The State and Healthcare: Comparing OECD Countries (Transformations of the State)

Transformations of the State Series Editors: Achim Hurrelmann, Carleton University, Canada; Stephan Leibfried, Universi...

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Transformations of the State Series Editors: Achim Hurrelmann, Carleton University, Canada; Stephan Leibfried, University of Bremen,Germany; Kerstin Martens, University of Bremen, Germany; Peter Mayer, University of Bremen, Germany. Titles include: Joan DeBardeleben and Achim Hurrelmann (editors) DEMOCRATIC DILEMMAS OF MULTILEVEL GOVERNANCE Legitimacy, Representation and Accountability in the European Union Klaus Dingwerth THE NEW TRANSNATIONALISM Transnational Governance and Democratic Legitimacy Anna Holzscheiter CHILDREN’S RIGHTS IN INTERNATIONAL POLITICS The Transformative Power of Transnational Discourse Achim Hurrelmann, Steffen Schneider and Jens Steffek (editors) LEGITIMACY IN AN AGE OF GLOBAL POLITICS Achim Hurrelmann, Stephan Leibfried, Kerstin Martens and Peter Mayer (editors) TRANSFORMING THE GOLDEN-AGE NATION STATE Anja P. Jakobi INTERNATIONAL ORGANIZATIONS AND LIFELONG LEARNING From Global Agendas to Policy Diffusion Kerstin Martens, Alessandra Rusconi and Kathrin Leuze (editors) NEW ARENAS OF EDUCATION GOVERNANCE The Impact of International Organizations and Markets on Educational Policy Making Kerstin Martens, Alexander-Kenneth Nagel, Michael Windzio and Ansgar Weymann (editors) TRANSFORMATION OF EDUCATION POLICY Thomas Rixen THE POLITICAL ECONOMY OF INTERNATIONAL TAX GOVERNANCE Heinz Rothgang, Mirella Cacace, Lorraine Frisina, Simone Grimmeisen, Achim Schmid and Claus Wendt THE STATE AND HEALTHCARE Comparing OECD Countries Steffen Schneider, Achim Hurrelmann, Zuzana Krell-Laluhová, Frank Nullmeier and Achim Wiesner. DEMOCRACY’S DEEP ROOTS Why the Nation State Remains Legitimate Peter Starke RADICAL WELFARE STATE RETRENCHMENT A Comparative Analysis

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Jens Steffek, Claudia Kissling, Patrizia Nanz (editors) CIVIL SOCIETY PARTICIPATION IN EUROPEAN AND GLOBAL GOVERNANCE A Cure for the Democratic Deficit? Michael J. Warning TRANSNATIONAL PUBLIC GOVERNANCE Networks, Law and Legitimacy Hartmut Wessler, Bernhard Peters, Michael Brüggemann, Katharina Kleinen-von Königslöw, Stefanie Sifft TRANSNATIONALIZATION OF PUBLIC SPHERES Hartmut Wessler (editor) PUBLIC DELIBERATION AND PUBLIC CULTURE The Writings of Bernhard Peters, 1993–2005 Jochen Zimmerman, Jörg R. Werner, Philipp B. Volmer GLOBAL GOVERNANCE IN ACCOUNTING Public Power and Private Commitment

Transformations of the State Series Standing Order ISBN 978–1–4039–8544–6 (hardback) 978–1–4039–8545–3 (paperback) You can receive future titles in this series as they are published by placing a standing order. Please contact your bookseller or, in case of difficulty, write to us at the address below with your name and address, the title of the series and one of the ISBNs quoted above. Customer Services Department, Macmillan Distribution Ltd, Houndmills, Basingstoke, Hampshire RG21 6XS, England.

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The State and Healthcare Comparing OECD Countries Heinz Rothgang Professor of Health Economics, Centre for Social Policy Research, University of Bremen

Mirella Cacace Analyst, RAND Europe, United Kingdom

Lorraine Frisina Research Fellow, University of Bremen, Germany

Simone Grimmeisen Program Officer, Robert Bosch Stiftung GmbH, Germany

Achim Schmid Research Fellow, University of Bremen, Germany

and

Claus Wendt Professor of Sociology for Health and Healthcare Systems, University of Siegen, Germany

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© Heinz Rothgang, Mirella Cacace, Lorraine Frisina, Simone Grimmeisen, Achim Schmid and Claus Wendt 2010 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6-10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2010 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN: 978–0–230–00548–8 hardback This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. A catalogue record for this book is available from the Library of Congress. 10 9 8 7 6 5 4 3 2 1 19 18 17 16 15 14 13 12 11 10 Printed and bound in Great Britain by CPI Antony Rowe, Chippenham and Eastbourne

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Contents

List of Illustrations

vi

List of Abbreviations

ix

Acknowledgements

xiii

Series Editors’ Preface

xiv

Notes on the Authors

xvi

Part I The Concept of the Study 1 Introduction to the Book Heinz Rothgang

3

2 Conceptual Framework of the Study Heinz Rothgang Part II

10

Cross-Sectional Analyses

3 The Changing Role of the State in Healthcare Financing Achim Schmid, Mirella Cacace and Heinz Rothgang

25

4 The Changing Role of the State in Healthcare Service Provision Achim Schmid and Claus Wendt

53

Part III Case Studies 5 The Role of the State in the British Healthcare System – Between Marketization and Statism Simone Grimmeisen and Lorraine Frisina

75

6 The Self-Regulatory German Healthcare System Between Growing Competition and State Hierarchy Heinz Rothgang, Achim Schmid and Claus Wendt

119

7 The US Healthcare System: Hierarchization With and Without the State Mirella Cacace

180

Part IV Conclusion 8 The Converging Role of the State in OECD Healthcare Systems Heinz Rothgang

237

References

248

Index

275 v

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Illustrations

Tables 2.1 2.2 2.3 2.4 3.1 3.2 3.3 4.1 4.2 4.3 5.1 6.1 6.2 6.3 6.4 6.5 6.6 7.1 7.2 7.3 7.4 8.1 8.2 8.3 8.4

Types of regulation State, societal, and private roles in a healthcare system Healthcare system types Potential transformative change in the structure of healthcare systems Structure of the analysis Coefficients of variation for different healthcare financing indicators Similarity of the funding mix The share of spending on inpatient care The public/private classification of service provision in healthcare sectors The Public Service Provision Index (in per cent) Emerging divergence patterns within the UK Major healthcare reforms in Germany since 1970 Number of statutory sickness funds Trichotomous Index of Service Provision (TIP) Number of hospitals and hospital beds in private for-profit hospital chains Healthcare coverage of German population in 2007 Changes in the regulation structure in Germany’s healthcare system Overview of the major US healthcare reforms between 1965 and today The public/private-mix in US service provision, trichotomous distinction Market shares of health plans in employer-sponsored insurance (as percentages of workers with insurance coverage) Health insurance coverage as percentages of total population Changing role of the state in healthcare financing Changing role of the state in service provision The changing regulatory structures of Britain, Germany and the United States Changes in financing, service provision and regulation

14 15 17 20 35 42 46 61 63 67 110 124 136 143 145 148 174 186 204 211 213 239 241 242 245

vi

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Illustrations vii

Figures 2.1 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 4.1 5.1 5.2 5.3 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 6.10 7.1 7.2 7.3 7.4 7.5

Conceptualization of a healthcare system Mean health expenditure in per cent of GDP and the mean public financing share in 23 OECD countries Sigma-convergence of total health expenditure Convergence in public expenditure levels Convergence in the structure of healthcare Catch-up in public expenditure in per cent of GDP (1970–2006) Catch-up in the public/private-mix (1970–2006) Mean public healthcare financing share according to financing types Coefficient of variation of the public spending share according to financing types The size of healthcare sectors in 2004 Total health care expenditure as share of GDP and per capita Public and private healthcare expenditure as share of GDP and per capita Public and private healthcare financing as percentage of total healthcare financing Total healthcare financing as a percentage of GDP and per capita Public and private healthcare financing as a percentage of GDP and per capita Public and private financing as a percentage of total health financing Public and private financing of inpatient care/hospitals Public and private financing of outpatient care Public and private financing of pharmaceuticals/pharmacies Hospital beds, health employment and physicians per 1,000 of population Percentages of resource flows in all sectors The inpatient care sector by ownership category Coverage in percentage of total population Total healthcare financing as a share of GDP and per capita Public and private healthcare financing as a share of GDP and per capita Public and private financing in percentages of total healthcare financing Public health expenditures including and excluding federal tax exemptions (in per cent of total expenditure) Public and private financing of inpatient care (Hospitals and nursing homes)

11 36 39 40 41 43 44 48 49 59 80 81 82 127 127 128 131 133 134 138 139 141 149 188 189 190 191 194

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viii

Illustrations

7.6 7.7 7.8 7.9 7.10

Public and private financing as percentages of outpatient care sectors Public and private financing as percentages of pharmaceuticals and medical goods Changes in service provision levels in percentages (Index year 2000=100 per cent) Percentages of monetary resource flows in all sectors Inpatient hospital beds according to ownership as percentages of total

194 195 200 201 202

Boxes 2.1 5.1

Objects of regulation Excurse: The effects of devolution on the British healthcare system

14 108

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Abbreviations AHA AHIP AIG ALB AMA AMG AMI AOK AUS AUT AVWG BBA BCBS BEL BfArM BKK BKn BUPA CA CDHP CHAI CH CHI CHIP CHIPRA CMS COBRA CON DCIS DDRB df DHHS DK DMP DRG DSH EBM ECJ EMTALA

American Hospital Association America’s Health Insurance Plans American International Group Arm’s Length Bodies American Medical Association Pharmaceutical Act, Arzneimittelgesetz American Medical International Regional Funds, Allgemeine Ortskrankenkassen Australia Austria Arzneimittelversorgungs-Wirtschaftlichkeitsgesetz Balanced Budget Act Blue Cross and Blue Shield health plans Belgium Bundesinstitut für Arzneimittel und Medizinprodukte Company-Based Funds, Betriebskrankenkassen Miner’s Fund, Bundesknappschaft British United Provident Association Canada consumer-driven health plans Commission for Healthcare Audit and Inspection Switzerland Commission for Health Improvement Children’s Health Insurance Program Children’s Health Insurance Program Reauthorization Act Centers of Medicare and Medicaid Services Consolidated Omnibus Budget Reconciliation Act Certificate-of-Need Democratic Constitutional Interventionist States Doctors’ and Dentists’ Review Body degrees of freedom Department of Health and Human Services Denmark Disease Management Program Diagnosis Related Group disproportionate share hospitals uniform valuation standard, einheitlicher Bewertungsmaßstab European Court of Justice Emergency Medical Treatment and Active Labor Act ix

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x

Abbreviations

ERISA EU EVS FIN FMAP FPL FRA FSA GATS GDP GdP GDR G-DRG GER GISC GKV GKV-GRG GKV-WSG GMC GMG GMS GÖA GPs GRE GRG GSG G-SOEP HCA HCFA HCPs HEDIS HIPAA HMO HRGs HTA ICE IGeL IHA IKK InBA

Employee Retirement Income Security Act European Union German income and consumer sample, Einkommens- und Verbrauchsstichprobe Finland federal medical assistance percentages federal poverty line France Financial Service Authority General Agreement on Trade in Services Gross Domestic Product General Dentist Practioner German Democratic Republic German Diagnosis Related Groups Germany General Insurance Standards Council Statutory Health Insurance, Gesetzliche Krankenversicherung Statutory Health Insurance Reform Act, GKVGesundheitsreformgesetz Statutory Health Insurance Competition Strengthening Act, GKV – Wettbewerbs-Stärkungsgesetz General Medical Council Statutory Health Insurance Modernization Act, GKV – Modernisierungsgesetz General Medical Service public fee schedule, Gebührenordnung für Ärzte General Practitioners Greece Healthcare Reform Act, Gesundheitsreformgesetz Healthcare Structure Act, Gesundheitsstrukturgesetz German Socio-Economic Panel Hospital Corporation of America Healthcare Financing Administration Health Cash Plans Health Plan Employer Data and Information Set Health Insurance Portability and Accountability Act Health Maintenance Organization Health Care Resource Groups Health Technology Assessment Iceland individual health services Independent Hospital Association Guild Funds, Innunsgkrankenkassen Institut des Bewertungsausschusses

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Abbreviations

INEK IPA IQWiG IRE ITA JCAHO JPN KBV KHG KVEG KVWG LHBs LIFT LKK LTCI LUX MDK MMA NAFTA NCQA NHS NI NICE NLD NOR NZL OBRA OECD ÖGD OMC PbR PCTs PES PFI PflegeVG PGME

xi

Institute for the Hospital Remuneration System, Institut für das Entgeltsystem im Krankenhaus independent practice association Institute for Quality and Efficiency in Healthcare, Institut für Qualität und Wirtschaftlichkeit im Gesundheitswesen Ireland Italia Joint Commission on Accreditation of Healthcare Organizations Japan federal panel association, Kassenärztliche Bundesvereinigung Hospital Financing Act, Krankenhausfinanzierungsgesetz Cost Containment Amendment Act, KostendämpfungsErgänzungsgesetz Health Insurance Development Act, KrankenversicherungsWeiterentwicklungsgesetz Local Health Boards Local Improvement Finance Trust Farmer’s Funds, Landwirtschaftliche Krankenkassen Long-Term Care Insurance Luxembourg Medical Review Board of Statutory Health Funds, Medizinischer Dienst der Krankenkassen Medicare Prescription Drug, Improvement, and Modernization Act Nord American Free Trade Area National Committee for Quality Assurance National Health Service National Insurance (Britain’s) National Institute for Health and Clinical Excellence the Netherlands Norway New Zealand Omnibus Budget Reconciliation Act Organization for Economic Co-operation and Development municipal public healthcare services, Öffentlicher Gesundheitsdienst Open Method of Coordination Payment by Results Primary Care Trusts Public Expenditure Survey Private Finance Initiative Long-Term Care Insurance Act, Pflegeversicherungsgesetz Postgraduate Medical Education and Training Board

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xii

Abbreviations

PHI PKV PMGs PMI PMS POR POS PPI PPO PPP PPS PPUs PRO PSRO RBRVS RCS SCHIP SeeKK SGB SHA SHI SIGN SPA SSA SWE THE TIP UK US WHO WTO ZVS

Private Health Insurance Association of Private Health Insurance Companies, Verband der privaten Krankenversicherung Primary Care Groups Private Medical Insurance Personal Medical Services Portugal Point of Service Public Service Provision Index Preferred Provider Organization US$-Purchasing Power Parities prospective payment system Private Patient Units Peer Review Organization Professional Standards Review Organization resource-based relative value scale Risk Structure Compensation Scheme State Children’s Health Insurance Program Sailor’s Fund, Seekrankenkasse Social Code Book, Sozialgesetzbuch System of Health Accounts Social Health Insurance Scottish Intercollegiate Guidelines Network Spain Social Security Amendments Sweden Total Healthcare Expenditure Trichotomous Index of Service Provision United Kingdom United States World Health Organization World Trade Organization Centre for Allocation of University Places, Zentralstelle für die Vergabe von Studienplätzen

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Acknowledgements This book is about the changing role of the state in healthcare systems. Investigating this major theme through cross-national analyses of OECD countries and case studies for the UK, Germany, and the US, we have drawn on various statistical sources as well as the invaluable input of experts on the respective healthcare systems, who gave us their time for extensive expert interviews. The authors would like to thank Larry Brown, George France, Richard Freeman, Thomas Gerlinger, Ted Marmor, Kieke Okma, and two anonymous reviewers for their critical feedback. We are also grateful for comments we received during four international workshops that we hosted at the University of Bremen on healthcare systems research (2004), the governance of welfare state reform (2005), healthcare reform in Germany and the Netherlands (2005), and explaining healthcare system change (2008). Finally, we would like to thank, first, our colleague Ralf Götze, who joined the research project in 2007 and proved to be an invaluable source of inspiration, help, and critical feedback to us and, second, Lisa Adler for her great assistance in all technical matters of production. The book is the result of a joint effort. It was originally conceived by Mirella Cacace, Simone Grimmeisen, Heinz Rothgang, and Claus Wendt, who at that time constituted the project team. After Simone Grimmeisen and Claus Wendt left Bremen University, their places were taken by Lorraine Frisina and Achim Schmid, who contributed as authors to this volume. The concept of the study and the structure of the chapters were developed in a common discussion process and – after the chapters had been drafted – each chapter was intensively discussed. Thus, though the authors bear final responsibility for their chapters, the whole product must be considered as a joint work. Our research is part of the ‘Collaborative Research Center Transformations of the State’, ‘TranState’ for short, funded by the German Research Foundation and drawing together expertise from political science, law, sociology, and economics. We gratefully acknowledge the excellent working conditions, helpful feedback from our colleagues at TranState, and the generous funding provided by the German Research Foundation. In particular we would like to thank the spokesperson of the TranState Center, Stephan Leibfried, for his inspiration and the ruthless pressure he put on us to finalize this book.

xiii

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Series Editors’ Preface When we think about the future of the modern state, we encounter a puzzling variety of scholarly diagnoses and prophecies. Some authors predict nothing less than the total demise of the state as a useful model for organizing society – its powers eroded by a dynamic global economy and by an increasing transference of political decision-making powers to supranational bodies. Others disagree profoundly. They point to the remarkable resilience of the state and its core institutions. For them, even in the age of global markets and politics, the state remains the ultimate guarantor of security, democracy, welfare and the rule of law. These debates raise complex questions for the social sciences: what is happening to the modern liberal nation-state of the OECD bloc? Is it an outdated model? Is it still useful? Is it in need of modest reform or far-reaching changes? The state is a complex entity, providing many different services and regulating many areas of everyday life. There can be no simple answer to these questions. The Transformations of the State series will try to disaggregate the tasks and functions of the state into four key, but manageable dimensions: ● ● ● ●

the monopolization of the means of force the rule of law as prescribed and safeguarded by the constitution the guarantee of democratic self-governance the provision of welfare and the assurance of social cohesion.

