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The Influence Of The Labor Market On German Health Care Reforms
On the surface, the health care systems of Germany and the United States seem to be quite different from each other. However, in both systems, health care financing has close ties to the labor market. Recent changes in Germany’s labor market have challenged the traditional employment-based funding of its social health insurance (SHI), to the extent that all political parties advocate decoupling health care financing from labor costs, to various degrees. This paper explores the impact of changes in the labor market on the proposed reforms in health care financing in Germany and suggests some implications for the United States.
GERMANY HAS LONG BEEN PERCEIVED AS A MODEL for social health insurance (SHI). The strengths of the German system include broad access to high-quality care and the virtual absence of waiting lists. Close ties with the labor market originally secured such benefits as reduced administrative costs through employment-based coverage, reduced adverse selection, and centralized collection of payments.1 During the economically stable 1950s and 1960s, these advantages of the system outweighed its weaknesses. As Germany’s economic growth began to slow in the 1970s, though, the trade-offs became apparent. The labor market-based financing provides a narrow financial base for the SHI scheme, which makes it vulnerable to changes in the labor market. To scrutinize the financial sustainability of the system, in 2002 the red-green (Social Democrat/Green party) government established the Rürup Commission, which drew up two reform options.2 Both options, favored in turn by two major political parties, focus to varying degrees on the decoupling of health care financing from the labor market; they differ, however, in their perceived impact on that market. In this paper we examine the effects of recent labor-market developments on SHI financing in Germany and the concept of solidarity. We introduce the two leading reform proposals, including their possible implications for the labor market, health care access, and solidarity. We conclude by discussing the latest trends in the reform debate and their implications for the German and U.S. health care systems.
Social health insurance. Germany’s SHI is part of the country’s broader social security architecture. Its guiding principle is solidarity, which consists of two parts: intergenerational and interpersonal redistribution.3 Services are rendered according to medical need. Funding is made on a "pay as you go" principle (inter-generational distribution). Contributions are levied as a percentage of gross wages, with a cutoff point (income threshold) of  3,525 per month.4 Contributions were split equally between employer and employee until 2005, when the balance was shifted to favor employers (46 percent employer, 54 percent employee).
All Germans earning below the income threshold are compulsory members of the SHI scheme. This setup implies cross-subsidization from low to high risks, from high-income to low-income earners, and from younger to older members of the insured population (interpersonal distribution).5 Additional cross-subsidizations between sickness funds (nonprofit organizations that collect premiums from members and pay health care providers according to negotiated agreements) are provided by the SHI’s Risk Compensation Scheme (RCS). The RCS was implemented in 1992, along with free choice of sickness funds, to compensate for differences in income and risk structures between funds. Risk adjusters include age, sex, entitlement to sickness benefits, and disability. In 2003, transfers between funds totaled Labor market. The German SHI system is based on the assumption that a large majority of society has access to health care via employment. Nonworking spouses and children are covered free of charge. Contributions for retirees are shared equally between the retirees and pension funds; contributions for the unemployed are covered entirely by unemployment insurance. Since the 1970s the German economy has slowly shifted from a manufacturing to a service orientation. This shift, together with a large labor force supplied by the baby-boomer generation, helped facilitate structural unemployment in Germany (unemployment that results when a gap occurs between employers’ needs and workers’ skills). To reduce long-term unemployment and to cope with the rising competitiveness of global markets, more and more jobs were created outside the typical labor-market architecture: Low-wage jobs were transformed to self-employed jobs, which are exempt from Germany’s compulsory insurance, even if the income earned is below the income threshold. As a result, a growing number of German jobs now operate outside the statutory SHI, and workers must seek private insurance. For other low-wage jobs, workers’ wage-dependent contribution rates of (on average) 14 percent to the SHI were reduced to an 11 percent flat rate. German reunification in 1990 aggravated the pressures of globalization on the labor market. The labor market in East Germany broke down almost completely and did not recover in most areas. While unemployment rates in western Germany range from 6.2 percent to 13.3 percent, rates in eastern Germany are higher: 16.6–20.5 percent.7 Demand for health care in the east, however, quickly adapted to the level of western Germany as the West German system was essentially imported into East Germany. As a result, positive transfer payments from the RCS for sickness funds in former East Germany are constantly increasing.
