Kristian Niemietz Blog

Published in “Gesundheit!”, May 2008

I recently told a former fellow student from Berlin about the desperate struggle of finding a reasonable flat in London. He asked why landowners would not simply respond to the shortage by building new dwellings en masse? So I explained that British land use planning laws were among the most restrictive in the world. He was very surprised to hear this. Hitherto, he had believed that in the “Anglo-Saxon Economic Model”, there was little, if any, state regulation.

When looking at specific sectors of an economy, buzz phrases like “Anglo-Saxon Model” or “Rhineland Model” are not much use. One sector for which this is particularly true is health care. Long before Michael Moore’s film “Sicko” arrived in the cinemas, Europeans tended to belief that the United States had a model of free market health care. Americans, in turn, often believe that Europe has a uniform model of so-called ‘socialised medicine’. Rampant capitalism there, commandand-control-style health care here: what about the facts?

In reality, there is not much truth to the notion that American health care is solely based on free markets and individual choice. Most Americans cannot even choose their health insurance company themselves. Only 6% of the population are covered through an individual or family contract; most are automatically enrolled in an employer-based scheme. There is no inter-state competition between health insurers. A citizen of New York cannot sign a contract with an insurer based in New Jersey. This is not only a severe limitation on customer choice, but also prevents health insurance companies from exploiting efficiencies related to economies of scale. Again, many observers argue that the United States’ medical market could absorb many more medical graduates than there are currently places in medical schools. This might be a nice situation for established physicians, but it means overpriced consultations and hospital bills for patients. As far as the second notion, socialised medicine in Europe, is concerned, matters are likewise more complex. While it is true that throughout Europe, the bulk of health care spending is government spending, it is also true that the state tends to shape the contractual relationships between patients, providers and insurers. That said, in some parts of Europe, there is a degree of free choice in health care which in some instances is more market oriented than America.

Take, for example, the development of Health Maintenance Organizations (HMOs) in

Switzerland. HMOs first emerged in the USA as an alternative to traditional health insurance policies. Insurance systems suffer from one basic problem: neither the provider nor the consumer of a service has an incentive to economise. Both know that a third party will pay. But if all clients of an insurance company want to get the most for the premiums they have paid, these premiums will have to be raised. HMOs are one way - there are several others - to evade this shortcoming. An HMO is an organisation which runs health care centres and hospitals for its members, so it is, on the one hand, a health care provider. Its clients pay a monthly fee in exchange for free treatment in case of need, so it is also an insurer. Operating as both an insurer and a provider means that there is no third party payer anymore. HMOs offer a very restricted choice of physicians and clinics, but their premiums are lower. They are not ‘better’ or ‘worse’ than traditional health insurance; they are an alternative for people who do not value choice in health care very much, but who still want a reasonable quality of care. They are an additional option that increases diversity. Since 1996, Swiss workers have had the option of joining an HMO instead of an insurance company. One study showed that even after adjusting for the fact that HMO clients are generally healthier than the traditionally insured, they still record a cost advantage of 32% vis-àvis the latter. The overall market share of HMOs in Switzerland is now 7%, but this is an incomplete picture. One of the main cost advantages of HMOs is that they provide care in a more subsidiary way. They are less likely to hospitalise a patient who could also be treated in ambulatory care. But, hospitals in Switzerland are mostly paid for by the cantons, not the insurers. And this means that the lower hospitalisation rates of HMOs cannot be fully translated into lower premiums.

But it is striking that the business model of the HMO, originally an American idea, has fared better in alpine exile than in its home country. American HMOs have been subject to furious attacks, and surveys reveal that patients’ confidence in them is at rock bottom. They have been accused of denying care at will to keep costs down. This, however, is an American debate. To date, to the author’s knowledge, no “Swiss Sicko” is in the making. Could the difference consist in the fact that all clients of Swiss HMOs have numerous alternatives at hand? Does this model work better when it has to prove its merits in stiff competition with other models?

Another example of an American-inspired model thriving elsewhere can be found in the Netherlands. Dutch health insurers can offer their clients two types of policy. In the more expensive one, they can go to any doctor in the country. Alternatively, the insurer offers to go shopping for the doctors who offer the best value for money. It establishes a contract network with these, and clients who commit only to see physicians which are part of the network can get a good rebate. A similar arrangement has been known for a long time in the US as a Preferred Provider Organization (PPO). This started out as a way to contain health care costs without sacrificing quality or accessibility. In the Netherlands, this ‘contracted care’ option is now conquering the market. Three out of five Dutch citizens provide for their health in this manner. The Dutch health system in general offers lots of choices. Following a thorough overhaul in 2006, 93% of the Dutch population are now privately insured, ahead of the US with 74% of those covered. The Dutch can choose tariffs with deductibles, or with no-claims bonuses. Another interesting feature is the possibility of group insurance. In the Netherlands, patients’ initiatives can negotiate a group contract for their members. People with specific health needs who, as individuals, would perhaps not be very attractive customers for the insurers, can increase their bargaining power in this way. In times when chronic conditions become the greatest challenges in health care, the group insurance could turn out as an innovative way to make a health system responsive to these patients’ needs.

But the Dutch model also has some drawbacks. While price competition takes place between GPs, specialists and hospitals are to some extent shielded from it. Their remuneration is regulated by the government, not subject to free bargaining. Also, people are only faced with half of the cost of health insurance, as the remainder is concealed as ‘employer contributions’. This creates the illusion that somebody else is paying, which weakens incentives to actively enquire who offers the best value for money.

So there may not be a shining example of free market health care anywhere, but there are market-based success stories in a number of places, the United States not being one of them. They may not always fit well into the wider economic and social model they operate in. But in their own local ways, and most importantly, for patients, they actually seem to work.