In the OECD world of the 1960s and 1970s these four institutional aspects merged as the central characteristics of the modern state, forming a synergetic whole. This series is devoted to empirical and theoretical studies exploring the transformations of this historical model and the promise it still holds today and for the future. Books in the series address research on one or several of these dimensions, in all of which crucial change is taking place. Although political science is the main disciplinary approach, many books will be interdisciplinary in nature and may also draw upon law, economics, history and sociology. We hope that taken together these volumes will provide its readers with the ‘state of the ar’ on the ‘state of the state’. This book contributes to the work of the Collaborative Research Center Transformations of the State at the University of Bremen (Germany), and is funded by the German Research Foundation (DFG). The state analyses pursued by the Centre are readily accessible through two overview volumes: Stephan Leibfried and Michael Zürn, (eds), Transformations of the State?

xiv

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Series Editors’ Preface xv

(2005); and Achim Hurrelmann, Stephan Leibfried, Kerstin Martens and Peter Mayer, (eds), Transforming the Golden-Age Nation State (2007), published in the Transformations of the State series. Further information on the Centre, can be found at www.state.uni-bremen.de. ACHIM HURRELMANN, STEPHAN LEIBFRIED, K ERSTIN MARTENS AND PETER MAYER Series Editors

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Authors Mirella Cacace, Ph.D., is an economist. Her main areas of research concern institutional economics and the international comparison of healthcare systems. She was a member of the Collaborative Research Center 597 in Bremen, Germany between 2003 and 2010. She is a 2008/2009 Commonwealth Fund Harkness Fellow at Columbia University, New York. She currently works as an analyst at RAND Europe, Health and Health Care. Lorraine Frisina, Ph.D., is a political scientist working as a research associate and lecturer at the Collaborative Research Center 597 ‘Transformations of the State’ at the University of Bremen, Germany since 2006. Her main areas of research include comparative healthcare policy, with a particular focus on national health services, developments in policy values, the effects of DRGS on the professional autonomy of physicians and the role that economic crises have on welfare states. Simone Grimmeisen is a Program Officer at the Department for Health Care and Humanitarian Aid at the Robert Bosch Foundation, Germany. Previous appointments include the German Ministry of Health and the University of Bremen, Germany where she was a member of the Collaborative Research Center 597 between 2003 and 2005. Her research interest is international and European welfare state research with a special focus on the German and British healthcare systems. Heinz Rothgang is Professor of Health Economics at the University of Bremen and Director of the Division for Health Economics, Health Policy and Outcomes Research, Centre for Social Policy Research, Bremen, Germany. His research interests are in the field of health economics, healthcare systems, long-term care insurance and welfare economics. He is currently heading the research project ‘The changing role of the state in OECD healthcare systems’ at the TranState Research Centre. Achim Schmid is a research fellow and Ph.D. student at the Collaborative Research Center 597 ‘Transformations of the State’ at the University of Bremen, Germany. He joined the project on the state and healthcare at the end of 2005. His main research interests include comparative social policy and health policy, in particular, the public–private mix of healthcare financing and health service delivery. Claus Wendt is Professor of Sociology for health and healthcare systems at Siegen University, Germany. He was a member of the Collaborative Research Center 597 in Bremen, Germany between 2003 and 2005. He is a 2008/2009 xvi

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Authors xvii

Harkness/Bosch Fellow of Health Policy and Practice at Harvard School of Public Health, and J.F. Kennedy Fellow at Harvard’s Centre for European Studies. His research interests include institutional theory, political sociology, international comparisons of welfare states and healthcare systems and the sociology of health.

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This illustration is taken from the original etching in Thomas Hobbes’ Leviathan of 1651. Palgrave Macmillan and the editors are grateful to Lucila Muñoz-Sanchez and Monika Sniegs for their help in redesigning the original to illustrate what ‘transformations of the state’ might mean. The inscription at the top of the original frontispiece reads ‘non est potestas Super Terram quae Comparetur ei’ (Job 41.33): ‘there is no power on earth which can be compared to him’. In the Bible, this refers to the sea-monster, Leviathan (Original Leviathan image reprinted courtesy of the British Library).

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Part I The Concept of the Study

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1 Introduction to the Book Heinz Rothgang

Healthcare systems in OECD countries seem to be in a state of permanent transformation.1 The economic recession following the oil price shocks of the 1970s triggered a broad range of cost containment measures in welfare state policies that would continue through four decades up to the present, where OECD healthcare systems face a new phase of economic turmoil brought on by our most recent financial crisis (see Starke 2006; 2007). This is not to suggest, however, that national governments have had an easy time curtailing public financing as well as provision in the field of welfare policy (Pierson 1994). This holds true particularly for the healthcare sector, as its legitimacy is in most countries largely based on its ability to provide a satisfactory standard of healthcare for all citizens, irrespective of their ability to pay for care. As demographic change and advancements in medical technology increase the demand for healthcare, globalization limits the amount of public funds that can go into it. As a result, the need for reforms that assure cost containment and at the same time guarantee high quality healthcare services for the population has increased. Interestingly, evidence suggests that although common challenges are experienced, the responses to various socio-economic pressures have differed considerably across healthcare system types (OECD 1994; Tuohy 1999). Starting in the 1990s, for example, we observe that in many predominantly publicly financed healthcare systems, market-oriented healthcare reforms have been implemented or proposed (Freeman and Schmid 2008; van de Ven 1996), whereas in the US, where private insurance plays a dominant role, access to healthcare and the introduction of universal health insurance have gained political salience, particularly during the presidency of Obama (Skocpol 1994; The White House 2009). In the light of these developments, how are healthcare systems in OECD countries transformed in a period of ‘permanent austerity’ (Pierson 2001a)? And how will this book contribute to describing these transformations?

3

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4 Heinz Rothgang

Theme of the book The distinct contribution we aim to make in this book has four critical aspects. First, we focus on the role of the state in healthcare. Second, we use a configurative conception of a healthcare system based on three dimensions – financing, service provision and regulation – which goes beyond mere description of, let’s say, spending patterns. Third, we not only ask whether major changes in the level of state involvement in healthcare systems have occurred over the past 30 years, but also discuss how the distinctiveness – or more technically, variance – of systems has changed in the period under scrutiny. Finally, the study follows a ‘nested design’, combining cross-sectional analysis of 23 OECD countries with three in-depth case studies. The role of the state in healthcare The last decade of comparative welfare state research has shown that advanced capitalist welfare states are facing enormous pressures in an environment of globalization and permanent austerity. While for many years the nation state was able to exercise effective control over its social policy institutions, nowadays, a range of factors is likely to reduce the capacity of the nation state to finance as well as to provide the post-war level of welfare services (Hurrelmann et al. 2007; Leibfried and Zürn 2005). As recent studies have shown, these profound changes within the political and economic environment have not only led to a massive debate on the future of the welfare state, but also to a plethora of welfare-specific retrenchment activities and ‘welfare state restructuring’ (Pierson 2001a). Apart from analyzing the tangible measures of welfare state reform, on a more general level welfare state research has also initiated a debate about the changing role of the state in welfare production (Kaufmann 1994; Leisering and Berner 2001; Majone 1994). Basically, according to the hypothesis most prevalent in the literature, we are witnessing a remarkable ‘change in the traditional role of the state in social policy’ and thus a change in the so-called welfare mix of modern welfare states (Falkner and Tálos 1996: 70; Seeleib-Kaiser 2008). This book seeks to build on these discussions by analyzing recent developments in the field of health policy. We focus on this policy field, which alongside pensions is the biggest single consumer of resources in modern welfare states, in order to give an overview of the developments in welfare states in general. Or, as Michael Moran (2000: 139) has put it: ‘making sense of what is happening to the healthcare state is critical to making sense of what is happening to modern welfare states’. Nevertheless, health policy has been suspiciously missing from most welfare state analyses. Ever since the establishment of the first social health insurance system in Bismarckian Germany dating back to 1883, the state has been an integral part of healthcare systems. In longitudinal perspective, however, its ‘gestalt’ within healthcare systems has varied and changed over time. Despite the

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Introduction to the Book

5

prominent role the state plays not only in the establishment and development but also in the day-to-day operation of healthcare systems, comparative healthcare/health policy literature has not so far provided a systematic analysis of the changing role of the state in healthcare (for partial exceptions see Alber 1989; Moran 1999). This deficit is the main starting point for our book, which addresses the question of how the role of the state in these systems has changed since the profound economic crisis of the 1970s and, in particular, how we can empirically trace and capture these changes in a comparative way. Configurative conception of healthcare systems With respect to the role of the state in healthcare, many comparative studies have exclusively concentrated on financing and expenditure (see, for example, Castles 2004; 2008; Comas-Herrera 1999; Huber 1999; Leidl 1998b; Mossialos and Dixon 2002). Following their line of argumentation, the involvement of the state in a healthcare system can be measured as the proportion of GDP that is spent on health care via the public purse, or the ratio of public to total health expenditure. Applying the idea of welfare state retrenchment to health policy would then lead to the expectation of a privatization of healthcare financing. A focus on financing alone, however, neglects the question of whether state agencies also provide healthcare, or whether these services are provided by private entities such as hospital corporations or self-employed doctors. A second role that the state can play in healthcare systems, therefore, is as a potential provider of services. As Alber (1995) has duly noted, social services are a somewhat neglected dimension of comparative welfare state analysis. This is not least due to Esping-Andersen’s conception of the ‘three worlds of welfare state capitalism’ (Esping-Andersen 1990), which is based on the analysis of cash benefits. For the last two decades this seminal work has forged a path for subsequent research which separates comparative welfare state research and healthcare system analysis.2 Within the healthcare systems literature, however, service provision has been raised as a major issue (Wendt and Kohl 2010). Starting with Field (1973), who distinguished healthcare systems according to the ownership of healthcare services and doctors’ autonomy, service provision has also been used as a category to classify healthcare system types. If we want to understand the role of the state in service provision, the share of public services is a good indicator for measuring this dimension of potential state activity. The expectation, then, is that in a period of retrenchment we will see a privatization of service provision. Even if the state neither finances nor provides services directly, there is a third role it can play: it can be more or less engaged in the regulation of the relationships between providers, financing bodies, and users – or it can leave this task to corporate self-regulation or to the market. These questions have been tackled by, for example, Rico et al. (2003), who compare

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healthcare systems in terms of the relative importance of ‘market’, ‘hierarchy’, and ‘networks’ that differ in the way they address the two governance functions of ‘coordination’ and ‘control.’ This concept is nearly identical to the components of the ‘institutional mix’ in healthcare systems (‘hierarchy,’ ‘market,’ and ‘collegiality’) as defined by Tuohy (1999), or to the ‘state-led’, ‘corporate-governed’, and ‘market-driven’ systems suggested by Giaimo and Manow (1999). While these and other influential comparative studies mainly concentrate on different modes of governance, we believe that in order to understand the (changing) role of the state in healthcare, a more sophisticated analytical framework is necessary which combines the three dimensions mentioned above and takes into account the (potential) role of the state in financing, providing and regulating healthcare. In line with Moran (2000), we argue that one dimension does not necessarily determine the other two, and that non-uniformity across dimensions can also arise: it is quite possible, for instance, for private funding to combine with public service provision and a high level of state control, as is the case of privately insured patients receiving inpatient care in a public hospital in Germany. Having in mind a similar framework for welfare state policy, Majone (1997) even argues that growing internal and external pressures will have two effects: on the one hand, prompting governments to cut direct welfare financing and service provision and on the other, leading states to engage increasingly in the regulation of social services that are financed and provided by private institutions. We therefore propose a configurative approach which simultaneously assesses the role of the state in financing, service provision and regulation. Level and corridor effects One of the possible aims of an international comparison is to look for common developments in all the systems under investigation. For a long time, the emphasis in comparative welfare state research has been on the search for common trends such as ‘retrenchment’ or ‘privatization’ (for a survey, see Starke 2006). However, even at the end of the ‘golden age’ of the welfare state (Hobsbawm 1994) in the 1970s and the beginning of what has been termed the ‘silver age’ (Taylor-Gooby 2002), there were distinct ‘worlds of welfare capitalism’ (Esping-Andersen 1990) and ‘varieties of welfare capitalism’ (Hall and Soskice 2001). How did these differences change over time? Has the corridor within which the varieties of welfare states are placed decreased or increased? There are good reasons to suppose that it is at least as important to ask to what extent distinct system patterns have survived in the age of globalization and austerity as to look for shifts in the level of welfare provision (Rothgang et al. 2006). We therefore suggest looking for ‘corridor effects’ and ‘level effects’, thereby analyzing changes in the dispersion of welfare state regimes as well as shifts in the mean values. Our analysis suggests that convergence in healthcare systems, that is, decreasing

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diversity among states in spending, financing, and regulation, may have been the most important pattern of healthcare system change in the last three decades – a pattern easily overlooked when looking only for common trends. Nested design Finally, we have chosen a specific approach to the art of comparing. Research on healthcare system comparisons is now well established, and there is no lack of country studies. The European Observatory on Health Systems and Policies, a co-operation between the World Health Organization, the World Bank, the London School of Economics and Political Sciences, and other partners, for example, regularly publishes country reports on healthcare systems in Europe that follow a similar pattern and are therefore comparable. There are also well-known readers (for instance OECD 1994), which contain numerous country studies in a single volume. These ‘stapled comparisons’ (Marmor et al. 2005), however, lack a systematic comparative design and are not embedded in a theoretical framework. Thematic volumes also exist that focus on specific dimensions and aspects of the healthcare system, for example, healthcare financing (such as Mossialos et al. 2002), certain instruments (such as OECD 1995), or on a particular healthcare system type (such as Saltman et al. 2004). The state of the art, therefore reflects one of the basic tensions of international comparative research: if the goal is for example a deeper understanding the regulation of a national system, the number of countries under scrutiny must be limited. Then, however, the possibility of generalization is also limited. If, in contrast, the number of countries under review increases, it is almost impossible to provide in-depth insight into these systems, and studies of this type are therefore restricted to certain aspects of the system. This trade-off cannot be solved; there can only be certain strategies to deal with it. This book addresses the trade-off between generalizability and comprehensiveness by means of a nested design, combining quantitative analyses for a larger OECD country sample with three in-depth case studies of countries that were deliberately chosen to represent a particular healthcare system type. For the quantitative analyses, generalization is therefore not an issue, while for our case studies, theory-based case selection should allow for as much generalization as possible, given the need to limit the number of cases. The broader country sample is taken from OECD countries that had already developed a high standard of democratic, constitutional and welfare institutions in the 1960s and early 1970s (for the concept of Democratic Constitutional Interventionist States see Zürn and Leibfried 2005). On the basis of this definition we include 23 of 30 current OECD members. Despite deficits with respect to democratic standards at the beginning of our observation period, Greece, Spain and Portugal are included, being founding members of the OECD. The Czech Republic,

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Hungary, Korea, Mexico, Poland and Slovakia are excluded, since they only became OECD members in the 1990s. Turkey is also excluded as it fails to meet the standards of a democratic, constitutional, welfare state. Main thesis This book therefore analyzes the changing role of the state in healthcare systems with respect to financing, healthcare service provision, and regulation within the framework of a nested design based on a particular conceptualization of a healthcare system. In doing so, we start from the hypothesis that although there are common trends, particularly privatization in financing and service provision, the reducing variability between distinct healthcare system types is the most important development over recent decades. Healthcare systems show increasing similarities, as they often include innovative policies or transfer policies developed in other healthcare systems, while preserving their inherited basic features. Healthcare systems thus develop into more hybrid system types, a development which at the same time reduces the heterogeneity of healthcare systems and produces a trend towards convergence. It is this thesis that will be proved in the chapters of this book.

Contents of the book The conceptual framework of this analysis is the topic of Chapter 2, which discusses in some detail several of the ideas mentioned above, such as healthcare systems, healthcare system types, level and corridor effects as well as convergence. The second part of the book is then devoted to crosssectional comparisons dealing with financing (Chapter 3) and service provision (Chapter 4).3 Both chapters are based on large-scale comparisons of up to 23 OECD countries. In-depth case studies of Britain, Germany and the US (Chapters 5 to 7) comprise the third part and are, we might say, the heart of the book. In these chapters, the description of changes in financing and service provision is also based on national statistics, which allows for some additional analyses along these two dimensions. Though the analysis of national data may provide further insights into changes in financing and service provision, the true contribution of these case studies lies in the area of regulation. For each country, a concise account of healthcare reforms is given, focussing on changes in regulatory competences. Combining the evidence for these case studies and the cross-sectional analyses, Chapter 8 concludes by looking at the changing role of the state in healthcare. We thereby establish our main thesis: the state is not generally on the retreat, but we see instead a blurring of ideal–typical healthcare systems leading to more hybrid systems. The systems have thus converged, in the sense that they now have more similarities and are much less distinct than they were at the beginning of our observation period in the 1970s.

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Notes 1. Reflecting this state of affairs, the European Observatory on Health Systems and Policies publishes a series of country reports labelled ‘Health Systems in Transition (HIT) Reports’. 2. Only recently Clare Bambra (2005) tried to bridge this gap by introducing a ‘health decommodification index’. 3. For guiding principles, values, and perceptions of healthcare systems see Frisina and Albrecht (2010).

