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Health Care’s Swiss Solution
Fostering competition among insurers has empowered consumers and controlled costs.
2 October 2009

It’s now clear that President Obama’s preferred vehicle for health-care reform is the bill taking shape in the Senate Finance Committee under the watchful eye of Senator Max Baucus (D-MT). As the substance of that bill becomes evident—sweeping new regulations of the private insurance industry; insurance exchanges where the uninsured can buy from a menu of government-approved private plans, with generous government subsidies; and government-financed nonprofit co-ops that would compete with the private sector—it appears that last summer’s arguments against a government (or “single-payer”) system, like that of Great Britain’s, were misplaced. While many U.S. liberals may yearn for such a system, any health-care reform that passes muster in Congress is likely to be very different and create something more akin to the systems of France or Germany than Canada or the U.K. If the biggest disease threatening the long-term health of the U.S. economy is entitlement spending in Medicare and Medicaid, however, these models are also the wrong solution.

If the U.S. opts for insurance co-operatives, heavily subsidized by the federal government, it will be travelling down a path opened by Bismarck in the nineteenth century and long embraced by politicians in France and Germany. In both these countries, the majority of citizens are enrolled in heavily regulated and subsidized sickness funds—mandatory health-insurance plans that charge premiums based on income—which are mainly provided through employers.

In France, at least, this has until recently provided a good blend of universal coverage and high-quality care— the holy grail of any health reform. The big problem is cost. The system constantly consumes far more than citizens pay in dedicated taxes and other health-related contributions. Between 1997 and 2006, the French health system ran up a cumulative deficit of $61 billion (adjusted for inflation) for a population of 65 million—a little over 20 percent of the current U.S. population.

Germany, too, has long relied on its mandatory sickness funds, which insure about 90 percent of the population (those over a certain income can choose to buy private insurance). These funds are required to give certain health benefits to subscribers, as well as provide temporary income to those too sick to work. In theory, the funds sustain themselves from a 14 percent payroll tax, split equally between the employer and employee. In reality, the funds increasingly rely on taxpayer support through general revenues. Health-care costs in Germany are exploding, with estimates reckoning that it will consume 30 percent of GDP by 2020 if left unreformed.

Central governments in both countries have responded to ballooning health-care costs by rationing care and tightening control over the system, undermining patient choice and access. In 2004, 286 of France’s most senior hospital doctors signed a petition bemoaning the increases in waiting lists. “In casualty units, sick people have to wait for hours, sometimes even days, on gurneys, because there are no beds for them in the hospital,” said the doctors’ petition, sent to Le Monde. The focus on containing costs has also had the perverse effects of reducing competition between providers and limiting the use of technological innovations that could lead to the cure of costly chronic conditions and help keep patients out of more expensive, hospital-based care.

In Germany, successive governments have been forced to charge citizens for over-the-counter drugs and increase co-payments on physician visits and prescription drugs. Anecdotally, waiting lists for certain kinds of treatment are on the rise, and the use of technology such as MRI and CT scanners lags considerably behind the U.S.

As outsiders, it seems to us that the real problem with U.S. health care is not the absence of public provision for the uninsured (who are generally young and healthy), but a lack of competition among health insurers, resulting in mind-bogglingly expensive premiums. The U.S. links the tax deduction for health insurance to employers and not individuals, and current law forbids the selling of health insurance across state boundaries: both of these policies are major barriers to insurance competition and cost control. Until individuals can choose their own portable insurance from a transparent, truly competitive national market, cost pressures will remain unchecked.

U.S. policymakers still enamored of European solutions have better models to choose from. Switzerland enjoys some of the highest quality health care in the world, largely because it has avoided some of the pitfalls of the Franco-German model, allowing a large measure of consumer-driven competition while subsidizing premiums for the indigent with taxpayer dollars. It’s not perfect: mandatory insurance has led to some cartel-like behavior among insurers and given the government increased control over health-care provision, but it has kept a lid on health-care inflation while continuing to offer patients high quality and more choices.

The Dutch have followed suit. The Netherlands for years labored under a Franco-German health-care model that absorbed 30 percent of its GDP growth. In 2006, it shifted to a Swiss-style system in which all citizens must purchase insurance from one of 41 competing private-insurance funds. This introduced a strong element of price competition into the system, with large numbers of switching customers forcing insurers to focus on patients’ needs and increase their back-office efficiency. The new arrangement has injected innovation into the system, too, as insurers seek to steal a march on their competitors. Crucially, costs have been kept under control without rationing. Since the Dutch enacted their reforms, health-care spending inflation has slowed from 4.5 to 3 percent annually, even as quality has improved.

The lessons for the U.S. are clear. Creating a state-subsidized insurer or non-profit co-op to cater to those unable to afford private premiums is the most expensive way of covering the uninsured. As Switzerland and the Netherlands demonstrate, lifting barriers to competition among insurers can provide a more sustainable solution to the cost and access problems that plague American health care. Mandatory insurance, however, needs careful checks on insurance cartel power.

Better still, a uniquely American solution would create universal health-savings accounts (with government subsidies targeted at the poor and high-cost patients) that would encourage consumers to adopt healthy lifestyles and seek care in cost-effective settings—like buying generic drugs at Wal-Mart or seeking basic care from retail clinics. The central insight now lacking in the health-care debate (whether in Europe or the U.S.) is that consumers demand better technology at lower cost from every market where they have “skin in the game”—whether it be electronics or automobiles. A combination of high-deductible catastrophic health insurance and HSAs is the only kind of “universal health care” that will, in the long run, work.

Philip Stevens is research director at International Policy Network, a London-based think tank. Alphonse Crespo is an orthopedic surgeon in Lausanne, Switzerland and founder of Medicine & Liberty, a market-oriented physicians’ network.

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