Health financing reform idea: health fund

• Abstract
• Purpose of health policy or idea
• Characteristics of this policy
• Political and economic background
• Purpose and process analysis
• Expected outcome
• References

Abstract

The health fund is currently the most favored proposal for health care financing reform. It is a compromise between the citizens insurance and the flat-rate health premiums scheme, favored by Social Democrats and Christian Democrats respectively. The health fund will draw on employee/employer contributions and on tax revenues. Sickness funds are to receive a flat-rate amount for each insured person out of this fund. Insurance of children will be financed through taxes.

Purpose of health policy or idea

The grand coalition's working group on health care reform discusses the health fund model (Gesundheitsfond) as part of a package of measures to secure the long-term financial sustainability of the German health care system. An early version of the funding model was developed by the scientific advisory council of the Ministry of Finance in 2005 and promoted by Volker Kauder, leader of the parliamentary group of the Christian Democratic Party. The model and its detailed design are hotly debated between and within the political parties and among health experts, labor unions, sickness funds, etc.

The grand coalition is under pressure to develop a model for sustainable financing of the German health care system. It is estimated that in the first quarter of 2006, sickness funds incurred a deficit of €1.2 billion which is equivalent to about 3% of their expenditure. This deficit can be attributed to decreasing revenues (due to demographic change and high unemployment rates) and increasing expenditures (especially for inpatient care and pharmaceuticals).

Therefore the health fund, which combines aspects of the citizens insurance scheme and the flat-rate health premiums scheme, meets increasing acceptance from policy makers (for a description of these schemes refer to section "Origin of idea" and to survey (2)2003 "Proposals for SHI reform").

The envisioned health fund will draw on employer and employee contributions as well as on tax revenues. Contributions and tax revenues will flow directly into the health fund and will no longer be paid to health insurers.

• employees will have to pay about 6.5% out of their pre-tax income
• employers will have to pay about 5.5% of the employees' pre-tax income 
• tax revenues will come from an increase of up to 8% in citizens' tax liability (Gesundheitssoli) or from an income tax increase of three percentage points, and will help fund insurance of children

Sickness funds and private health insurances will receive a flat rate of €150-170 out of the fund for each insured person and will be entitled to additional risk-adjusting payments if they insure many old or sick persons. Funds that operate efficiently may refund part of the contribution payments to their members or offer additional benefits. Excess costs may be covered by charging a nominal premium from their members (max. €40 per person).

The detailed design of the health fund is still under debate. Members of the working group have not yet agreed on important issues such as who should contribute to the health fund and how the employer contribution should be shaped (c.f. section "policy paper and stakeholder positions"). Therefore, the outcomes of this reform proposal are difficult to estimate at this point.

Main points

Main objectives

• to secure long-term financing of health care insurance system
• to stabilize or reduce wage related costs and thus to give employers an incentive to invest in new workplaces
• to increase equity by broadening the contribution base (all types of income (i.e. from rent, capital investments, etc.) will be included in the assessment of contribution rates; self-employed persons will possibly be included into the scheme)
• to promote competition between health insurance funds by urging them to operate in an efficient way

Groups affected

The insured, statutory sickness funds, private health insurers, tax payers, employers

Degree of Innovation	traditional		innovative
Degree of Controversy	consensual		highly controversial
Structural or Systemic Impact	marginal		fundamental
Public Visibility	very low		very high
Transferability	strongly system-dependent		system-neutral

Political and economic background

In September 2005, a grand coalition of Christian Democrats and Social Democrats came into power. Facing urgent problems such as the high unemployment rate and the aging of the German society (that lead to decreasing revenues for health insurance funds) and increasing health care expenditures, the government is under pressure to develop a sustainable financing mechanism for health care.

The coalition government paper stipulates

• long-term sustainability of the health care system,
• protection and creation of employment that is subject to social insurance contributions, 
• more efficiency through competition, and
• maintenance of the pluralistic health care system (statutory and private health insurance) and free choice of providers and insurers.

The aim of the government is to complete an outline containing cornerstones of its health care reform plan before the parliamentary summer break begins on July 8, 2006.

Change of government

Social Democrats and Christian Democrats are forced to cooperate in the grand coalition. The health fund integrates the concepts of citizen?s insurance scheme, favored by the Social Democrats, and flat rate premiums, favored by the Christian Democrats.