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2 Conceptual Framework of the Study Heinz Rothgang

Introduction The discussion of the changing role of the state requires a clear concept of what a healthcare system is and what the role of the state within a healthcare system can be. Some aspects of this can be described for all OECD countries, but other more in-depth descriptions can only be provided for selected cases. Case selection, however, may determine the outcome of research and is therefore a very sensitive issue. In the present study, this problem is resolved by presenting a typology of healthcare systems from which we select one representative case from each healthcare system type for in-depth-analysis, while also using data from 23 OECD countries for quantitative comparisons. In this way, we aim to ensure both the representativeness and generalizability of our cases and their respective findings on healthcare system change. When speaking of change of any kind, it is first and foremost necessary to discuss the nature of its direction. Since healthcare systems as well as their developments over time vary between countries, the description of change for any dimension may relate to the mean value and to the question of dispersion among countries. These are what has elsewhere been referred to respectively as ‘level and corridor effects’ (Rothgang et al. 2006). In studying the changing role of the state in healthcare over time and across healthcare system types, the careful conceptualization of such terms is of great importance, particularly as they relate to the notion of convergence, which is central to the comparative focus of the present study. In what follows, we will problematize each of these concepts, but we begin with the more rudimentary questions: what is a healthcare system and what types of healthcare systems are there?

Healthcare systems Healthcare systems are fully differentiated societal subsystems, in which various actors interact with each other regularly and on a continuing basis 10

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Conceptual Framework of the Study 11

in order to fulfil certain functions (Mayntz 1990). Healthcare systems rest on a foundation of shared values and perceptions which inform the guiding principles of the system (Frisina and Albrecht 2010). As healthcare systems exist for the provision of healthcare goods and services, service provision can be regarded as the basic function of the system. In order to remunerate service providers, however, funds from different possible sources have to be collected. Financing is therefore to be regarded as the second basic function of a healthcare system. Accordingly, service providers and financing agencies are two types of actors we find in every healthcare system, regardless of type.1 Healthcare systems serve their national populations, and it is these that are also the ultimate source of funding. These (potential) beneficiaries constitute the third type of actor found in any healthcare system. The complex interplay of these three groups of actors has to be regulated. The regulation of the bilateral interactions within this triangle of funding agencies, service providers and (potential) beneficiaries thus constitutes the third fundamental function that must be fulfilled if the healthcare system is to operate properly. Healthcare systems can therefore be visualized as a house, with financing and service provision as two pillars resting on a foundation of shared values, perceptions, and guiding principles, and with the roof representing the regulation of the interactions between service providers, financing agencies, and potential beneficiaries (patients) (Figure 2.1). The role of the state in healthcare must also be conceived within this threedimensional framework. First of all, the state can – to a greater or lesser extent – finance healthcare. Second, the state can act as a provider of healthcare. Third, even if the state neither finances nor provides services directly, there is a third role it can play: it can be more or less engaged in the regulation of the other actors. Only the simultaneous analysis of all three dimensions can provide an adequate picture of the (changing) role of the state

(Potential) Beneficiaries

Regulation

Financing agencies Financing

Service providers Service provision

Guiding principles, values, perceptions Figure 2.1 Conceptualization of a healthcare system Source: Author’s own diagram, based on Rothgang et al. (2005: 189).

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12 Heinz Rothgang

in healthcare systems (Freeman and Moran 2000; Freeman and Rothgang 2010; Maarse 2006). In cases where the state does not fulfil these functions, who does? Generally speaking, either civic society or private actors may step in. We therefore distinguish for all three dimensions a state, a societal, and a private modality. Just how these modalities should be defined and how the role of the state can be measured under financing, service provision, and regulation, however, require some elaboration. Financing The financing of healthcare systems may come from any combination of three different sources: taxes, social insurance contributions, and private financing. Taxes certainly represent the most public form of financing. They are compulsory, but do not generate specific claims. Where direct taxes play an important role, tax financing of healthcare also implies an element of ex ante redistribution from the wealthier to the less wealthy portions of society (Wagstaff and van Doorslaer 2000). Like taxes, social insurance contributions are also mandatory and redistributive. Unlike taxes, however, they generate certain claims on healthcare provision. As social health insurance funds are non-governmental agencies, we regard social insurance contributions as a kind of collective, albeit non-state, form of financing. They are viewed here as a form of societal-based funding emerging somewhere between state taxation on the one hand, and private financing on the other. Since the state has no direct access to social insurance revenues, a line can clearly be drawn between taxation and this type of funding, but because social insurance is mandatory, non-profit oriented, and contains some element of ex ante redistribution, it also fails to fall under the heading of the private sector (Wendt et al. 2009). Private financing comes in two forms: private insurance premiums and out-of-pocket payments. Though both are regarded as private, the former represents a kind of pre-payment, which guarantees access to services when they are needed. Accordingly, the World Health Organization, for example, regards a sufficient amount of pre-payment as a central prerequisite for fair financing (WHO 2000). Being based on risk-related premiums, private insurance premiums lack any ex ante redistribution, which is characteristic of taxes and social insurance contributions. This is also true for outof-pocket payments including deductibles, co-payments, and any form of cost-sharing, as well as direct (over the counter) expenses on healthcare. This form of financing, however, also lacks risk pooling and the ex post redistribution between the sick and the healthy that follows from it. A high level of out-of-pocket payments therefore creates a barrier to healthcare utilization for those who cannot afford them.

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Conceptual Framework of the Study 13

Clearly the amount of tax financing is the most accurate indicator of the role of the state in healthcare financing. Compared to this, public financing, consisting of taxes and social insurance contributions, is a somewhat cruder indicator. As data availability does not allow us to maintain our trichotomous classification of financing for an analysis of long time-series (see Chapter 3), the amount of public financing can nevertheless be used to indicate the (changing) role of the state in healthcare financing. Service provision Service provision can be characterized according to several criteria. With respect to the role of the state, however, two criteria are of particular interest: ownership and profit orientation (Field 1973; Frenk and Donabedian 1987; OECD 1987a). With respect to ownership, public and private providers can be distinguished; the latter can be divided into for-profit and non-profit providers. Public providers represent the state, whereas private non-profit providers are classified as societal, and private for-profit providers stand for the private sector (Wendt et al. 2009). Within the OECD, the greatest variety can be observed in hospital care. Alongside state hospitals, which generally provide the vast majority of all available hospital beds in OECD countries, there also exist private forprofit and private non-profit facilities. In Germany, for example, the role of non-profit organizations in hospital healthcare is deeply intertwined with welfare organizations and facilities. Historically there have also been facilities provided by social insurance agencies: both in the German health insurance system of 1883 and in the British social health insurance program established in 1911, doctors worked in part as employees of health insurance agencies. Today in Austria a limited number of non-profit health insurance facilities still exist alongside welfare agencies as societal-based pooled healthcare providers (Wendt et al. 2009). In some respects, some present-day private Health Maintenance Organizations (HMOs) in the US also follow in this tradition, as their provision is furnished partly by salaried doctors. In contrast to the European examples, however, for-profit HMOs remain rooted in the private sector (White 2007). Even if in most countries public providers are dominant in in-patient healthcare and private for-profit providers in out-patient healthcare, due to the existence of private non-profit hospitals in a number of countries the categories ‘state’, ‘societal-based’, and ‘private’ are also relevant to the healthcare provision dimension. Regulation With respect to regulation, the objects of regulation, the actors of regulation, and the modes of interaction between these actors have to be discussed.2 The objects of regulation are to be seen in the relations between the three sets of actors, that is service providers, financing bodies, and (potential)

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14 Heinz Rothgang

beneficiaries of the healthcare system. As Box 2.1 shows, there are six major relations, concerning coverage, financing, remuneration, access of providers and patients, and the benefit package. With respect to actors, a basic distinction can be made between state, societal, and private actors. The latter are primarily involved in their role as private market participants. As far as the interactions between these actors are concerned, a multiplicity of forms is discussed, particularly in the political science and economic literature on governance (Dingeldey and Rothgang 2009; Mayntz and Scharpf 1995; Williamson 1998). With regard to healthcare systems, three forms are commonly identified: (1) hierarchy, that is, a clear domination–subordination relationship; (2) collective negotiations as a form in which actors operating on equal terms enter into long-term

Box 2.1 Objects of regulation Relations between (potential) beneficiaries and financing agencies: (1) Coverage: the inclusion of (parts of) the population in public and/or private healthcare systems. (2) System of financing: the financing of healthcare by public (taxes, social insurance contributions) and/or private (private insurance contributions, out-ofpocket payments) sources. Relations between financing agencies and service providers: (3) Remuneration of service providers: the specific system of provider compensation. (4) Access of (potential) providers to healthcare markets: access to financing agencies. Relations between service providers and (potential) beneficiaries: (5) Access of patients to service providers. (6) Benefit package: the content and range of services offered to patients.

Table 2.1 Types of regulation Actors Form of interaction

Self-governing actors Market participants

State

Hierarchy

State-hierarchical regulation

–

–

Collective negotiation Competition

–

Societal selfregulation –

–

–

Private-competitive regulation

Source: Own representation.

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Conceptual Framework of the Study 15

agreements; and (3) market transactions, in which a competitive relationship between the actors prevails.3 Cross-tabulating the actors and forms of interaction produces the combinations depicted in Table 2.1. The ‘pure’ regulatory types are located on the main diagonal. In these fields, an actor is combined with the form of interaction that normally goes together with that type of actor to form state-hierarchical regulation, societal self-regulation, and private-competitive regulation. From bottom right to top left on the main diagonal, an increasing level of state control can be observed. The pure forms identified here have strong similarities with the terminology used, for example, by Giaimo and Manow (1999). However, their conceptual ‘triad’ of ‘state-led’, ‘corporatist-governed’ and ‘market-driven’ does not distinguish between the configurations of actors and the forms of interaction. In contrast, Rico et al. (2003) refer only to the forms of coordination and make the standard distinction between ‘market’, ‘hierarchy’ and ‘networks’, but without taking account of the actors involved. The advantage of the nine-field matrix depicted in Table 2.1 is that it views actors and their interactions simultaneously, thereby capturing combinations of regulatory interactions otherwise neglected by examining the two dimensions in isolation. For example, the table highlights combinations that are not on the main diagonal, such as the hierarchical interactions between privatecompetitive actors that are characteristic of HMOs in the US. Synopsis Table 2.2 contains a synopsis of the above discussion. As the table shows, for all three dimensions of a healthcare system – financing, service provision, and regulation – a state, societal, and private form can be distinguished.4

Table 2.2 State, societal, and private roles in a healthcare system Actors Form State of interaction

Societal

Private

Financing

Taxes

Social insurance contributions

Private insurance and out-of-pocket payments

Service provision

Public providers

Private non-profit providers

Private for-profit providers

Regulation

State-hierarchical Societal self-regulation Privateregulation competitive regulation

Source: Own representation.

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This analytical framework is thus able to capture the (changing) role of the state in a healthcare system in a threefold-way.

Healthcare system types Comparisons of healthcare systems require detailed examination of institutional arrangements. As a result, they are necessarily restricted to a small number of countries. In order to draw more general conclusions, though, attempts can be made to cluster healthcare systems into healthcare system types characterized by common features and, consequently, a rather low level of internal variance. If representatives of these types are then compared with one another, the developments observed can be interpreted as indications of general trends that transcend individual cases. There are numerous typologies of healthcare systems (for a discussion, see Burau and Blank 2006; Wendt 2009; Wendt et al. 2009). These attempts have started from different angles. Concentrating on the financing dimension, scholars have distinguished Bismarckian types (with financing based on social insurance contributions) and Beveridge types (with financing based on taxes), or social insurance systems and national health services (Jönsson and Musgrove 1997; Kokko et al. 1998; Wendt 2009). Focussing on service provision, Field (1973) differentiated healthcare systems according to the ownership of healthcare services and doctors’ autonomy. Frenk and Donabedian (1987) suggested a typology of state intervention in medical care that is based on the form of state control over the production of medical care and the basis for eligibility of the population. More recently, regulation has been chosen as a basis for classification, leading to a differentiation between ‘state-led’, ‘corporatist-governed’ and ‘market-driven’ systems (Giaimo and Manow 1999); ‘the supply state’, ‘the corporatist state’ and ‘the insecure command and control state’ (Moran 2000: 147); or ‘agency’, ‘contract’ and ‘governance’ (Tuohy 2003); as well as ‘markets’, ‘hierarchy’ and ‘networks’ (Rico et al. 2003). In order to comprehend the healthcare system as a whole, however, it is necessary to analyze all three dimensions simultaneously. Respective attempts have thus far been rare (for an exception, see Chinitz et al. 1998; Hsiao 1995). Despite this shortcoming in the literature, it is nevertheless common practice in healthcare systems research to make a distinction between three types of healthcare systems: national health services, social insurance systems, and private healthcare systems, although this distinction is mostly not rooted in theory.5 This typology can be deduced systematically, though, when all three dimensions of a healthcare system – financing, service provision, regulation, with their respective modalities (see Table 2.2) – are used as a starting point (Wendt et al. 2009). Distinguishing a state, a societal, and a private modality for each of the three dimensions, we arrive at three healthcare system types, namely a national health service (NHS) with state

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financing, service provision and regulation; a social insurance system with societal financing, service provision and regulation; and a private healthcare system with private financing, service provision and regulation. In order to also cover the normative dimension, Table 2.3 additionally refers to the respective guiding principles of the system. This typology is, on the one hand, deduced from theoretical considerations of the basic functions of a healthcare system and the actors needed to fulfil these functions. On the other hand, it can also be regarded as an idealtype, which according to Max Weber (1994: 90, italics in original) ‘is formed by the one-sided accentuation of one or more points of view and by the synthesis of a great many diffuse, discrete, more or less present and occasionally absent concrete individual phenomena, which are arranged according to those one-sidedly emphasized viewpoints into a unified analytical construct [Gedankenbild]’. In other words, a typology can be derived starting from a broad description of existing healthcare systems and then idealizing their patterns to yield certain ideal-types. It is based on this typology that three countries, whose healthcare systems in the 1960s and 1970s come closest to our ideal-types, have been selected for comparison in the present study. These consist of Britain as representative for an NHS system, Germany as representative for a social

Table 2.3 Healthcare system types Regulation (dominant mechanism)

Healthcare system type

Underlying values and principles Financing

Service provision

National Health Service

Equity: equal access to services for everyone

Public: direct and indirect taxes

Public providers

State-hierarchical: comprehensive planning and tight control by the state

Social Insurance System

Solidarity: equal access to services for all members of insurance funds

Societal: social insurance contributions according to income

Societal: private non-profit providers

Collective bargaining of corporatist actors; legal framework and some state control

Private Healthcare System

Principle of equivalence: service according to ability to pay

Private: private insurance premium according to risk

Private for-profit providers

Competition of private actors; limited state regulation

Source: Own depiction based on Rothgang et al. (2005: 191).

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insurance system, and the US as representative for a private healthcare system. While the British system comes very close to its ideal-type along all three dimensions, in Germany service provision is not dominated by private non-profit providers, though they play an important role. Meanwhile, the characterization of the US as a private insurance system best suits the period up to 1965, when the public programmes of Medicare and Medicaid were introduced; the features of this example become more diverse thereafter. Accordingly, while a perfect fit between the real and ideal types used here is not possible, our cases represent the closest approximations to these ideal-types, thus allowing for some generalization within a given category of healthcare system type.

Conceptualization of change As this book is about change in and across healthcare systems, the concept of change also needs some clarification with respect to the period of observation, the direction of change, and the way in which developments in certain countries are looked at. Period of observation In order to be able to identify changes, it is necessary, first, to determine the starting situation of the time period in question. During the ‘golden age’ (Hobsbawm 1994) of welfare expansion, states pushed for the inclusion of more of the population in the healthcare system. Thus, with the notable exception of the US, by the early 1970s almost the entire population of the OECD countries had access to healthcare services. But with the oil price shocks of the 1970s, the long post-war period of continuous growth came to an end and gave way to a one of ‘permanent austerity’ (Pierson 2001a). In order to capture the policy changes resulting from this break or critical juncture, we take 1970 as the starting point for our cross-sectional analyses for both Britain and Germany. In the case of the US, however, we will start our period of observation somewhat earlier, to include the introduction of Medicare and Medicaid in 1965, as these programmes already constituted an important shift away from the private healthcare system and must therefore be included in our description. Directions of change When analyzing change, we refer to change on at least one of two axes: the public–private axis and the territorial axis (Blank and Burau 2004: 61). The former is a continuum stretching from private to public, with societal situated somewhere in between. Analyzing changes in healthcare systems along this axis allows us to measure the extent to which the state or state actors have been involved in the financing, provision, and regulation of healthcare and how this involvement has changed over time. Much of the

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literature on change in the welfare state today focusses on whether we can see a retrenchment and an increasing privatization of the welfare state (for example Gilbert 2002; Pierson 1994; 2001b; Starke 2007), since – in contrast to the 1940s and 1950s – few tendencies towards a de-privatization or socialization of responsibilities are to be observed. Thus, it will be interesting to see to what extent we see such changes in healthcare systems. The second analytical axis, the territorial axis, stretches from the subnational to the international level. Looking at the state as a whole, welfare state scholars have identified internationalization on this axis (see, for example, Keohane and Milner 1996). Moreover, even if competences remain at the national level, their use may become effectively restrained by necessities resulting from competition between systems, with some authors seeing a ‘hollowing out of the nation state’ (Jessop 2002). Against this backdrop, we explore whether the involvement of the nation state with respect to the financing, service provision, and regulation of healthcare has changed visà-vis the international and the sub-national level. Level and corridor effects As outlined in Chapter 1, we are not just interested in common trends in OECD healthcare systems, but also in the question in how far developments vary. We therefore look for level effects as well as corridor effects. Technically, when considering several states simultaneously, level effects refer to a shift in mean values, such as a decreasing share of public healthcare financing among all OECD countries. Corridor effects then refer to changes in the dispersion among countries, for example, the variance in the share of public healthcare financing. Table 2.4 shows the potential forms of change resulting from a simultaneous analysis of level and corridor effects. If, for example, healthcare systems were being privatized to the same extent in all countries such that the differences between countries remained constant – that is, the corridor of regimes neither widened nor narrowed – a simultaneous decrease in the amount of state spending would simply lead to a decrease in the level of state intervention, as in cell 8. If all countries moved towards a similar public–private mix for their healthcare systems, while the mean level of state intervention stayed the same, as in cell 6, there would be a simple convergence. But if the level of state intervention also decreases, then we have convergence with a reduced level of state activity, as in cell 9. As Table 2.4 reveals, a common trend, let’s say privatization in healthcare provision, cannot be regarded as convergence, but rather as a level effect. Convergence, on the other hand, requires some narrowing in the dispersion among states. As already stated in the introduction, in our study we find a narrowing of corridors. It is therefore also useful to discuss briefly the concept of convergence here.