Demographic transitions. Population aging occurs when a country has both a birthrate that is too low to sustain a stable population size and rising life expectancy (Exhibit 1  ).8 As a result, a shrinking working-age population has to support a growing number of retirees: In 1995, 4.4 working members supported 1 retiree; by 2020 this will shift to 2.1 to 1.9 To keep the support ratio constant until 2050, an average of 3.4 million working-age immigrants would be needed each year. To keep the total population constant (with a decline in the support ratio from 4.4 to 2.3 in 2050), an average of 324,000 immigrants per year would be required. Nevertheless, there is no consensus policy on immigration with respect to the social insurance system.10
Health care costs. With almost 11 percent of its gross domestic product (GDP) spent for health care, Germany is a worldwide leader in health care spending.11 In international rankings, only the United States and Switzerland rank higher. Annual average spending has been relatively stable (increasing 2 percent per year), which means that it has not exceeded nominal GDP growth.
Labor market and unemployment.
Germany is a member of the G8 (Group of 8), a group of leading industrial nations; its national GDP was
Erosion of income base.
For decades, there has been an imbalance between GDP growth and wages that contribute to the SHI scheme. As the overall increase in gross wages slowed down, increases in gross wages for SHI members fell 0.4 percentage points short of the average growth of gross salaries and wages, which in turn led to an erosion in income that is subject to SHI contributions (Exhibit 2
Additionally, SHI contributions for the unemployed (from unemployment insurance) were reduced, but benefits for the unemployed were not cut; this created an imbalance among incoming funds and benefits provided. Also, SHI members earning an income above the threshold were allowed to switch to private health insurance.14 Young and healthy members in particular take advantage of this opportunity, because the risk-adjusted premiums of private insurance plans are lower for them than the wage-dependent SHI contributions. As a result of these forces, with few exceptions since 1995, SHI revenues have lagged behind expenditures, leading to negative overall financial performance (Exhibit 3 ).
As costs rose in the SHI, cost containment policies such as budgets, spending caps, and reimbursement reforms could not avert an increase in average contribution rates; these rose from 13.15 percent of annual earnings in 1995 to 14.23 percent in 2004.15 As a result of the demographic transition and innovations in medical technology (which cause health care costs to rise), contributions from annual earnings are expected to rise even further (Exhibit 4 ).
Any long-term discussion of sustainable financing must consider the following questions: (1) How high can nonwage labor costs be raised without affecting international competitiveness? (2) Should financing be based on the concept of solidarity? (3) How should interpersonal and intergenerational distribution be implemented? These issues are beyond the scope of our paper.
Despite the challenges that have arisen in recent years, Germany’s SHI system has maintained its remarkable social stability. This suggests that health care as part of a larger contract of social security is deeply ingrained in both citizens’ and policymakers’ perceptions.16 However, the cost pressures resulting from the labor-market shifts discussed above have forced the government to react. Since 1993 the government has attempted to open the system to more competition, to achieve an estimated 9 billion in potential savings.17 To do so, experts advocate improving coordination and collaboration as well as curbing quantitative and qualitative oversupply regarding hospital beds, ambulatory specialty services, and pharmaceuticals.18
The newest reform, the SHI Modernization Act of 2004, stabilized financing by shifting costs to patients (raising copayments and ceasing coverage of over-the-counter drugs) and the pharmceutical industry (compulsory rebates for social health insurance–funded drug purchases). The overall financial relief was about
Labor-market implications for reform.
Nonwage labor costs are increasingly viewed as the main cause for worldwide industries’ reluctance to invest in Germany and to create new jobs.20 Two main reform concepts have emerged in response: the All Citizens’ Health Insurance (ACHI), favored by the Social Democrats, and the Flat-Rate Premium Scheme (FRPS), developed by the Christian Democrats (Exhibit 5
Who should be insured? Both reform options plan to extend insurance coverage to include currently exempt jobs and the privately insured, to strengthen the SHI’s financial basis. The effects of the ACHI would reduce average contribution rates by 0.7 percentage points, balanced against an estimated rise of 0.1 percentage points in contribution rates because of additional costs incurred. Under this scenario, all who enter the labor market would become members of the ACHI/SHI. Members of private insurance plans could either stay in those plans or switch to SHI sickness funds. Whether they would be allowed to take their accumulated capital reserves with them, when switching to SHI funds, remains a matter of debate. It is expected that initially the old and sick will switch to the SHI, because contribution payments will be lower for them in the SHI compared with the risk-adjusted premiums in private insurance. Private insurance plans are not allowed to enroll any more new members, which will eventually lead to the collapse of the private insurance system. Thus, the future role of private insurance plans under this scenario is still unclear. They could either operate under SHI conditions or offer supplemental benefit packages beyond the coverage offered under the SHI.