Change based on an overall national health policy statement

Coalition paper of the grand coalition

Purpose and process analysis

Current Process Stages

	Idea	Pilot	Policy Paper	Legislation	Implementation	Evaluation	Change
Implemented in this survey?

Origins of health policy idea

The health fund model was developed by the scientific advisory council of the Ministry of Finance in 2005 and promoted by Volker Kauder, leader of the parliamentary group of the Christian Democratic Party, in April 2006.

The main purpose of the health financing reform idea is to implement a sustainable financing mechanism for the German health care system. Facing increasing expenditures and decreasing revenues, the current system is not maintainable over the long run. The coalition parties seem to agree on the idea of a health fund as such but differ with respect to the detailed design of the new health fund and the focal points of the reform (c.f. section "policy paper and stakeholder positions").

The debate about the reform of the German health care system goes back many years. After the governing coalition of Social Democrats (SPD) and the Green Party (Bündnis 90/Die Grünen) had been confirmed in power in the general elections in 2002, the Minister of Health, Ulla Schmidt, had established a commission, the so-called Rürup Commission, with the task to develop a proposal on how to reform the German social security systems.

The commission developed two main reform proposals, aspects of which are now included in the health fund idea (for more detailed information on the two reform proposals c.f. survey (2)2003 "Proposals for SHI reform"):

1. Citizens insurance scheme (Bürgerversicherung): contributions to health care insurance should be levied according to ability to pay; inclusion of all citizens (including privately insured citizens); all types of income (i.e. income from rent, capital investments, etc.) should be subject to the calculation basis of contributions; income redistribution should remain part of the health insurance system
2. Flat-rate premiums (Gesundheitsprämie): everyone contributes the same premium, regardless of income and health status; contributions to SHI should be decoupled from labor costs; income redistribution should be shifted to the tax system (i.e. by subsidizing the health premiums of the poor)

Another reform proposal was developed by the Herzog Commission, which had been established by the then opposition party (Christian Democrats). This commission developed a proposal similar to the flat-rate premium proposal of the government commission. However, it combined flat-rate premiums with a capital stock to be built up through contributions by all insured and aimed at compensating individually for illness and aging.

Initiators of idea/main actors

• Government: The government working group on health care reform seems to agree on the general idea of a health fund but is divided over the detailed design of the fund. Main contentious issues are the integration of private health insurers and employer contributions.

• Payers: Sickness fund representatives oppose the health fund. They argue that the bureaucratic effort would be much too high. Private health insurers are also against the health fund model. They criticize that keeping the current pay-as-you-go system will not make the German health care system viable for the long-term. Private health insurers also reject the idea to integrate privately insured persons into the fund.

• Civil Society: The unions are sceptical because they fear that increasing costs will be carried by employees alone, and they criticize the health fund idea as too bureaucratic. They demand to reform free co-insurance of children and spouses (i.e. introduction of tax-financed insurance of children), to integrate private health insurers into the health fund scheme, to broaden the contribution base by taking into account income from capital investments and by abolishing the income threshold for compulsory insurance, and to retain the risk structure compensation scheme.

• Political Parties: Christian Democrats and partisans of the Christian Social Union (the Christian Democrats' Bavarian branch) generally agree on the health fund idea but demand the maintenance of the plural system of statutory and private health insurance as it is stipulated in the coalition paper. Moreover, CDU/CSU want to freeze employer contributions in order to stabilize labor costs.The left wing of the Social Democratic Party opposes the health fund model, especially the idea to freeze employer contributions and to allow sickness funds to charge a nominal premium if the funds don?t get by with the flat-rate premiums they receive out of the fund. They demand the integration of private health insurers into the new health fund.