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Heinz Rothgang

Table 2.4 Potential transformative change in the structure of healthcare systems Level of state intervention plateau (mean) For a given set of healthcare systems CORRIDOR Spread of policy regimes in healthcare systems

Widens

Rises

1 4 Divergence, Divergence on an uplifted intervention plateau

Remains 2 the same Uplift Narrows

Remains the Sinks same

5 Status quo

3 6 Convergence, Convergence on an uplifted intervention plateau

7 Divergence, on a subsided intervention plateau 8 Subsidence 9 Convergence, on a subsided intervention plateau

Convergence In recent years, the question of the possible convergence of healthcare systems has been increasingly debated by researchers in the area (ComasHerrera 1999; Field 1999; Hitiris and Nixon 2001; Leidl 2001; Nixon 2003; Saltman 1997). Generally speaking, however, the dimensions, concepts and indicators deployed in the convergence debate vary considerably, which leads to inconsistent results (Heichel et al. 2005). Consequently, it is necessary to clarify which dimensions are under review, which concepts of convergence are used, and how they are being measured (see also Chapter 3). Each of the dimensions that constitute a healthcare system – financing, service provision and regulation – can be investigated for convergent trends, as can the values that prevail in the population at large (Marmor et al. 2006), or among the political elite (Taylor-Gooby 1996). Nevertheless, many of the studies cited here are concerned solely with financing (Comas-Herrera 1999; Hitiris and Nixon 2001; Nixon 2003). With respect to the concepts of convergence, a distinction can be made between beta-, delta- and sigma-convergence, with the last of these most frequently studied (Heichel et al. 2005). Sigma-convergence refers to a reduction in the variance between different systems with regard to one parameter and in quantitative analyses is usually measured as the variance or the coefficient of variation. When applied to regulation, it is difficult to use quantitative indicators. Convergence in regulation, therefore, refers instead to a reduction in the level of dissimilarity in regulatory structures or mechanisms (Field 1999: 323; Ham and Brommels 1994). In this sense Knill (2005: 768) defines policy convergence ‘as any increase in the similarity between

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Conceptual Framework of the Study 21

one or more characteristics of a certain policy [ ... ] across a given set of political jurisdictions [ ... ] over a given period of time’. When, for example, NHS systems introduce competition and private healthcare systems introduce elements of hierarchical regulation, it can be argued that both adopt features from the other and thus become more similar. Such a ‘blurring of regimes’ leads to a kind of hybridization, which may well be an effect of policy learning and can also be regarded as a kind of convergence. It is a kind of convergence insofar as the uniqueness of certain features disappears. While each system type itself becomes more heterogeneous, differences between systems and system types diminish. Beta-convergence is another concept in statistical analysis. It attempts to measure catch-up processes among ‘laggard’ countries and uses the ß parameter in regression models (Sala-i-Martin 1996). Consequently, it is only used in quantitative analyses. Sigma-convergence generally implies beta-convergence, while the converse is not necessarily true. High rates of adjustment may even cause the ‘laggards’ to overtake the frontrunners without any effect on variance or sigma-convergence. Delta-convergence, finally, is a measure of whether and to what extent systems are evolving relative to a reference model. Hurst (1991), for example, found delta-convergence in the ‘public contract model’ that served as his reference model. Generally speaking, convergence can thus be found in all three dimensions of healthcare systems as well as in their normative foundations. Particularly in financing and service provision, it can be analyzed using quantitative data and statistical methods. In our study we will therefore employ the concepts of sigma- and beta-convergence when analyzing the financing dimension in general and the public–private mix in particular. Due to limited data availability, we only search for sigma-convergence in the service provision dimension. With respect to regulation, qualitative description must be used instead. Convergence may then appear in the form of a blurring of ideal– typical healthcare system types, leading to more mixed types of regimes and a hybridization of system types. Based on the case studies in Part III of this book, we will substantiate our hybridization thesis and summarize our findings in a concluding chapter.

Notes 1. Of course, one corporate actor could serve both functions, in which case, financing agent and service provider would be a single corporate actor. This is precisely the case with staff-model Health Maintenance Organizations (see Chapter 7). 2. In Part III the regulatory framework resulting from the interaction of these actors is discussed for the three case studies. This chapter concentrates instead on the possible roles of the state in regulation. 3. Market and competition can be differentiated analytically: ‘competition’ can be defined in general terms as rivalry between individuals, groups or nations that occurs when more than one party seeks to obtain something that not all can

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22 Heinz Rothgang possess simultaneously (Stigler 1987: 531). Thus competition is an action principle that can occur inside as well as outside markets. The ‘market’, on the other hand, is a level at which competition can take place. In healthcare systems, ‘competition’ is used both in markets and in quasi-markets specially created for the purpose. 4. With respect to regulation, the classification may differ for the six relations identified. 5. This distinction can be traced back at least to Terris (1978) or – in the German language literature – Neubauer and Birkner (1984).

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Part II Cross-Sectional Analyses

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3 The Changing Role of the State in Healthcare Financing Achim Schmid, Mirella Cacace and Heinz Rothgang

Institutional legacies are one broad explanation for considerable and persisting differences in the ways nations finance their healthcare systems (Pierson 2004; Taylor-Gooby 1996; Wilsford 1994). Yet it is clear that although all countries throughout the world rely on their own, specific funding-mix in healthcare, this mixture is also subject to readjustment and change (Huber 1998: 63; Scott 2001: 3). Changes in the funding mix may be caused by political interventions such as the inclusion of new groups in a public health1 insurance scheme, changes in co-payment rules or the scope of the benefit package covered by the public system (Maarse 2004b). Different growth trends of healthcare sectors which are predominantly financed by rather private or public funds may also alter the funding-mix substantially (Tuohy et al. 2004). Neither the financing structure nor funding levels have therefore been static during the past decades. While the development of total health expenditure and its determinants have been analyzed extensively, the evolution of public healthcare spending and of differences in the funding-mix across countries have attracted less attention (Barros 2007; for notable exceptions see Castles 2004; Comas-Herrera 1999; Mossialos and Dixon 2002; Starke et al. 2008). In this chapter we scrutinize the role of the state as a financer versus other sources of financing since the early 1970s in 23 OECD countries (see Chapter 1). After a short account of the various public and private sources of funding that will come under scrutiny, we provide a brief overview of the findings in the literature on the role of the state in healthcare financing. The following sections examine changes in healthcare financing in the OECD world. We consider level effects, as indicated by changes in mean spending, as well as corridor effects, which are revealed by measures of dispersion, and mirror the discussion about convergence in healthcare financing (Rothgang et al. 2006). As a result, we are particularly interested in public healthcare expenditure data, which serves as a broad indicator of the role of the state in healthcare systems. In addition, we examine tax funding, social insurance funding and private funding, which reflect different levels of state-involvement in 25

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healthcare financing. Based on this trichotomous classification, we measure the development of similarity of the funding mix since the early 1990s across a smaller sample of countries. Finally, we consider patterns of public healthcare spending within different types of financing systems as revealed by the dominant mode of healthcare financing.

Public and private sources of health financing According to our trichotomous conception of healthcare systems (see Chapter 2) we discern three major sources of funding along the public/ private-axis: tax funding, social insurance contributions and private financing. Healthcare systems make use of a mix of these financing sources, which represent different levels of state-involvement. Tax funding can be characterized as most closely related to the role of the state, as the funds accrue from general taxation directly to governments’ budgets. Earmarked taxes may be regarded as an exception, as they are levied for special purposes, like social insurance contributions (Maarse 2004b: 171). Predominantly tax-funded systems tend to guarantee equal and universal access to healthcare based on citizenship. Tax funding, whether general or earmarked, typically does not establish specific entitlements for health services. The mode of financing involves substantial distributive effects. Healthcare systems based on tax funding such as those of Denmark, the UK, or Canada are usually associated with progressive2 financing and therefore tend to disproportionally burden high-income households. This is also the case in Ireland, Italy, and Spain, where indirect taxation – in principle indicating regressive financing – plays a major role in the financing mix. In all these countries healthcare financing through indirect taxation is (over-)compensated by the progressive effect of direct taxation (Wagstaff and van Doorslaer 2000). Social insurance schemes, in contrast to taxes, guarantee individual benefits in return for contribution payments. They are generally based on a mandate. People are obliged to join social health insurance (SHI) as soon as they meet specific criteria, such as a certain employment status or wage level (Barr 2001: 24). At the same time, statutory health insurance funds are obliged to include people who meet the defined criteria. Universal coverage is often achieved through derived rights for dependents and the inclusion of the non-employed (Greve 2007). Some groups, however, may also opt out of the SHI scheme. In Germany, for example, the self-employed and employees earning less than €400 or more than about €4,000 per month do not have to join the public scheme. These population groups may choose to contribute on a voluntary basis (see Chapter 6). In the Netherlands, until the health reform of 2006, high income groups were systematically excluded from the social insurance scheme and had to purchase private insurance (Maarse and Okma 2004). Until 2008 the Belgian healthcare system provided the

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self-employed only with a limited benefit package which had to be supplemented by private insurance (Corens 2007). Premiums in SHI systems, unlike those in private insurance, are not riskdependent. They may, however, vary substantially with respect to the definition of contribution rates as well as their reference base, and therefore also involve diverse distributional effects. Typically, contributions are raised from employees, employers, or both, in proportion to wages. Modifications include the imposition of contribution ceilings, which tend to make the financing system more regressive (Wagstaff and van Doorslaer 2000). Other sources of revenue may also be drawn on to make the financing system proportional to overall income rather than wages alone. In the French healthcare system, for example, wages as well as capital incomes are liable to contributions (Sandier et al. 2004: 116). Like insurance arrangements in general, contribution-financed social insurance redistributes income from those who suffered losses to those who stayed healthy within a given time period (ex post redistribution) (Getzen 2004: 69f). In addition, ex ante redistribution from individuals with good risk structure (the healthy) to those with bad risk structure (the sick) is intrinsically linked to contribution financing. Depending on the specific social policy objectives, additional ex ante redistribution can be achieved, for example from singles to families, from high to low-income earners as well as to the unemployed, and from younger to older generations (Wille 2002: 10). Social insurance schemes may also entirely, or at least partially, rely on per capita flat-rate premiums, as in Switzerland or the Netherlands. Flat-rate premiums involve ex post and some elements of ex ante redistribution, since premiums are independent of health risk. In addition, in both empirical examples, dependent children are charged no premiums (the Netherlands) or reduced flat rates (Switzerland), which in effect means a subsidization of families with children. Since flat-rate premiums are not income-related, low-income groups are disproportionally burdened. These financing systems are, therefore, often cited as social insurance schemes with a largely private character, because they leave social redistribution to a tax-financed transfer system (Gerlinger 2009; Götze et al. 2009). Hence, while social insurance systems vary with respect to the extent to which they contain instruments of redistribution, they share a clear-cut relation between payments and entitlements, mandatory insurance, the obligation to contract and contributions that are independent from individual health risk. Social insurance contribution payments usually accrue to collective actors such as sickness funds. The health risk is spread amongst the members of one sickness fund. When competition between several sickness funds is allowed or even promoted, the risk pools become fragmented (Wagstaff 2007). In such cases social health insurers face the temptation of riskselection (cream-skimming), that is the systematic attraction of ‘good risks’ and attempts to repel ‘bad risks’ (Laske-Aldershof et al. 2004). Although

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social insurance funds are obliged to accept each applicant as long as the defined coverage criteria are met, ‘informal’ cream-skimming practices are ubiquitous (Höppner et al. 2006). Moreover, adverse selection may cause problems for systems which allow competition for insurants between sickness funds. As a result, risk-equalization schemes have been established in Belgium, Germany, the Netherlands, and in Switzerland (van de Ven et al. 2007: ; see also Chapter 6). Risk-equalization schemes shift premium incomes from health insurers with favourable risk structure to those with higher health risks, thereby levelling out the different risk structures. Private funding subsumes private insurance financing and out-of-pocket payments. Both sources imply risk-equivalence, but while private insurance implies a pooling of risks, there is no such provision in the case of out-of-pocket payments. Private insurance is not mandatory in the US and also used to be voluntary in Switzerland, before social insurance was introduced in 1996. This means that for several reasons (for example budget constraints, free-riding behaviour in face of minimal security provision) single individuals or groups might withdraw from the purchase of insurance. As mentioned above, a feature common to all social and private insurance schemes, is (ex post) redistribution from those members of the risk pool who remain healthy to those who suffer losses (WHO 2000: 97f.). The scope and degree of further redistributive elements depend on the specific mode of premium calculation (Enthoven and Fuchs 2006; Scott 2001: 19). In the US case, until this system came under pressure in the 1970s, premium calculation in private insurance used to be based on regional averages (community rated), thereby cross-subsidizing individuals with higher health risks. Today, in most cases, (mainly) for-profit private insurers calculate experience-rated premiums based on actuarial risk (see Chapter 7). Differentiating between social and private insurance, therefore, can be difficult, particularly if private insurance is mandatory, as in the case of the German private long-term care insurance system. However, private insurance schemes are distinct, as they claim risk-equivalent premiums and therefore limit solidarity among insured people. Only a few healthcare systems within the OECD world cover significant parts of the population using private insurance as the primary form of coverage. Within our sample, the US is the only country where the majority of the population holds private, employment-based health insurance. Conventionally, primary, supplementary, complementary, and duplicate private insurance schemes are distinguished (OECD 2009). Primary private insurance represents ‘full’ coverage through a private scheme due to the absence of public coverage, as for a major part of the US population. In addition, primary private insurance may be chosen as a substitute to the public system and is therefore also known as ‘substitutive’ insurance. Complementary private schemes which cover the costs associated with co-payments in the public system are common in France or Belgium.

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Supplementary schemes are widespread and tend to cover benefits that are not part of the public scheme, while duplicate private insurance provides for higher quality services, for example through private providers or the bypassing of waiting lists. The latter insurance schemes are quite frequent in NHS systems, but in Canada such duplication is prohibited by law (Cacace and Schmid 2008). No risk-pooling is associated with out-of-pocket payments, so there is no element of redistribution, whether ex ante or ex post. Out-of-pocket payments incorporate cost-sharing requirements as well as the expenses borne completely by the individual (such as over-the-counter medicines, alternative treatments not covered by any insurance and the like). Thus on the one hand, out-of-pocket payments can reflect the willingness to pay for ‘luxury’ healthcare services or for higher quality services (Maarse 2004b: 178). Extrabilling from the providers’ side may also be included in this category. On the other hand, they are a strictly regressive means of financing healthcare, drawing on private households. Either way, the income position of individuals and households directly determines their access to healthcare services and reproduces economic inequalities. Tax exemptions are the last element to be considered in our brief account of public and private financing sources. Since tax exemptions entail public funds going directly to private entities (insurers or individuals), they are an element of the public/private-mix in healthcare funding that is often neglected (Hacker 2002). However, the role of public funding in healthcare is not comprehensively captured when considering gross spending alone. Apart from direct public spending, the provision of tax exemptions is an alternative and more indirect way of channelling public money towards healthcare (Hacker 2002; Immergut 2001; Sheils and Haught 2004). OECD health data neglects tax expenditure and therefore tends to underestimate the tax spending share in favour of private or social health insurance expenditures which can be offset against tax. Generally, public tax policy seems most important in healthcare systems with strong private insurance components and least important in tax-funded systems (Adema and Ladaique 2005). Public healthcare spending is therefore somewhat underestimated by the use of gross expenditure data. By the same token, gross spending overstates country differences with respect to the public/private funding-mix. Since net spending data is only available for individual years, we will have to ground our analysis on gross health spending. We consider the provision of tax benefits explicitly in the case studies of the US and German healthcare systems, health-related tax benefits being negligible in the UK (see case studies in Part III). In summary, we argue that we can distinguish private funding, social insurance funding, and tax funding, which reflect different degrees of state-involvement. Private funding as represented by out-of-pocket payments and private insurance premiums is based on the logic of markets and

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voluntary contracts between individuals or groups and providers or private insurance, respectively. Therefore, private funding is by and large free from state involvement. The state may control for the fairness and sustainability of contracts but is less concerned to shape contractual arrangements to include elements of solidarity. By contrast, the state looms large with respect to social insurance. The mandate to insure, the requirement to accept insurants irrespective of individual health risk, and elements of redistribution are enforced and sustained by state regulation. However, within this framework, the state gives leeway to social insurance funds, providers and the insured to implement contributions, entitlements, and the organization of healthcare. Moreover, contributions collected by social insurance are not at the disposal of the state. Finally, with respect to tax funding, state influence is most pronounced. The state’s financing responsibility implies hierarchical interventions into the benefit catalogue and the remuneration of providers, which involves favourable opportunities for the state to hierarchically control spending. As a result we consider public financing which subsumes taxes and social insurance as a broad indicator of the role of the state. Nevertheless, the trichotomous classification serves as a more precise yardstick for estimating the changing role of the state in healthcare financing. Before we give an account of the development of financing patterns across 23 OECD countries since 1970, we start by reviewing the findings in the literature.