Some reformers propose to raise the maximum level of income subject to contribution payments to the same cutoff level as the statutory pension insurance scheme. This would lower contribution rates approximately 0.8 percentage points further. This option has been rejected so far because it would impose an extra burden of up to Decoupling health care financing from the labor market. To decouple health care financing from the labor market, the ACHI aims to expand the SHI’s financial basis by levying contributions from capital and rent income, not just earnings. This would counteract the demographic challenge, compensate for the effects of a shrinking share of wage and salary income on GDP, and ease the pressure on the labor market by creating the potential for lower contribution rates. The effect is estimated at 0.5 percentage points. Analysts believe that lowering nonwage labor costs would be an important signal in the face of high structural unemployment and globalization pressure. Also, low-income households would get financial relief, which is expected to promote domestic demand for manufactured products.
The FRPS would completely decouple SHI financing from the labor market. Every citizen would pay a flat rate of approximately Maintaining social equilibrium. The implementation of the ACHI would strengthen solidarity at the expense of a less rigorous decoupling of SHI financing from the labor market. Cross-subsidizations, which are an important part of solidarity, would be strengthened by extending insured subgroups and by targeting capital income. Redistribution would be maintained within the SHI.
The implementation of the FRPS would abolish solidarity in its present form in the SHI and relocate redistribution and cross-subsidization to the tax system. Proposals suggest a compensation system with a probable cutoff point at 12.5 percent of gross wages. This would require sizable additional public subsidies (up to
Since neither Social Democrats nor Christian Democrats could achieve a majority in the last election, neither party will be able to implement its concept wholly. A possible compromise includes maintaining wage-related contribution rates, levying contributions on other forms of income, and introducing a "mini" flat rate of approximately 30–50 per month. Keeping contribution rates dependent on wages has several advantages. For one, employers will demand structural reforms to make the system more efficient, so that their contributions rates do not rise. Further, it would be difficult to completely abolish a system that most citizens favor. To levy contributions on other forms of income broadens the SHI’s financial basis and makes room for a possible lowering of contribution rates. Additionally, it would decouple health care financing to a certain degree from the labor market. Introducing a "mini" flat rate would serve three purposes: First, it would facilitate competition between sickness funds, which could determine the level of their flat rates individually. Second, it would generate additional revenues and thus decouple health care financing from the labor market. Third, it would allow both parties to implement part of their original concepts.
Two other issues that figure prominently in the discussion of a compromise are the role of private insurance plans and the insurance of children, which does not require a contribution from earnings. The future role of private insurance is one of the most controversial issues between the coalition parties. Because the abolishing of private insurance plans faces too much resistance, Social Democrats advocate that the privately insured no longer be allowed to evade solidarity. Private insurance plans should become part of the SHI’s RCS. This would generate additional revenues of up to Although the final shape of the compromise is unclear, it should leave room for both parties to develop the system further in accordance with their own concept if they should gain a majority in the next election. No matter which party wins that election, it seems unlikely that Germany’s health care financing will be completely decoupled from the labor market. As in the United States, employers are seen as a regulative force to curb rampant cost increases. Some U.S. reformers aim to lower employers’ health care contributions by extending the insurance system to employers that do not offer insurance.27 This is not an option for Germany, because all employers must offer insurance, and contribution rates in the low-income sector are kept deliberately low. Instead, German reformers advocate keeping employers’ contribution rates lower by extending the financial basis of the SHI to income from other sources besides wages and by shifting payment for certain benefits to the tax system. This would lead to a system that would combine a broader financial basis with the advantages of a labor market–financed system. However, it would also render the system vulnerable to the uncertainties of tax payments. Solidarity would be maintained at a high level, because those with higher incomes would contribute more. Because solidarity is a prominent concept in Germany’s SHI, cutting benefits sharply or excluding certain populations from insurance coverage, as is discussed in the United States, is not an option in Germany. To keep nonwage labor costs down, employers’ share of contributions might be frozen at approximately 6 percent. Any increases in contribution payments would then be financed solely by the insured. If the SHI moves toward a broader financial basis, this could be an interesting alternative for the United States to consider. The U.S. insurance system is more flexible than Germany’s because it is a market-based system that can react more quickly than Germany’s typical self-governing system in which all stakeholders must find a compromise. For instance, sickness funds in Germany have to contract unilaterally, whereas U.S. health plans can contract selectively. However, the U.S. system excludes high-cost subpopulations. Resistance to broadening the U.S. system to universal coverage might diminish if a wider financial basis could be attained for its financing.
Stephanie Stock (Stephanie.Stock{at}uk-koeln.de) and Marcus Redaelli, both physicians, are health economists at the Institute of Health Economics and Clinical Epidemiology, University of Cologne in Germany. Karl Lauterbach, a professor of medicine there, is on furlough as a member of the German parliament. No third-party funding was used in preparing this paper. The authors thank the reviewers for their helpful comments.
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