Approach of idea

The approach of the idea is described as:
new:

Stakeholder positions

The grand coalition, political parties, sickness funds, the scientific community, media and the public are divided over the reform proposal and its detailed design. The following issues are still controversially debated:

• Contributors to the health fund: A very controversial issue is the question who should make contributions to the health fund. The Social Democrats want to oblige the privately insured to make contributions to the fund. Most Christian Democrats are opposed to this at least publicly mainly due to legal concerns: existing private health insurance contracts cannot easily be cancelled or modified. It is also unclear what would happen to the money that private insurers put aside for each insured person and that is to cover sickness costs in old age. Another issue is how contribution rates should be assessed. Statutory sickness fund contributions are based on income, private health insurance premiums on health risks. Some members of both parties argue that at least self-employed persons and those who can opt out of statutory health insurance because their income is above the income limit for assessment of contribution should pay into the health fund. However, civil servants, who represent almost 50% of the privately insured, should be exempt from making contributions. The reason for this is that the federal government and the federal states as the employers of civil servants would have to pay employer contributions. That would mean additional expenditures for the already strained budgets at the state and federal level.
• Employer contributions: Christian Democrats demand a freezing of the employer contributions to health insurance in order to stabilize labor costs. Social Democrats want to abolish the contribution assessment ceiling for employers so that employers would have to pay a higher contribution amount for employees with relatively high incomes. Indirectly this would lead to a relief of employers with below-average wages (as e.g. the construction industry) what has not been recognized publicly.
• Administration of the health fund: Opponents of the health fund idea claim that sickness funds and tax authorities lack human resources to take over administration of the fund.
• Collection of contributions: It is unclear who will be responsible for collection of contributions. Currently, sickness funds collect social security contributions (contributions for health insurance, long-term care insurance, pension insurance, and unemployment insurance) and forward them to the respective institutions.
• Risk adjustment payments for old and sick insurance members: The working group has not yet decided according to which rules these extra payments to sickness funds would be determined.
• Tax revenues: It is unclear where additional tax revenues should come from. In 2007, the public will face one of the biggest increases of value added tax in postwar history and therefore citizens would strongly oppose additional tax burdens.

Actors and positions

Government
Grand coalition	very supportive		strongly opposed
Payers
Statutory health insurers	very supportive		strongly opposed
Private health insurers	very supportive		strongly opposed
Civil Society
Unions	very supportive		strongly opposed
Political Parties
CDU / CSU	very supportive		strongly opposed
Left wing of the Social Democrats	very supportive		strongly opposed

Influences in policy making and legislation

The grand coalition intends to submit an outline of health care system reform measures at the beginning of July. The reform proposal is highly controversial and the negotiation process is rather complicated. However, formal legislative changes will be required if the government decides to implement this reform.

Actors and influence

Government
Grand coalition	very strong		none
Payers
Statutory health insurers	very strong		none
Private health insurers	very strong		none
Civil Society
Unions	very strong		none
Political Parties
CDU / CSU	very strong		none
Left wing of the Social Democrats	very strong		none

Positions and Influences at a glance

Adoption and implementation

The actors involved in the adoption process will be the parliament, the Ministry of Health, statutory sickness funds as well as private health insurers, and the insured. However, it is still unclear if the health fund model will be accepted and how the detailed design will look like.

Monitoring and evaluation

n/a

Results of evaluation

n/a

Expected outcome

The envisaged effects and expected outcomes of the new financing mechanism are the following:

• Redistribution of revenues between sickness funds is going to be less pronounced since every health fund will receive a flat-rate amount for each insured person. Income differences don't need to be offset any longer.
• Health funds that operate efficiently can refund part of the contributions to their insured. This will lead to competition about prices and quality.
• Tax-financed insurance of children will help lower employer/employee contributions and give employers an incentive to invest in new jobs.
• High income earners, those who are either voluntarily insured members of statutory health insurance or privately insured will be charged proportionately higher contributions or premiums compared to their current contributions if the contribution assessment ceiling is raised.
• The abolition of the contribution assessment ceiling for employers will indirectly lead to a relief of employers with below-average wages.

Impact of this policy

Quality of Health Care Services	marginal		fundamental
Level of Equity	system less equitable		system more equitable
Cost Efficiency	very low		very high

References

Sources of Information

Weinbrenner, S., Busse, R. (2003): Proposals for SHI reform. Health Policy Monitor. Survey no (2)2003.

Author/s and/or contributors to this survey

Melanie Zimmermann, reviewers: Reinhard Busse, Sophia Schlette

Suggested citation for this online article

Melanie Zimmermann, reviewers: Reinhard Busse, Sophia Schlette. "Health financing reform idea: health fund". Health Policy Monitor, June 2006. Available at http://www.hpm.org/survey/de/b7/1