The role of the state in healthcare financing: Findings in the literature The persistent growth of healthcare expenditure, cross-national variation in healthcare spending and, last but not least, the availability of international comparative expenditure data have given rise to an extensive literature related to healthcare financing. In our brief review, we focus on quantitatively oriented, comparative studies concerned with the development of healthcare financing in the OECD world and which refer to the role of the state. This involves analyses of aggregate spending data rooted in welfare state and healthcare systems research, though we do not consider the multitude of detailed single country studies on healthcare financing systems (for example, European Observatory on Health Systems and Policies 2009). Moreover, there is a long line of economic studies concerned with the evolution of health expenditure and its determinants. Economic studies have identified economic wealth and progress in medical technology as major determinants of health expenditure. These studies are mostly concerned with total levels of healthcare spending per capita and spending growth (Docteur and Oxley 2003; Gerdtham and Jönsson 2000). The role of the state is conceptualized as an independent variable alongside other potential socio-economic or institutional determinants of healthcare

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spending. The effects of variables related to the role of the state on total spending are mixed. Such variables include the share of public financing or classifications of health systems as public integrated systems or NHS systems. Leu (1986) argued that public financing and public provision would increase demand for health services and total health spending, due to the lack of consumer prices and bureaucratic budget maximizing. Subsequent studies have not confirmed an expansive effect of state involvement, but instead highlight the active role of public financing agents which try to curb healthcare costs and institutional features of the healthcare system that provide incentives for cost containment such as global budgets (Gerdtham and Jönsson 2000). Whether high levels of state engagement shift the level of spending seems therefore to depend on other context variables, such as whether the government is pursuing active austerity policies. Besides this analysis of spending levels, changes in the dispersion of healthcare expenditure and healthcare expenditure growth across countries have been observed. The examination of growth patterns has revealed an inverse relationship between health expenditure growth and initial levels of expenditure, which indicates convergence among countries (Barros 1998; Hitiris and Nixon 2001; Okunade et al. 2004). As explained in greater detail below, the negative correlation of growth rates with initial levels is conventionally termed beta-convergence (Sala-i-Martin 1996). As a result, several studies have also found decreasing variance of total healthcare spending over time, which is labelled sigma-convergence according to the mathematical symbol for variance ( ) (Alber 1988; 1989; Barros 1998; Leidl 1998a; 2001). Barros (1998) suggests that the cross-national diffusion of medical knowledge, new drugs and medical equipment may cause a tendency towards similar per capita spending levels. Leidl (1998a; 2001) and Hitiris and Nixon (2001), who study beta-convergence, highlight the European Union as a driver of convergence in health expenditure. The harmonization of income and wealth fostered by the EU may stimulate economic catch-up processes and thereby also promote convergence in total healthcare expenditure levels per capita and per GDP. However, the EU effect may be questioned, since non-EU countries show similar convergence trends (Nixon 2003). It seems that the role of the state in healthcare also affects these convergence patterns: Hitiris and Nixon (2001) find that among 15 EU countries, the tax-financed NHS systems tend to converge on lower levels of spending compared to SHI systems. In NHS systems stronger centralization and controllability of the financing system – a ‘stronger state’ – seems to provide better mechanisms for the containment of healthcare costs. Furthermore, tax-based NHS systems are directly exposed to tax resistance and therefore are forced to cut spending, while the link between contributions and benefits in insurance-based systems may help to legitimize increasing funding. Earlier, Alber (1988) argued that state-involvement shapes spending dynamics. Examining the variance of 21 OECD countries from 1960–82, Alber

j

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found that convergence of spending is especially strong in times of prosperity, while conditions of austerity lead to divergence. The effect of ‘state control’ seems strongest in times of economic strain. While the literature cited above examines total health expenditure, we now turn to research that focuses on public healthcare spending, thereby referring more specifically to the state as a financing agent. Analyses of aggregate spending data rooted in welfare state and healthcare systems research have shed light on the development of public healthcare spending. This literature is concerned with the consequences of the changing political and economic environment in the aftermath of the 1970s oil crises, which marked the end of the ‘golden age’ of welfare states. Moreover, assumptions about a ‘race to the bottom’ due to the globalization of trade and capital markets, postulating downward convergence of public spending as well as more general ideas of convergence among countries, have motivated these studies (Castles 2004; Starke et al. 2008). Castles (1999) suggests that whereas until the 1970s variation in public healthcare spending across OECD countries was influenced by political variables (such as right- or left-wing incumbency or union density), since the 1980s, bureaucratic cost-containment policies have tended to dominate, thereby shifting influence towards the availability of resources rather than politics. As persistent health expenditure growth aggravates financing problems, the fiscal self-interest of the state tends to prevail over provider interests in the expansion of healthcare and favours the implementation of cost-containment policies (Wilsford 1995). This would imply a limit to the growth of public spending and probably convergence towards an upper limit. In fact, Castles (2004) finds (sigma-)convergence of public healthcare spending as a percentage of GDP between 21 OECD countries between 1980 and 1998. Starke et al. (2008) corroborate an upward convergence trend for a similar sample of countries between 1980 and 2003, albeit with respect to ‘social health spending’, which includes public spending and governmentsubsidized private spending components. Analogous to examinations of total health spending, some studies have focused on convergence of public healthcare spending between EU-countries, since similar economic conditions and benchmarks, as well as the diffusion of policy ideas within the EU, might foster convergence (Comas-Herrera 1999). Leidl (2001) supports the assumption of convergence: the dispersion of public per capita expenditure among 15 EU-countries declines between 1970 and 1995. Castles (2004) also observes convergence between 1980 and 1998 with respect to public healthcare spending per GDP, but disagrees with the idea of an EU-induced model of public healthcare financing because of even more pronounced declines of variance observed outside the EU. By contrast, Comas-Herrera (1999) rejects the convergence hypothesis, basing her conclusion on the observation of 12 EU-countries over the period 1960 to 1992. Her analysis only confirms a common convergence trend between

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tax-based systems, while there is no evidence for convergence in the case of insurance-based healthcare systems and across the complete EU sample (Comas-Herrera 1999: 210f.). Although results may vary due to different observation periods and country samples, Comas-Herrera’s findings deviate because she uses a different convergence indicator. While the studies we have examined so far rely upon the concepts of sigma- and beta- convergence, Comas-Herrera (1999) uses structural time series analysis.3 Further insights into the role of the state are given by examining the public share of financing as a percentage of total financing or the public/ private financing mix (Rothgang et al. 2008). Yet few quantitatively oriented studies have focused on these structural variables. Moreover, there seems to be a lack of comparative analyses of changes in the funding mix going beyond the straight public/private split (Barros 2007). Alber observed, as early as 1988, that the public expenditure share increased in all countries but rose much more quickly in healthcare systems that used to rely primarily on private healthcare financing (Alber 1988). This observation is in line with catch-up processes denoted by beta-convergence. A younger branch of healthcare literature has highlighted privatization trends across all countries and healthcare sectors, possibly pointing to a weaker role of the state in financing (Hacker 2004; Huber 1999; Poullier 2004). Instead, Gerdtham (2000) suggests a common need for a certain share of public financing responsible for a solidarity component in healthcare systems. Wasem (1995) even hypothesizes that there is a ‘middle way’ between public and private healthcare financing, which all countries tend to achieve. However, the idea of a trend towards a single common financing model symbolized by the term delta-convergence (Knill 2005) strongly contradicts the ideas put forward in the institutionalist literature on healthcare systems (Pierson 2004; Saltman 1997; Tuohy 1999). According to these authors, the deeply rooted ‘social embeddedness’ of healthcare systems has led to path-dependency, which in turn would preclude such a middle way in healthcare financing. A first step towards examining the funding mix in more detail, considering government spending as well as social insurance, private insurance, and out-of-pocket spending has been taken by Barros (2007). The analysis suggests that the funding mix has only changed slowly within the OECD world (16 countries from 1990 to 2005), though there is some evidence for convergence, as the sum of distances of funding shares across countries has declined. The impact of this finding on different funding agents remains an open question. Summing up, the literature reviewed reveals that it is necessary to study changes in levels of spending as well as changes in the dispersion across countries, since the studies point to corridor effects and trends of convergence in healthcare financing. Moreover, to capture the changing role of the state, structural variables such as the public financing share will have to be observed. While previous studies highlight a catching-up on the part

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of low public spenders, recent studies point to privatization trends, denoting a weakening of the state. Concerning the funding mix, assumptions about path dependence and ‘social embeddedness’ can be observed alongside assumptions that financing systems will converge to a single (optimal) financing model. The literature also suggests that convergence patterns differ with respect to types of healthcare systems and time periods. Since most studies that refer to convergence in public healthcare financing and the financing mix end in the mid-1990s and therefore do not consider recent developments, we aim to contribute a descriptive account of the changing role of the state in healthcare financing and related convergence trends. Therefore we also examine changes with respect to the trichotomous classification of financing sources which follows the logic of healthcare systems classification that can be found in Chapter 2 of this book.

Patterns of healthcare financing The approach we suggest now systematically addresses the questions about changes in healthcare financing within OECD countries from 1970 to today. The core question is how the role of the state in healthcare financing has changed since the end of the ‘golden age’ of the welfare state. The role of the state in healthcare financing is reflected in the three basic financing categories: tax funding, social insurance contributions and private financing. However, financing data is not provided in a consistent form according to this trichotomous concept for the whole sample and observation period. We therefore use the category public funding, which subsumes tax and social insurance financing, as a broad indicator of state-involvement (OECD 2004). Information on public financing is provided more consistently by OECD health data.4 However, we have found adequate data on the trichotomous funding-mix since the early 1990s for 18 countries out of our OECD sample. This allows us to examine recent changes in the funding mix in more detail, though for a limited group of countries and a much shorter observation period. In order to provide a comprehensive picture of financing patterns, we look at mean levels of healthcare financing (level effects) as well as the dispersion of healthcare financing (corridor effects). Therefore, we use data on total, public and private spending on health (level variables) as well as the public financing share which indicates the structure of healthcare financing (structural variables). Table 3.1 illustrates this approach. As a first step, we survey level effects as indicated by the changes in mean total, public and private spending, measured in percentages of GDP. Both level indicators and structural variables are necessary to evaluate the role of the state, its absolute involvement in health financing and its relative position with respect to private alternatives. A comprehensive picture therefore requires an examination of public spending vis-à-vis private healthcare funding. For this purpose we use the public financing share measured as a

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Table 3.1 Structure of the analysis Type of variable Focus on Level variables

Structural variables

Level effects

Changes in mean total, Changes in mean public financing public and private healthcare share as per cent of total health financing as per cent of GDP spending

Corridor effects (Convergence)

Dispersion of total and public healthcare spending across OECD countries

Dispersion of public financing share and the funding-mix across OECD countries

percentage of total healthcare spending. As a result, we are able to identify phases of relative expansion of the state, that is, when the state is increasing its financing share in relation to private spending while public financing as a percentage of GDP remains constant. An absolute expansion of the role of the state is indicated if the public financing share and public spending per GDP are growing. By the same token, we can distinguish the absolute and relative retreat of the state. A second step leads us to corridor effects, that is, to the question of whether there is convergence in healthcare funding. We understand convergence as a reduction in variance, as measured, for example, by the coefficient of variation and denoted by sigma-convergence. Analogous to the analysis of level effects, we start with total health expenditure and continue with public spending and the public/private-mix. In addition, beta-convergence is considered in order to illustrate catch-up processes and the contribution of single countries to convergence. Subsequently, we scrutinize changes of the funding mix since the early 1990s in more detail. For a sub-sample of 18 countries the trichotomous concept of financing, which discriminates between tax financing, social insurance financing and private funds, is applied. Here we suggest an index of similarity of the funding mix, based on the absolute differences of each country’s funding shares from all other countries and evaluate changes between 1992 and 2006. Finally, we use the trichotomous concept to assign all countries under consideration to different types of healthcare financing according to their dominant funding source in the 1970s. Juxtaposing convergence trends within financing systems and the phenomena observed across all countries, we attempt to explore the relation between funding systems and convergence. Level effects: Changes in total, public and private healthcare financing To start with the question of whether the state is on an expansion path or on the retreat in healthcare financing, as suggested in the recent literature on

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Health expenditure in % of GDP (OECD-23-mean)

14 Public financing in % of total health expenditure (right y-axis)

12

76

74

10

8

Total health expenditure in % of GDP (left y-axis)

72

70

6 Public health expenditure in % of GDP (left y-axis)

4

68

66

2

Public health expenditure in % of total health expenditure (OECD-23-mean)

36

Private health expenditure in % of GDP (left y-axis) 0 1970

64 1975

1980

1985

1990

1995

2000

2005

Figure 3.1 Mean health expenditure in per cent of GDP and the mean public financing share in 23 OECD countries Source: OECD (2009). In public expenditure, Belgium is included only from 1995 on.

the privatization of healthcare systems, we begin by comparing total, public and private healthcare expenditure as percentages of GDP (see Figure 3.1). In order to capture general trends, we consider the average spending level (total, public, and private expenditures) of all 23 OECD countries under investigation. Figure 3.1 also includes information on the development of the mean public financing share (dotted line). Over the whole period, and on average over all 23 OECD countries, healthcare consumed an ever-increasing share of overall economic resources. The total expenditure level almost doubled from an average of 5.2 per cent in 1970 to 9.5 per cent of GDP in 2006. Average public spending on health increased markedly in the early 1970s from 3.7 per cent in 1970 to 4.8 per cent in 1975. By 2006, average public spending accounted for 7.0 per cent of GDP. Economic shocks such as the first oil crisis of 1973 and the economic downturns of the early 1990s and early 2000s are related to an expansion of public healthcare spending as a proportion of GDP. The increases in those periods do not necessarily indicate excessive spending but rather the decline in the growth of the denominator, GDP (not shown). The years following the economic shocks show slowed growth or even a decline of public healthcare spending as a proportion of GDP in some years, indicating attempts to curb public spending. Private financing, over the whole period, grew quite steadily from 1.5 per cent in 1970 to 2.5 per cent in 2006. Thus, in absolute terms, the role of the state in healthcare financing has not declined. Public healthcare spending as a share of GDP is at the present time much

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37

higher than in 1970. Yet what about the relative position of the state? This can be exemplified by the public share of total healthcare spending, as depicted by the dotted line in Figure 3.1, by which we relate public and private spending. First of all, on average public sources cover nearly three quarters of health expenditure, which highlights the important role of the state in health financing. When measured over the whole period, we also find an expansion of the state’s role in health financing. The average public spending share has grown from 70.4 per cent in 1970 to 74.8 per cent in 2006. However, within these 36 years we can distinguish different periods. Between 1970 and 1980, the public financing share increased considerably from about 70 to more than 76 per cent. From then on, the state retreated from healthcare funding relative to private funding sources. In the 1980s and 1990s the public financing share decreased to 73 per cent. Since 2000 we again observe higher public spending shares. As a first result, we therefore find that the state is not on the retreat. On average public spending as a share of GDP has increased throughout the observation period. A relative retreat of the state and relative privatization of health financing is only observed in the 1980s and 1990s. Quite remarkably, from 2000 to 2006 we once again find an increased role of the state in healthcare funding: public spending grows as a percentage of GDP as well as in relation to private financing responsibilities. However, mean spending levels are ambiguous indicators. On the one hand they clarify general trends, but on the other they conceal distinct developments in the countries observed. While almost all countries have followed the privatization trends of the 1980s and 1990s, some countries document a continuous increase in public involvement in healthcare financing from levels that had been, in some cases, relatively low. In Japan the public share increases from 70 to 81 per cent, in Switzerland from 47 to 59 per cent, and in the US from 37 to 45 per cent. Portugal’s public financing share is more volatile until the mid-1980s and then rises from roughly 50 to 72 per cent (OECD 2009). Recently the trend towards privatization has ended or paused in most countries, while in countries such as those named above, the public share kept growing. As a result the average public spending share is rising again. In the following section we will examine corridor effects and consider again the patterns of public healthcare spending of OECD countries when we take a look at beta-convergence and changes in the funding mix. Corridor effects: Convergence in (public) healthcare financing It has been shown that on average the state is still responsible for a fundamental share of healthcare financing. While the 1980s and 1990s saw a relative retreat of the state from healthcare financing, state responsibility for financing has recently increased. In the following sections we scrutinize corridor effects and particularly the idea of convergence. Do OECD healthcare systems resemble each other more closely over time (convergence) or

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Achim Schmid, Mirella Cacace and Heinz Rothgang

do they become more distinct in their funding levels and structures (divergence)? Convergence assumes a narrowing of corridors or decreasing variance. Considering per capita health spending levels, convergence may arise from the cross-national diffusion of medical knowledge (Barros 1998) or as a result of economic convergence (Hitiris and Nixon 2001). One may also assume ‘growth to limits’ if health spending in relation to economic wealth is considered (Flora 1986). Regarding the funding mix and the public financing share, convergence may be related to a limited scope for sources of spending as well as cross-national diffusion of ideas about beneficial financing schemes (Holzinger and Knill 2005). We use different but related concepts of convergence. Sigma-convergence refers to decreasing variance of health spending over time. This is measured by the coefficient of variation which gives the relative standard deviation to the mean. Since the coefficient of variation is mean standardized, it controls for increasing averages over time and can be directly compared across different variables (Leidl 1998a). Beta-convergence considers the mobility of countries. It is defined as a negative correlation between the position of the individual countries at the beginning of an observation period and the changes or growth rates, respectively, over this period. It therefore assumes that growth from a low base is faster than growth from higher levels (Sala-i-Martin 1996). Both concepts are related, since sigma-convergence implies beta-convergence. However, beta-convergence does not necessarily lead to sigma-convergence. For example, former low spending countries with high growth rates may overtake high spending countries. The countries may thus change position without any effect on the distribution of spending patterns between the countries. For the dichotomous conceptualization it suffices to concentrate on public healthcare finance and measure mean and variance, leaving private financing as the residual. This no longer works if financing is conceptualized trichotomously. In order to capture corridor effects of the trichotomous funding-mix we therefore suggest an index of similarity of the funding-mix used, for example, by Barros (2007). For each country we measure the absolute distances of the three funding shares to the corresponding funding shares in all peer countries. The absolute distances are added up to an index of similarity (city-block metric). A decline of this index over time points to convergence. Sigma-convergence We start by examining two indicators for total expenditure levels: total healthcare spending as a share of GDP and per capita expenses in US$purchasing power parities (PPP). In both cases, the variance measured by the coefficient of variation diminishes over time (see Figure 3.2). The coefficient of variation decreases from 40.7 to 28.5 per cent when total healthcare expenditures (THE) per capita are taken as an indicator, and from 25.6 to 18.0 if expenditure level is measured as a share of GDP. However, almost all of the effect took place in the early 1970s. Here, convergence coincides with

