems in which the government operates the production of health care and provides its financing. Great Britain and most of the Nordic countries of Europe fit that label, as do the health systems operated by U.S. Department of Veterans Affairs and by the Department of Defense. The dominant notion throughout Europe, and in Canada, is that health insurance should not only help smooth the individual's own outlays for health care over time, but that it should also force chronically healthy people to bear part of the health care cost incurred by the chronically sick, and that the insurance mechanism is the ideal vehicle to affect this redistribution. This notion is fundamental to those countries' idea of community and nationhood. They call it the principle of solidarity.

Germany's statutory health insurance system is a perfect expression of that principle. The system openly uses health insurance premiums to redistribute income from healthy and high-income households to low-income households and to the sick. To cope with the adverse risk selection such a premium structure might otherwise engender, the system limits the choice individuals and their families have among different sickness funds.

Traditionally, the sickness fund for compulsorily insured West Germans has been dictated by location and/or employment. Blue collar workers typically have had little or no choice of sickness funds, while white collar workers have had a wider choice. Even the 25 percent or so of the population who are not compulsory members of the statutory system, but may join that system voluntarily, have much less freedom of choice than is typically available in the United States. All statutory health insurance funds, for example, must offer the same catalog of prescribed benefits, and they cannot tailor their premiums to the individual's actuarial risk.

Not surprising, an approach to eliminate risk selection and, at the same time, to effect a redistribution of income through statutory systems premium structure has led to considerable strain within the system. Because the individual sickness fund is empowered to levy whatever payroll tax is necessary to cover the risk mix of its own members, these taxes vary widely among funds. Round one in the revolt is the increasing tendency among large business firms to take their employees out of high-premium sickness funds and to fold them instead into a newly established company-based sickness fund whose actuarial health care cost may be lower. Naturally, this move is vigorously opposed by the other funds in the system, particularly by the local sickness funds that cover demonstratively higher average morbidity.

Yet another attack on the present system comes from the West Germans' neoclassical economists, who, like their colleagues on this side of the Atlantic, regard as the only fair and efficient health insurance one priced strictly on actuarial principle and one offering every citizen the widest conceivable choice among competing funds. These economists believe that governmental paternalism should not override individual myopia and that the individual should be made to suffer for the consequences of his or her myopia. Neoclassical economists also believe that health insurance premiums are not a proper vehicle for redistribution of income. If a society wishes to assist its poor and sickly citizens, it should do so with taxes and cash transfers (or, at most, vouchers).

The West German government is in the mist of arbitrating the emerging fight over West German's health insurance system. The Minister of Health is involved in considerable debate, the outcome of which undoubtedly will place an additional burden on individual citizens. It is probable that this will amount to their paying out-of-pocket some 12 DMs per day and the health system's becoming more like that of the United States. The status quo is unlikely to be tenable over the long run. Many believe that West Germans would be unlikely to move toward the U.S. health insurance model, which is decried throughout Europe as not only wasteful, but also grossly inequitable. A move toward the Canadian model would probably be more palatable to West Germans unless, as it seems more likely, the system could evolve toward a more workable middle ground. One such compromise might be a model akin to the highly regulated pluralism advocated by proponents of managed competition in the United States.

Princeton University Professor Uwe Reinhardt recently pointed out that a policy calling for a global national health budget could not be implemented easily in the United States because of a lack of an institutional framework such as exists in the German health system. A number of recent reforms of the German system were implemented Jan. 1, 1993. These reforms are designed to make the German health insurance system more competitive and to provide better public control over it. Some of the changes are:

* Limiting the number of physicians who may practice under the statutory insurance system.

* Instituting DRG-type compensation for hospitals.

* Encouraging open, but regulated, competition among the sickness funds.

* Limiting growth of and outlays for physician services and fund premium income.

* Limiting global budgets for prescription drugs.

The new law contains several provisions that require the sickness funds and the physician associations to reach agreement or have matters settled by decree.

The basic lesson Americans can draw from the West German health experience is that it is possible to provide universal access to health insurance-and to needed health care--without having the financing for such a system flow through the public budget (12 percent in Germany versus 42 percent in the United States).

At the same time, the West German experience illustrates that it is extremely difficult and probably impossible to maintain an unregulated, pluralistic, competitive health insurance system that avoids adverse risk selection and, at the same time, maintains horizontal equity in the financing and distribution of health care. The more freedom of choice is granted to those who purchase health insurance from a multitude of competing insurance carriers, the more opportunities there are for both the insured and the carriers to sort people into distinct risk classes. And the more inequitable will be the distribution of health care and its financing, unless society is willing to subsidize health insurance premiums of high-risk, low-income persons with tax-financed subsidies.

Perhaps most relevant to the immediate crisis in the United States of an uninsured population is the willingness of the West German government and its citizens to embrace East Germany, with its 539 hospitals, 626 polyclinics, and 17 million citizens. The East German health system has essentially been state run group practices and is in the process of being abandoned. It is estimated that $20 billion will be needed to upgrade hospitals to Western standards and 20-25 percent of hospital beds will have to be closed. There is also duplication of academic medical centers and other resources. The average GP salary has been $18,280, with a $3,000 bonus for not fleeing to the West and a $1,200 rural differential. The polyclinics were significantly overstaffed with physicians and nurses, some of whom have been lured to the West. The average GP worked 33 hours per week, of which only 20 were involved in direct patient care. The old systems gave incentives for shunning work. Profit-minded doctors in the East must now adapt to longer hours and ways of cultivating relationships with patients. Nevertheless, the West German people have embraced responsibility for the 17 million Germans who have resided for 40 years in communism-dominated East Germany. It appeared to me that there is a willingness to carry out this responsibility, including paying the taxes necessary to cover these individuals. To me, this is a lesson for us as we attempt to cope with 35 million uninsured Americans.

In the January-February 1994 issue of Physician Executive, an article by W. Grayburn Davis, MD, will explore further the European concept of "solidarity" as it applies to the delivery of health care services.

Further Reading

Iglehart, J. "German/s Health Care System (1 )." New England Journal of Medicine 324(7):503-8, Feb. 14, 1991.

Iglehart, J. "Germany's Health Care System (2)," New England Journal of Medicine 324(24):1750-6, June 13, 1991.

Reinhardt, U. "Can We Learn Health Care Lessons from Germany? Internist 32(5):6-9,17, May 1991.

Whitney, C. "Medical Care in Germany: With Choices, and for All." New York Times, Jan. 23, 1993.

Kirkman-Lift, B., and Neubaurer, G. "The Development of Quality Assurance in the German Health Care System." QRB 18(8):266-74, Aug. 1992.

Galvin, R. "Physician Payment in Canada, Germany, and the United States." Physician Executive 19(3):22-8, May-June 1993.

Blendon, R., and others. "Physicians' Perspectives in Caring for Patients in the United States, Canada, and West Germany." New England Journal of Medicine 328(14):1011-6, April 8, 1993.

Frederic G. Jones, MD, FACPE, is Executive Vice President, Medical Affairs, memorial Hospital, Anderson, S.C. He is Chair of the College's Forum on Quality Health Care and a member of its Forums on International Medicine and health Care and on Bioethics and its Society for Hospitals.