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Coefficient of variation: Relative standard deviation of total health expenditure in %

Changing Role of the State in Healthcare Financing

39

45.0 40.0

Total health expenditure in US$-PPP, per capita

35.0 30.0 25.0

Total health expenditure in % of GDP

20.0 15.0 10.0 5.0 0.0 1970

1975

1980

1985

1990

1995

2000

2005

Figure 3.2 Sigma-convergence of total health expenditure Source: OECD (2009). Levene’s test statistic: Total health expenditure in US$PPP per capita, df(1, 42) p=0.04; Total health expenditure as a percentage of GDP, df(1, 44) p=0.12.

times of prosperity and rapid growth in spending on welfare and healthcare. From the late 1970s onwards, the variance of total spending levels decreased only slightly and even increased temporarily, depending on which of the two indicators is observed. In order to test whether there is a significant shift of variance between 1970 and 2006 we use the Levene’s test, which is less sensitive to the assumption that the data is drawn from a Gaussian distribution. The data is mean standardized analogous to the coefficient of variation. Then we test a shift of variance between two groups (years 1970 and 2006) each consisting of 20 to 22 countries (due to missing public spending data for Belgium and per capita spending data in purchasing power parities – $PPP – for Luxemburg). Degrees of freedom (df) are defined as the number of groups minus one and the total number of cases in both groups minus two. Conventionally, the null hypothesis of equal variances is rejected for p<0.05 referring to the 95 per cent significance level. The rejection of the null hypothesis at the 90 per cent level (p<0.10) may be considered as weak significance. A downward trend of the coefficient of variation and the rejection of equal variances points to sigma-convergence. In the case of total spending as a share of GDP, Levene’s test statistic suggests that we cannot reject the null hypothesis of equal variances of the distribution in 1970 and 2006. The decline of variance in total health spending is not statistically significant at the 90 per cent level (p=0.12). By contrast, total health spending per capita shows a significant shift of variance (p=0.04).

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Coefficient of variation: Relative standard deviation of public health expenditure in %

Turning to public healthcare spending (measured again per capita and as a percentage of GDP), assumptions of convergence are more closely related to the changing role of the state. Convergence may be linked to a limited scope for national actors to define public spending levels, because, for example, of global economic competition. It may also originate in the catching-up process undertaken by low public healthcare spending countries in order to strengthen the role of the state and thereby reinforcing redistributive elements of financing typically related to public financing schemes. Figure 3.3 reveals that the coefficient of variation declines considerably for both indicators, public spending in relation to the GDP as well as the respective per capita figures. The coefficient for public spending per capita decreases from 42.1 to 22.1 per cent, the coefficient for public spending as a proportion of GDP declines from 32.3 to 11.3 per cent. The diminishing coefficient of variation between 1970 and 2006 is statistically highly significant for the latter indicator (p=0.001). Here, we can reject the null hypothesis of equal variances. In the case of public spending per capita the shift of variance is still weakly significant (p=0.06). Coming now to the question of whether there is also convergence in the funding structures, we observe changes in the coefficient of variation in the countries’ public spending shares of total healthcare expenditure. Over 36 years the coefficient of variation dropped significantly by almost 10 percentage points from 22.5 to 12.9 per cent (see Figure 3.4). Recalling that the mean public share of healthcare financing, as represented by the dotted line

45.0 Public health expenditure in US$-PPP, per capita

40.0 35.0 30.0 25.0 20.0 15.0

Public health expenditure in % of GDP

10.0 5.0 0.0 1970

1975

1980

1985

1990

1995

2000

2005

Figure 3.3 Convergence in public expenditure levels Source: OECD (2009). Levene test statistic: Public healthcare expenditure in US$PPP, df(1, 40) p=0.06. Public healthcare expenditure as a percentage of GDP, df(1, 42) p=0.001.

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Changing Role of the State in Healthcare Financing

OECD-23 mean share of public financing in % of total health expenditure

35.0 Public financing share: Mean (left y-axis)

76.0

30.0

74.0

25.0

72.0

20.0

70.0 68.0

15.0 Public financing share: Coefficient of variation (right y-axis)

10.0

66.0 64.0 1970

5.0 0.0 1975

1980

1985

1990

1995

2000

Coefficient of variation: Relative standard deviation of public health financing share in %

78.0

41

2005

Figure 3.4 Convergence in the structure of healthcare Source: OECD (2009). Levene test statistic: Public financing share, df(1, 42) p=0.016.

in Figure 2.1, increased between 1970 and 1980 and since 2000, we observe a phenomenon that can be labelled ‘upwards convergence’ of the role of the state in healthcare funding for these periods. Upwards convergence means that there is both an increasing commitment of the state in all healthcare systems on average, and at the same time a more similar structure of healthcare funding over all countries (for conceptualization see Rothgang et al. 2006). For the 20-year period from 1980 to 2000, which is the time when the state retreated relative to private sources of funding, we find significant (p=0.016) ‘downward convergence’. The following Table 3.2 summarizes the development of the coefficient of variation for diverse parameters of healthcare expenditure and time periods. The summary table shows that the coefficient of variation declines for all indicators between 1970 and 2006. The decline was most pronounced in the 1970s when, in particular, mean public expenditure was expanding. With respect to public financing and the public financing share sigmaconvergence can be observed for all time periods. Moreover, the decline of variance between 1970 and 2006 is statistically significant for public healthcare spending as a percentage of GDP as well as the public financing share, and still weakly significant for public spending per capita, while there is less evidence for convergence in total healthcare expenditure since the 1980s. Beta-convergence: Catch-up processes in healthcare financing Sigma-convergence, which we have identified in public healthcare financing and also, to a weaker extent, in total expenditure levels, implies

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22.5

Public financing share as a percentage of total health expenditure

20.0

33.6

26.0

31.4

17.6

1975

19.2

33.3

25.4

31.2

17.3

1980

18.3

33.3

22.6

34.2

17.9

1985

17.4

29.8

19.5

33.9

18.9

1990

16.0

27.5

17.6

31.8

19.6

1995

14.2

25.5

16.9

30.3

19.0

2000

12.9

22.1

11.3

28.5

18.0

2006

–3.3

–8.8

–6.9

–9.5

–8.3

1970–80

–1.8

–3.5

–5.9

2.7

1.6

1980–90

–3.2

–4.3

–2.6

–3.6

0.1

1990–2000

–1.3

–3.4

–5.6

–1.8

–1.0

2000–6

Changes in percentage points

–9.6**

–20.0*

–21.0**

–12.2**

–7.6

1970–2006

Note:* Denotes weakly significant shift of variance: p<0.10; ** denotes significant shift of variance: p<0.05. Source: Own calculation based on OECD (2009). Missing data: Germany 1991, Luxemburg US$PPP 1970–94 and Belgium Public Expenditure 1970–94.

42.1

Public per capita expenditure in US$ PPP

40.7

Total health expenditure per capita in US$ PPP

32.3

25.6

Total health expenditure as a per cent of GDP

Public healthcare expenditure as a per cent of GDP

1970

Indicators

Coefficient of variation (per cent) for the years

Table 3.2 Coefficients of variation for different healthcare financing indicators

Changing Role of the State in Healthcare Financing

43

beta-convergence. Beta-convergence is defined as a negative correlation between the position of the individual countries at the beginning of an observation period and the changes or growth rates, respectively, over this period. Beta-convergence indicates catch-up processes in the sense that countries with below-average expenditure levels increase spending while countries which start from higher spending levels grow more slowly or even reduce spending levels. Since we have observed a decreasing variance over time, we can expect beta-convergence. Beta-convergence is used here to evaluate the position of single countries which was concealed by averages and indicators of distribution. The following graphs show the correlation of average annual growth rates (geometric mean) of public healthcare expenditure and of the public healthcare spending share with its initial levels in 1970 (see Figures 3.5 and 3.6). Starting with public healthcare expenditure as a share of GDP, we find a strong and significant negative relationship between the change in public healthcare expenditure and initial spending levels. The R 2 of 0.88 indicates that almost 90 per cent of the variation in spending growth rates is explained by the 1970 baseline. Countries like the US, Switzerland or the southern European countries, whose public healthcare system were not fully developed in 1970, have increased public spending markedly. Portugal and Spain, as well as Iceland, have developed mainly tax-financed NHS systems. Switzerland has strengthened social insurance financing, while the US and

Average annual growth rate of public health expenditure per GDP in %

4.5 4.0

POR

3.5 3.0 GR SP

2.5

USA CH LUX ICE AUT UK FR JPN NLD FIN AUS NO NZL GER

2.0 1.5 1.0

IRE

IT CA

0.5 0.0 0.0

SW

1.0

2.0

3.0

4.0

5.0

6.0

DK

7.0

Public health expenditure in % of GDP in 1970

Figure 3.5 Catch-up in public expenditure in per cent of GDP (1970–2006) Notes: Average annual growth = 4.3(20.2) – 0.02(–6.6) Public healthcare expenditure 1970; R 2 =0.88; n=22; p=0.000; t-statistics in parentheses. Source: OECD (2009). Years with break in time series have been excluded from the calculation of average annual growth rates.

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Average annual growth rate of public health financing share in %

1.4 NLD

1.2 1.0 0.8

GR USA

0.6

CH

ICE AUT POR

0.4

AUS

0.2

JPN SP

FIN FR

0.0

CA

−0.2

LUX SW UK IRE NO

DK

GER NZL

−0.4 −0.6

IT 30

40

50

60

70

80

90

100

Public health financing share in 1970

Figure 3.6 Catch-up in the public/private-mix (1970–2006) Notes: Average annual growth = 1.7(7.4) – 0.67(-12.1) Public financing share 1970; R 2 = 0.68; n=22; p= 0.000; t-statistics in parentheses. Source: OECD (2009). Years with break in time series have been excluded from the calculation of average annual growth rates.

Greece still largely rely on private funding sources but have nevertheless considerably expanded public healthcare expenditure as a proportion of GDP. In contrast, the tax-financed NHS systems of Sweden and Denmark are characterized by exceptionally low changes in public spending. Looking at the correlation between initial public financing shares and their growth from 1970 to 2006 provides a picture very similar to public spending as a share of GDP. Again, we find that the current structure of healthcare funding can be explained to a considerable degree by the structure we found at the beginning of our observation period in 1970. The negative and significant beta-coefficient indicates catching-up of countries with a low public financing share. Again, countries like the US, Switzerland, and Greece stand out, as they have increased their public funding share from very low initial levels. While the US has mainly raised tax spending, Switzerland turned towards social insurance. The Netherlands shows the highest growth rate in the public share since the healthcare reform of 2006 turned a substantial part of the private insurance sector into a social health insurance scheme, thereby increasing state influence on financing. At the same time, several NHS countries that mainly rely on tax financing have decreased their public financing share, pointing either towards superior capabilities for curbing public spending or the need to complement public financing with private sources. The decline is most pronounced in Italy, where out-of-pocket payments increasingly complement tax financing.

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Changes in the similarity of the funding mix So far we have examined the public/private-mix in a dichotomous way, distinguishing public funding sources (taxes, social health insurance) from private sources (private insurance, out-of-pocket payments). This approach is at odds with our trichotomous concept of healthcare financing, but had to be chosen due to data restrictions for the 1970s and 1980s. However, for the years 1992 to 2006 there are far fewer data gaps. We can therefore scrutinize the funding mix for 18 OECD countries in a more detailed way, distinguishing tax financing, social insurance financing, and private financing. In 2006 the mean spending mix within this sample was about 56 per cent taxes, 21 per cent social insurance and 23 per cent private sources, reflecting the overrepresentation of NHS countries in the 18-country sample. Countries differ most with respect to social insurance financing. In many NHS countries social insurance financing is negligible, while SHI countries, as the name suggests, draw upon social insurance as the major financing component. All countries rely upon a substantial private financing share ranging from about 9 per cent in Luxemburg to 51 per cent in the US. All countries also use tax revenues for healthcare financing. The tax share ranges from five per cent in France to almost 87 per cent in the UK. The relation of mean financing shares does not change substantially over this rather short observation period. There are, however, substantial changes of the financing system in some countries. In Spain, social insurance funds were phased out, and this funding source has been replaced by tax financing and private financing. In Switzerland and the Netherlands private financing has been reduced in favour of social insurance, while in Sweden and Germany private financing has increased by about five percentage points (all figures based on OECD 2009). Corridor effects with respect to the trichotomous funding structure cannot be analyzed by a single figure such as the distribution of the public share. We therefore attempt to examine changes in the funding-mix, employing an indicator of ‘similarity of the funding mix’ suggested by Barros (2007). This indicator measures the sum of the absolute distances of one country to all the other countries for each of the three funding shares (city-block metric). The result is then standardized by the number of countries related to the country for which the indicator is provided. It is divided by two so that the values can in theory range from zero to a maximum of 100. Convergence is indicated by a decline of the index over time. The index presented in columns three and four of Table 3.3 quantifies the similarity of the funding mix. Focusing on the year 1992, we can see that for countries where tax spending dominates, the index ranges from 28.4 units (Canada) to 32.8 (Sweden). The market-based healthcare systems of the US (48.0) and Switzerland (50.8) indicate a similar funding structure, though Switzerland is also quite close to countries that rely mainly on SHI,

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Achim Schmid, Mirella Cacace and Heinz Rothgang

Table 3.3 Similarity of the funding mix Sum of absolute distances to countries

Countries

Main source of financing in 1992

CA IRE

dj ⫽

3 n⫺1 1 ∑ ∑ sij ⫺ sik 2( n ⫺ 1) i⫽1 k =1

Difference of distances ∆dj = dj(2006) – dj(1992)

1992

2006

2006 minus 1992

Taxes Taxes

28.4 28.5

28.6 27.4

IT

Taxes

28.5

27.5

–1.1

NZL

Taxes

28.6

27.5

–1.1

FIN

Taxes

28.7

29.4

0.7

DK

Taxes

30.0

29.4

–0.5

AUS

Taxes

30.8

28.5

–2.3

ICE

Taxes

30.8

29.2

–1.6

NO

Taxes

31.1

30.2

–0.9

0.2 –1.1

UK

Taxes

31.2

32.2

1.0

SP

Taxes

31.9

28.9

–3.0

SW

Taxes

32.8

28.4

–4.3

US

Private

48.0

45.6

–2.4

CH

Private

50.8

51.9

1.1

GER

SHI

53.2

55.3

2.1

NLD

SHI

58.5

62.0

3.5

LUX

SHI

59.2

56.1

–3.1

FR

SHI

61.8

59.4

–2.3

Sum of Distances

692.9

677.6

–15.3

Note: The variable s represents the share of financing; subscript i denotes the type of financing (tax, social insurance, private); subscript j denotes the country for which the index is calculated, while k stands for the other countries and n represents their total number. The abbreviation we use for denoting the distance is d. Source: OECD (2009); own calculation.

grouping together from 53.2 (Germany) to 61.8 (France). Since the majority of countries in the sample are NHS countries which share a funding mix that combines mainly tax financing (on average almost 80 per cent) with a smaller part of private financing (about 20 per cent), and a negligible share of SHI financing, convergence is equivalent to a move towards this mix. This is indicated by the negative signs in column five of Table 3.3. Thus, Sweden (-4.3) shows a convergent trend by expanding private financing, as does Spain (-3.0) which has replaced insurance schemes by tax financing

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and private funds. Australia, Luxemburg, France and the US also contribute to convergence as they have strengthened the tax-financing component. The Netherlands, Germany, and Switzerland, however, show a divergent trend, due to the expansion of social insurance financing, which means that these countries depart from the funding mix that is characteristic for the majority of tax-financed countries. For a general evaluation of convergence trends, we can first look at the change in the range of values between 1992 and 2006. The range from the minimum to the maximum has slightly increased from 33.4 units in 1992 (Canada 28.4 to France 61.8) to 34.6 units in 2006 (Ireland 27.4 to the Netherlands 62.0). However, 12 countries show negative signs and therefore convergent trends, while six diverge. The differences add up to -15.3 units, indicating convergence of the funding-mix. At the same time, the position of healthcare systems reveals that countries cluster quite narrowly according to their main source of financing in 1992 and also consistently over the observation period. The distance between mainly tax-financed countries increases slightly from 4.4 to 4.8 units, whereas the distance among SHI countries declines from 8.6 to 6.7 units. The mainly private funded US moves somewhat towards the tax spending nations, while Switzerland approaches the SHI countries. Overall, the development of the trichotomous funding-mix between 1992 and 2006 suggests that convergence trends are limited over this rather short observation period. Moreover, the assumption of a move towards a single common funding-mix (delta-convergence) is not corroborated. Instead, it seems that the tax and SHI funding clusters have been strengthened since 1992, giving some support to path dependence. At the same time, the US and Switzerland, in both of which private health financing predominates, have diverged. Convergence and healthcare financing types The analysis of the trichotomous funding-mix has highlighted remarkably consistent types of healthcare financing. Therefore, we reconsider the role of the state in these distinct funding systems for our OECD-23 sample and the observation period 1970 to 2006. In contrast to the analysis in the previous section, we focus on role of the state by examining public healthcare spending for the three types of healthcare financing. First, we assign countries to these types according to their predominant funding source: (mainly) tax financing, social insurance financing, and private funding. We classify countries based on the 1990 data, because this reference year is best suited for an unambiguous grouping of countries, because of the availability of OECD and national health financing data for our country sample. We then examine the development of mean public financing share and its coefficient of variation within types of healthcare financing between 1970 and 2006.

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48 Achim Schmid, Mirella Cacace and Heinz Rothgang

Mean share of public health financing in % total health expenditure by predominant financing type

In 1990, most countries in our OECD sample used tax revenues as the major funding source. Mainly tax-funded countries include Australia, Canada, Denmark, Finland, Iceland, Ireland, Italy, New Zeeland, Norway, Portugal, Spain, Sweden, and the UK. Mainly social insurance financing can be found in Austria, France, Germany, Japan, Luxemburg, and the Netherlands. Greece, Switzerland, and the US relied for the most part on private funding in 1990.5 The mean spending shares of financing types shown in Figure 3.7 support the observations made in the sections above. In the 1970s all groups expanded their public financing share, so we find increasing averages in all three funding types. Since the 1980s the public financing share has decreased in tax-financed countries, while increases can be observed for social insurance countries and countries with mainly private financing. The difference between mean public financing shares of tax-financed and social insurance financed health systems has all but disappeared. The distance of mainly private funded systems to both groups has declined substantially by about 6 percentage points and 13 percentage points. Thus, with regard to the role of the state as measured by the public financing share, the funding systems seem to have grown more similar since the 1970s. In order to ascertain whether the system averages might conceal divergent trends within financing types, we look at the coefficient of variation within the three

90 Mainly tax financing 80 70

Mainly social insurance financing

60 50 Mainly private financing 40 30 1970

1975

1980

1985

1990

1995

2000

2005

Figure 3.7 Mean public healthcare financing share according to financing types Source: OECD (2009).

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Coefficient of variation: Share of public financing by predominant financing type in %

Changing Role of the State in Healthcare Financing

49

25

20 Mainly private financing 15

10 Mainly social insurance financing

5

0 1970

1975

1980

1985

Mainly tax financing

1990

1995

2000

2005

Figure 3.8 Coefficient of variation of the public spending share according to financing types Source: OECD (2009). Levene test statistic: Public financing share tax-financing type, df(1, 24) p=0.002; Public financing share social insurance financing type, df(1, 10) p=0.17; Public financing share private insurance financing type df(1, 4) p=0.57.

types. This also sheds light on the question of whether convergence within financing system types contributes to the overall convergence trends found in the above sections. Figure 3.8 shows the coefficient of variation for the three funding types. The financing systems were already fairly homogeneous in the 1970s, with a coefficient of variation between 13 and about 16 per cent compared to the overall coefficient of variation across financing types of 22.5 per cent (see Table 3.2). The trends of mean public financing shares observed in Figure 3.7 seem quite consistent. However, the coefficient of variation is volatile for the private financing type, which consists of only Greece, Switzerland, and the US. These countries all show an upward trend in public financing, but country-specific growth patterns of the public financing share cause some heterogeneity within this small group. The SHI financing type seems more homogeneous, with coefficients between 16 and 8 per cent, while there are little signs of (sigma-)convergence with respect to the public funding share. A decline in the indicator in the 1970s is reversed in the following years. The only group for which we do observe significant sigma-convergence (p=0.002) between 1970 and 2006 consists of mainly tax-financed systems. The coefficient declines from 15 per cent to about seven per cent, indicating that tax-financed systems converge with respect to the share of public and private financing sources they devote to health. This has occurred

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particularly since the mid-1980s, when countries like Portugal and Australia increased the tax-financing share while at the same time many NHS countries began to contain public spending, thereby shifting the funding-mix towards private sources. Besides the convergence between different funding types, convergence within the group of countries relying mainly on tax revenues for health financing has also contributed to convergence of the public financing share.

Conclusion In this chapter we have examined the role of the state as a financer of healthcare expenditure since the early 1970s in the OECD world. We have looked particularly at public healthcare spending and the public financing share, but also at tax funding, social insurance funding, and private funding, which reflect different degrees of state involvement. Over the whole observation period, mean public healthcare expenditure has grown as a percentage of GDP. Using public spending as broad indicator for state-involvement, we therefore find that on average the state has strengthened its position on the financing dimension in absolute terms. During this time the mean public financing share has also increased in our OECD sample. Only between 1980 and the late1990s did the share of public healthcare spending decline. In this period we observe a relative retreat of the state, since public involvement in terms of spending as a proportion of GDP has been growing continuously. Assumptions that the state might lose its important position in healthcare financing are probably linked to the period when in several countries conservative political majorities implemented policies to cut public spending. Since the beginning of this millennium, however, the mean public financing share has been increasing again, mostly driven by the catching-up of low public spending nations. Moreover, the financing patterns reveal an inverse relationship between initial levels of spending and expenditure growth in the case of public healthcare expenditure as a share of GDP and the public financing share. This beta-convergence can be interpreted as a narrowing of spending corridors. Strong public spenders seem to face limits to further expansion of public healthcare financing, while low public spenders appear to be under pressure to strengthen the solidarity component of healthcare financing through public involvement. In fact, the coefficient of variation has declined continuously between 1970 and 2006 for public healthcare expenditure and the public financing share, both indicating sigma-convergence. Further patterns of convergence have been revealed by looking at the development of tax, social insurance, and private funding. For a sample of 18 OECD countries we find increasing similarities in funding between 1992 and 2006. At the same time, this trichotomous classification shows that there are still distinct financing models. The similarity index points to three

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51

models of healthcare financing – tax financing, social insurance financing, and private financing – which despite signs of convergence turn out to be quite persistent over time. These findings oppose ideas of delta-convergence, that is, convergence towards one single financing model. However, with respect to the public financing share, the financing models have grown more similar since the 1970s. The ostensible discrepancy between developments of the funding mix and the public financing share may point to functional equivalence between tax financing and social insurance financing, since both provide for social redistribution in healthcare financing, although based on different concepts of state influence.

Notes 1. When we refer to public health insurance or public health(care) financing we mean publicly organized health insurance or publicly financed health expenditure, respectively. We do not consider public health in the sense of prevention and health promotion (for a comprehensive definition of public health see Winslow 1920). 2. Financial contributions towards healthcare systems can be classified as regressive, proportional, or progressive. Proportional means that the same percentage of income is contributed towards healthcare over all income levels. A regressive system distributes income from the poor to the rich, while progressive financing denotes the opposite. According to the World Health Report 2000, proportionally financed systems are considered as vertically just, since contributions closely relate to individuals’ ability to pay (WHO 2000), but progressive financing may also be considered as fair (Shaw 2002: 196f.). 3. Comas-Herrera (1999: 207f.) estimates the trend of public healthcare expenditure for each time series (country) and its corresponding confidence intervals. The convergence indicator is then defined as the rate of intersections of the estimated trends. While Comas-Herrera has argued that this indicator is less vulnerable to outlier values, most studies rely upon sigma- and beta-convergence. 4. We generally use OECD health data 2009, 1st version issued July 2009. Some limitations apply to this data-set. Total health expenditure: Data for Australia 1970, Denmark 1970 and Netherlands 1970–1 calculated by total health expenditure $PPP and GDP $PPP. Missing data interpolated using geometric mean: France 1971–4, 1976–9, 1981–4, 1986–9; Greece 1971–9, 1981–6; Italy 1980–7. Data for Italy 1970–9 based on expert interviews. Missing Values: Germany 1990, Luxemburg PPP$ 1970–94. Public healthcare expenditure: Data for Netherlands 1970–1: own calculation based on total health expenditure $PPP and GDP $PPP. Data for Australia 1970 and Denmark 1970: estimates based on the trend of the following years. Missing data interpolated using geometric mean: France 1971–4, 1976–9, 1981–4, 1986–9; Greece 1971–9, 1981–6; Italy 1987. Own calculation based on OECD. Missing values: Belgium 1970–94, Germany 1990, Luxemburg PPP$ 1970–94. Total health expenditure and public share: Switzerland 1970–84, Luxemburg 2002–6, Belgium 1998–2007. Data for Italy 1970–86: Fausto (1990). Missing Values: Belgium 1970–94, Germany 1990. Private healthcare expenditure: Missing data interpolated using geometric mean: France 1971–4, 1976–9, 1981–4, 1986–9; Greece 1971–9, 1981–6; Italy 1987. Own calculation based on public

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healthcare expenditure share: Australia 1970, Denmark 1970, Belgium 1998–2007, Netherlands 1970–1, Luxemburg 2002–6, Switzerland 1970–84. 5. Belgium is excluded due to missing data and ambiguous classification, since social insurance and tax financing have accounted for an almost equal share of about 36 per cent in the early 1990s (Kerr and Siebrand 2000).

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4 The Changing Role of the State in Healthcare Service Provision Achim Schmid and Claus Wendt

This chapter focuses on measuring the public/private-mix of service provision in order to evaluate the nature of the role the state adopts as a provider of healthcare services and how this role has changed over time. While internationally comparable time series on healthcare financing give a clear indication of the role of public relative to private financing, there is no such common standard for the service provision dimension. The absence of a straightforward indicator for measuring the public/private-mix of healthcare delivery might be one reason why the role of the state in service provision has only been poorly scrutinized (Wendt et al. 2005). However, a number of studies have concentrated on the relation between the state and healthcare providers (Frenk and Donabedian 1987; Moran 1999; 2000) and also on the question of ownership of healthcare provision (Moran 1999; 2000; OECD 1987b). However, these studies have not provided empirical evidence on the level of public service provision in cross-country comparison (Powell 2007; Wendt et al. 2009), nor have they treated service provision as a distinct dimension separate of financing and regulation. In order to trace changes in the service provision dimension of OECD healthcare systems, we attempt to develop a composite Public Service Provision Index (PPI). This includes estimating the size of healthcare sectors which may all represent different shares of public provision. Indeed, as a general pattern, private providers appear to be important in the delivery of outpatient services, while public involvement is more likely to occur in inpatient care (Scott 2001: 22; Wendt et al. 2009). Consequently, we have to separate public from private healthcare provision within each healthcare sector. Based on the PPI we aim to shed light on the question as to whether there is a privatization trend or, in other words, a retreat of the state in healthcare provision. Bearing in mind the issue of convergence, we also ask whether developments in service provision are commensurate with trends observed in the financing dimension. Is there a trend towards a common public/ private-mix of health service delivery? While we mainly look at public versus private provision through the PPI, we complement our observations 53

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54 Achim Schmid and Claus Wendt

with information on developments within the private sector, namely shifts between for-profit and non-profit private provision. One situation where this is particularly important is in social insurance countries like Germany, where welfare organizations play a strong role in the hospital sector. Ideally, our cross-sectional analysis would cover 23 OECD nations since 1970 (see Chapter 1). However, comparative data on service provision is fragmentary. The findings in the service provision section are therefore restricted with respect to the observation period as well as the number of observed countries. Before we turn to these empirical questions, we briefly address the context of changes in the public/private-mix in health service delivery. This includes secular trends of service provision as measured by broad indicators of healthcare infrastructure, and general developments in the role of the state and the market in healthcare.

The context of change in the service provision dimension Healthcare systems represent the service-heavy part of the welfare state (Alber 1995; Bambra 2005; Powell 2007). Today, their main task is not the financial transfers that were once crucial, but services provided by healthcare personnel (Moran 1999: 175). Healthcare services include diverse healthcare sectors and activities such as inpatient care in hospitals and nursing homes, treatments provided by physicians1 and dentists in outpatient settings, and the delivery of medical goods such as pharmaceuticals.2 Trends in the service provision dimension have typically been described by broad indicators of healthcare infrastructure (Figueras et al. 2004; Freeman 2000; McPherson 1990; Wendt and Thompson 2004). Such indicators comprise personnel density (for example, health employment, hospital employment, practicing physicians, nurses), the supply of healthcare facilities (for example, hospital beds) and medical technology (for example, Computed Tomography Scanners, MRI Units, Lithotripters). Based on such broad categories, first attempts have been made to calculate indices of healthcare services for cross-country comparisons (see, for example, Wendt and Kohl 2010). According to the Health Care Provider Index by Wendt and Kohl (2010), the Social Health Insurance (SHI) systems of Belgium, France, and Austria offer the highest level of healthcare provision, while a mixture of Central and East European social insurance systems like Poland and the Slovak Republic, but also the Netherlands and some National Health Service (NHS) systems, such as the Danish system, are located at the lower end of the country scale. Though only a few OECD countries provide data on healthcare provision covering the whole observation period, we can identify secular trends in the OECD world: a constant growth of health employment and decline of acutecare hospital beds. In 1970 total health employment per 1,000 of population ranged from 6.6 in Greece to 17.8 in Australia; by 2005 the range runs from

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14.0 in Portugal to 59.7 in the Netherlands (all figures extracted from OECD 2008). Health employment growth mirrors increasing demand, which is related to ageing populations, and the increase of multi-morbid patients, as well as medical technological innovations that allow for the treatment of diseases that were once untreatable (Comas-Herrera 1999; McPherson 1990). Moreover, the demand for high quality services by increasingly selfaware patients perceiving themselves as consumers of healthcare services rather than passive recipients not only changes the doctor–patient relationship but also contributes to rising demand (Kuhlmann 2006). Furthermore, healthcare markets have expanded, as natural life-circumstances, as well as individual life style choices, are increasingly ‘medicalized’ and systematically redefined as illnesses which require medical treatment (Moynihan and Smith 2002). As healthcare employment grew in the OECD world, the number of acutecare hospital beds decreased. For the year 1970, the OECD lists Switzerland on top with 7.1 hospital beds per 1,000 inhabitants and the US at the bottom with 4.1. By 2006 hospital beds had declined to 3.5 beds per 1,000 inhabitants in Switzerland and 2.7 in the US. In the OECD, bed density today ranges from 2.2 in Sweden to 8.2 in Japan. Generally, SHI systems tend to provide higher numbers of hospital beds while NHS systems and also the US healthcare system are characterized by a comparatively low number of acute hospital beds (all figures extracted from OECD 2009). Despite this variation, all countries share the decline of acute-care beds which is closely related to a decreasing average length of stay (Schölkopf and Stapf-Finé 2003). Short stays have been made possible by medical technological progress, such as minimally invasive treatment. Furthermore, health policy reforms have contributed to reducing length of stay and bed capacity. The implementation of Diagnosis Related Groups (DRGs) or similar case-based instruments of hospital financing, budget allocation or hospital planning do have profound implications (Forgione et al. 2005). In contrast to day-based hospital allowances, these schemes set incentives to release patients early and therefore reduce the length of stay. Moreover, DRGs have promoted internal reorganization, outsourcing strategies and specialization of hospitals, which may affect the public/private-mix since hospitals differ in their flexibility in responding to this new policy environment. DRGs have encouraged shifting patients from expensive hospital care to less-costly outpatient services, which – as we will see below – also crucially affects the public/private-mix of service provision. Though the state is an important actor in healthcare, it may not necessarily offer healthcare services directly through public employees but rather act as a financer or regulator, while service delivery is left to private actors (Powell 2007). The latter include self-employed professionals, for-profit businesses as well as non-profit organizations such as welfare and religious organizations (Wendt et al. 2005).

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The diverse forms of public and private provision in healthcare can be understood as a response to specific problem pressures (Cacace et al. 2008). At the same time, the public/private-mix in healthcare can be interpreted historically as the product of ideological preferences, the power resources of interest groups – in particular, healthcare professions – and the institutional features of the political system, which may either make it easier for government majorities to implement their ideas or foster interventions by powerful interest groups (for example Giaimo and Manow 1999; Immergut 1992; Tuohy 1999). Generally, it may be said that the expansion phase of the welfare state until the mid-1970s was from time to time accompanied by attempts to establish and expand public healthcare provision in order to improve control over service provision. However, in contrast to the financing dimension, the expansion of public health services not only provokes the resistance of liberal proponents of the market, but also of conservative (Christian democratic) parties and the health professions, with the former endorsing subsidiary forms of provision and the latter seeking to maintain their professional independence and profitability. Therefore, the role of the state as a provider of health services is presumably weaker than its role in the financing dimension. The mid-1970s are considered as a ‘turning point in the history of health care policy’ (Moran 1999: 1). Cost-containment issues began to dominate healthcare and ‘the drift of policy was almost universally in the direction of more market based arrangements’ (Moran 1999: 172). Reforms also tended to favour private organizations in the delivery of healthcare (Scott 2001: 18). Hence, the end of the so-called ‘golden age’ of the welfare state created a policy environment that tended to foster privatization and the roll-back of public healthcare provision. In this context it has been argued that privatization trends would be observed in service provision rather than in the financing dimension (Maarse 2006: 1006). The rationale for this argument is that a retreat of the state from healthcare delivery does not directly affect universal access to healthcare services, which generally enjoys strong public support (Gelissen 2002). Presumably, patients are rather concerned about the quality and accessibility of healthcare services than about the public/ private status of providers. As a result, we may expect that – compared to the funding side – private elements have generally continued to be of high importance in the healthcare provision dimension. Moreover, the role of the state in the provision of healthcare appears to be particularly vulnerable to privatization. As long as the principle of equal access is not jeopardized by these changes, health politicians and other actors in this field may find it easier to support privatization of healthcare facilities than similar processes in healthcare funding. We may therefore observe a decline of public provision across all OECD countries which – depending on the patterns of change – may also involve

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convergence. These tentative assumptions are scrutinized empirically with the help of the Public Service Provision Index (PPI).

Measuring the public/private-mix in health service provision Considering the role of the state as a provider of healthcare, we are interested in the following questions: What share of provision can we attribute to the state in the service provision dimension? Is the retreat of the state from service provision a general trend that is observable across OECD countries? Can we identify a process of convergence in the public/private-mix of healthcare delivery, as we have observed in the financing dimension? Additionally, where data is available, we try to specify privatization trends which may occur either in favour of non-profit providers or include for-profit trends as for-profit providers are strengthened. To this end, we survey the public/private-mix of healthcare delivery in 15 OECD countries. The selection of these 15 countries has been guided by the availability of data and information on public and private service provision. The sample does, however, include representatives of different types of healthcare systems and a sufficient number to sketch general developments in the changing role of the state in health service provision. Common knowledge about healthcare systems suggests that public provision – health service delivery through publicly owned healthcare facilities and public employees – is the dominant form of healthcare delivery in NHS systems, which in our sample are represented by the Nordic countries Denmark, Finland, Iceland and Norway as well as by Australia, England, Italy, and New Zealand. In SHI systems, represented by Austria, France, Germany, Japan, and the Netherlands, the state typically gives more leeway to societal actors, which points to a more mixed system of service provision with a strong share of private non-profit providers. Finally, in market-based healthcare systems such as those found in the US and Switzerland, we would expect that private provision is preferred to the delivery of health services by public institutions and that private for-profit providers play a crucial role (see Chapter 2). Considering changes in the public/private-mix which may affect all three forms of provision, we concentrate primarily on public versus private (non-profit and for-profit) provision. This compromise is due to the fact that in some countries statistics do not distinguish between for-profit and non-profit providers in the private sector. Consequently, since data constraints produce a dichotomous world of service provision, two directions of change are theoretically conceivable: Systems could move towards more public provision, which, based on general assumptions, would imply that social insurance and market-based healthcare systems expand public provision, while NHS countries stabilize the dominant role of the state. A move towards more private provision would, in

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particular, require NHS and SHI countries to shift capacity in the provision of health services towards private entities. The convergence of the public/private-mix requires not only a move in the same direction, but also a reduction of dispersion, which implies that the rate of change differs across countries. Alternatively, convergence occurs as private healthcare systems strengthen public provision, while countries that already display high shares of public provision move towards private service delivery. When measuring the public/private-mix in healthcare provision we build upon earlier attempts to capture the role of the state in this dimension. Frenk and Donabedian (1987), for instance, introduced a typology of state intervention in medical care, with one of the dimensions concentrating on state control over the production of medical care, measured as a percentage of all expenditures in medical care incurred through state ownership. In the same year, the influential OECD (1987b) study ‘Financing and Delivery of Health Care’ employed public and private categories of healthcare provision – along with other dimensions – to distinguish healthcare systems. Finally, in his comparative study on ‘Governing the Health Care State’, Moran (1999; 2000) refers to institutions governing the ‘provision’ of healthcare which are concerned with the (state) control of hospitals and doctors (see also Burau and Blank 2006; Wendt et al. 2009). Neither of these studies, however, measures the changing public/ private-mix of healthcare provision in a cross-country comparison. And the classification of service provision as public or private is based more or less upon ‘informed estimation’ (see, for instance, OECD 1987b). Moreover, these studies often blend healthcare delivery with issues concerning the regulation and financing of healthcare systems. Our aim, in contrast, is to explicitly evaluate the changing role of the state as a provider of healthcare services. In order to measure changes in both the role of the state in service provision and the public/private-mix of service provision, we therefore propose constructing a straightforward indicator which identifies the share of public provision in a healthcare system. Therefore, we first disaggregate the healthcare system into four healthcare sectors (see below), since the configuration of providers is likely to differ from sector to sector. Within each sector, we then estimate the share of public and private providers. In the inpatient sector the estimates are based on hospital ownership, and thus on the number of inpatient beds by ownership category, to account for the different size of hospitals. In the other sectors the health employment status of providers, that is, public employees versus self-employed professionals, represents the public/private-mix (Blank and Burau 2004; Frenk and Donabedian 1987; Moran 2000; OECD 1987b). In addition, we use the health expenditure devoted to each sector as a weight. As a formula for assessing the role of the state across all sectors we then multiply the share of

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resources allocated to each sector with its respective public shares of service provision in percentages:

Public Service Provision Index: PPI ⫽ ∑ ai . Pi i

with ai = share of health spending on sector I; Pi = share of public service provision in sector i and i = inpatient sector, out-patient sector, dental sector, medical goods/pharmaceutical sector

In the following section we describe shifts in resource flows across healthcare sectors, which determine the size of respective sectors. We then examine developments along the public/private axis within healthcare sectors. In this section we will also discuss the choice of indicators employed to delineate public from private provision. As a final step, these data are merged into a Public Service Provision Index (PPI). Healthcare sector size and developments across healthcare sectors We differentiate inpatient care, outpatient care, dental care and medical goods/ pharmaceuticals. Figure 4.1 shows the size of healthcare sectors in percentages of total, personal healthcare spending in 2004. Investment costs, spending on public health and administration costs had to be excluded from the

Denmark Iceland Switzerland Norway France Netherlands Italy Finland Austria Japan Germany Australia USA 0 Inpatient care

20

40

Outpatient care

Dental care

60

80

100

Medical goods/pharmaceuticals

Figure 4.1 The size of healthcare sectors in 2004 Source: OECD (2009); data for Denmark 2002; Netherlands adjusted by national data sources see Götze (2010).

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analysis, since it has not been possible to allocate these expenditures to the selected healthcare sectors. As we can see from Figure 4.1, in most countries the inpatient sector attracts more money than any other. Nevertheless, differences between countries are evident, with Iceland and Denmark spending more than 50 per cent of personal health expenditure on inpatient care, while the corresponding figures in Germany and Australia are around 40 per cent, and, in the US, only 31 per cent. The US is also exceptional in that almost half of resources are spent on outpatient care, which includes physician and other outpatient services. The variation in sector size can be traced back to various features of healthcare systems, including incentives related to remuneration rules and crosscountry differences in prices for healthcare services and products (Colombo and Morgan 2006: 37). Healthcare systems which concentrate specialist physician services in hospitals tend to steer more money into inpatient care. This is often the case in NHS systems, but also in the Netherlands (den Exter et al. 2004). By contrast, in Switzerland and Austria specific financial incentives promote inpatient care. In Switzerland, where the inpatient sector accounts for about 50 per cent of personal health spending, insurance funds tend to prefer inpatient care because half of the expenses on inpatient care are covered by cantonal budgets, while ambulatory care has to be financed by insurance funds alone. Insurance funds therefore also thwart the introduction of managed care models designed to direct patients to lesscostly outpatient services. Moreover, the de facto cantonal coverage of hospital costs is considered to reduce efficiency and inflate costs (Rosenbrock and Gerlinger 2006: 310). Unlike the concentration of specialist care in hospitals, free access to specialist care in outpatient settings, for example in Germany, tends to raise the share of expenditure allocated to outpatient care (see Chapter 6). Furthermore, in some countries, healthcare reforms have attempted to shift resources from high-cost inpatient care to low-cost ambulatory care (Docteur and Oxley 2003: 24). In the US, for instance, the introduction of a DRG-based prospective financing system and managed care organizations shifted resources from inpatient to the less-costly outpatient sector (see Chapter 7 for details). Table 4.1 shows the percentage-point changes of the share of spending on inpatient care in the last decades. While resource flows to the inpatient sector grew in the 1970s, they have declined in most of the observed OECD countries since the 1980s. Marked reductions can be found in the US, Australia, Finland, Denmark, and France. Apart from deliberate strategies to strengthen ambulatory care, advancements in medical technology have triggered organizational changes which contribute to replacing inpatient care through ambulatory interventions (Saltman and Figueras 1997: 241f.). Moreover, shifts in sector size can also be related to changes in prices, such

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Changing Role of State in Healthcare Service Provision 61 Table 4.1 The share of spending on inpatient care3

Country USA Australia Finland Denmark Norway Switzerland France Austria Japan Germany Netherlands Iceland Italy

Percentage-point change 1970–80

Percentage-point change 1980–90

Percentage-point change 1990–2004

+3.3 (1971–80) +0.5 –1.1 – – – +10.4 – – +1.1 (1972–80) +5.9 – –

–9.3 –8.0 –1.9 –5.9 – – -5.2 – – +1.7 –4.7 –3.7 –

–9.6 –8.6 –7.2 (1990–2002) –2.0 (1997–2004) –1.7 –1.7 –1.1 (1995–2004) –0.8 (1995–2004) +0.2 (1992–2004) +0.3 0.7 (1990–2002) +0.8 +0.8

Source: OECD (2009); data for the Netherlands adjusted by national data sources, see Götze (2010).

as increasing remuneration for outpatient services or the introduction of new, expensive technologies or pharmaceuticals (Docteur and Oxley 2003: 24). In either case, developments in the relative size of the inpatient care sector are of particular interest, since public involvement is more likely to occur in inpatient care and the public/private-mix is therefore implicitly affected, as we will show in the next section. We will refer to these shifts in sector size which affect the public/private-mix in favour of private provision as implicit privatization.4 Implicit privatization shares its conceptual logic with the term ‘passive privatization’ used by Tuohy et al. (2004: 367). The latter describes a move towards more private financing, as healthcare sectors that are predominantly financed privately grow faster than sectors that are dominated by public money. While passive privatization reveals the interrelations between service provision and financing, implicit privatization is restricted to the service provision dimension of healthcare systems. Developments of the public/private-mix within healthcare sectors Following our sectoral approach, we now examine changes in the public/ private-mix within healthcare sectors. Service provision therefore has to be categorized along the public/private axis. Based upon concepts that have been used in discussions about the privatization of public services, different modalities of changes in the public/private-mix can be identified. The literature distinguishes between material, formal and functional privatization (Schneider and Tenbücken 2004). Changes in ownership from public

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62 Achim Schmid and Claus Wendt

institutions to private actors represent material privatization, the sale of public hospitals to private investors being the most evident example. Formal privatization refers to situations where institutions remain in public hands, but their legal status is modified. In order to increase organizational autonomy, public institutions are ‘corporatized’ as they adopt a private legal form. However, privatization may also take place when ownership and the legal status remain unaffected. The outsourcing of activities that used to be performed by public institutions to private actors is covered by the term functional privatization. Since this chapter aims to develop an overall index of public service provision, our analysis concentrates on material changes. For the purposes of the PPI, the degree of public penetration in the inpatient sector is approximated by the share of inpatient beds owned by public institutions. That is, according to our material classification, publicly owned hospitals which have adopted private management structures (formal privatization) are still considered public. In order to categorize physicians, dentists, and pharmacists in the outpatient, dental, and pharmaceutical sectors, we use their employment status. Self-employed professionals are classified as private, while the employment status ‘public employee’ indicates public provision. The classification of physicians is at times ambiguous, given that in some cases self-employed physicians are ‘forced’ to contract with public financing institutions because private alternatives are absent. In this case financing institutions may encroach upon their professional autonomy. At the same time these physicians still run a business, strive for therapeutic and economic autonomy, and perceive themselves as private actors (Freeman 2000: 86–103). Therefore, in the service provision dimension, we deem the employment status of physicians as the decisive factor in classifying outpatient services, independently from the main source of financing (Blank and Burau 2004). Turning to empirical evidence on the public/private-mix of healthcare services, we start with sectors that offer the most consistent results. The pharmaceutical sector and dental services can be classified as private in almost all of the 15 countries. In all of these countries pharmacies are privately owned businesses (see Table 4.2 below). This finding is, however, not generalizable: for example, in Sweden pharmaceuticals are provided by a state-owned monopolistic pharmacy chain (Glenngård et al. 2005). Dental services are commonly delivered by self-employed dentists who either contract with public financing institutions or receive private payments. For example, in England, about two thirds of all dentists work under NHS contracts while one third works exclusively for the private sector (see Chapter 5). In Norway, dental services are not covered by the NHS but are left to the private market (Furuholmen and Magnussen 2000). By contrast, in Finland the provision of dental services is overwhelmingly in public hands through municipal health centres (OECD 2005), and in Denmark, child dental care is provided in municipal dental health centres (Wendt 2009).

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Table 4.2 The public/private classification of service provision in healthcare sectors Public/private classification of service provision in healthcare sectors

Countries Finland Iceland Denmark

Inpatient care

Dental Outpatient care Pharmaceuticals Sources care

Defined by Public public share of hospital Mixed beds Private

Norway

Mixed

Austria Italy France Australia Germany Japan Netherlands USA England Switzerland New Zealand

Private

Public

Private

Private

Mixed Private

16; 21; 22; 24; 25; 33 28 24; 25; 31; 32; 33 10; 17; 24; 25; 30 23; 9; 11; 15; 19 2; 3 1 6 14 7; 13; 18; 34 6 6; 8; 26; 33 4; 5; 27 12; 20; 29

Sources: AIHW (various issues) (1); Bellanger (2004) (2); Bellanger and Mossé (2005) (3); BernardiSchenkluhn (1992) (4); Bundesamt für Statistik der Schweiz (2001) (5); Case studies, part III of this book (6); Centraal Bureau voor de Statistiek (2007) (7); Department of Health (2006) (8); Donatini et al. (2001) (9); Furuholmen and Magnussen (2000) (10); France et al. (2005) (11); French et al. (2001) (12); Hartgerink (1976) (13); Henke and Schreyögg (2005) (14); ISTAT (2007) (15); Järvelin (2002) (16); Johnsen (2006) (17); Maarse and Okma (2004) (18); Ministère de la Santé et des Solidarités (2005) (19); Ministry of Health, New Zealand (2004) (20); Niemilä and Salminen (2006) (21); OECD (2005) (22); Österle (2006) (23); Øvretveit (2003) (24); Pedersen (2005) (25); Rivett (2007) (26) Rosenbrock and Gerlinger (2006) (27); Sigurgeirsdóttir (2006) (28); Statistics New Zealand (2005) (29); Statistics Norway (2007) (30); Vallgårda et al. (2001) (31); Wendt et al. (2009) (32); WHO (2007) (33); Götze (2010) (34).

Analogous to dental services in most countries, outpatient physician care is provided by self-employed doctors who either work under public contract or are paid on a private basis. In some countries, we find doctors in the outpatient sector employed by public institutions. In Austria, a minority of doctors are employed in the outpatient clinics of social insurance organizations and therefore qualify as public employees (Wendt 2009). In Great Britain, general practitioners (GPs) used to hold an ‘independent contractor status’: ‘Since the establishment of the NHS in 1948,

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GPs [ ... ] have been self-employed professionals who provide services to the NHS under contract’ (Robinson and Dixon 1999: 54). This has changed due to the introduction of the ‘Personal Medical Services’ (PMS) scheme of 1997 and its amendments in 2003 and 2004. Under the PMS-scheme, salaried GPs can be appointed alongside GPs working under individual contracts. The number of salaried GPs has risen sharply. and by 2005 their share amounted to 40 per cent of all GPs (Rivett 2007). In contrast to the increasing numbers of public employed GPs there are about 200 GPs who compete in the private sector niche, most of them located in city centres in Southern England (Chapter 5). In Iceland, we find private outpatient provision in medical clinics of specialists and diagnostic research centres, but GPs are predominantly public employees in public healthcare centres, this group accounting for about 30 per cent of outpatient physicians (Sigurgeirsdottir 2006). In Norway, municipal councils, which are responsible for outpatient care, are free to employ GPs or to contract them as private professionals (Johnsen 2006). While there is no information on the development of public GPs relative to private specialists in Iceland, there is evidence for privatization in Norway: The share of private contract GPs increased from 54 per cent in 1990 to 71 per cent in 1998. GPs who work privately without NHS contracts increased their share from 5 per cent to 8 per cent. By 2005 about 90 per cent of GPs were self-employed (Pedersen 2005). In Finland, the provision of outpatient services is organized through municipal health centres which employ GPs and specialists; only 8 per cent of all doctors practice full-time privately (Øvretveit 2003). Thus, unlike in the other countries, a considerable share of outpatient services is provided by public facilities in the Nordic countries and in Great Britain. While there is a noticeable trend towards individually contracted GPs in Norway, the British NHS promotes public employment through the PMS scheme. Finally, the inpatient sector is characterized by a mix of service providers in all observed countries. Developments in the inpatient sector illustrate the dimensions of privatization. Besides material changes in the public/privatemix, the inpatient sector has also been affected by functional and formal privatization. Busse et al. (2002: 129) highlight increasing managerial and financial autonomy of public hospitals. Particularly in NHS countries, where public hospitals used to be integrated in the public administrative system, formal privatization is observed (see Chapter 5 and Pedersen 2005: 176). In SHI countries, changes in the hospital sector are less uniform and less incisive because, as Busse et al. (2002: 129) argue, the natural purchaser– provider split in these countries prevented typical ‘command-and-control’ institutions and promoted managerial independence. Nevertheless, formal privatization is also observable in SHI countries. In Germany, the public legal form used to be stipulated by law for public hospitals. Meanwhile, the proportion of public hospitals that have adopted a private legal status

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increased from 28 per cent in 2002 to 51 per cent in 2006 (Statistisches Bundesamt 2007). Functional privatization has been observed as management functions have been contracted out to private companies (Maarse 2004b: 181). Moreover, the outsourcing of operational activities in hospitals such as cleaning and laundry is widespread across healthcare systems. Less often, private actors have also taken over health-related activities such as diagnostic testing (see Pedersen 2005: 175). The core aspect for constructing the PPI is hospital ownership. Since OECD data is inconsistent with respect to the classification of non-profit hospitals into the dichotomous public/private category, we use national data sources as well as WHO data, and we rely on secondary literature in order to ensure that the share of public inpatient beds is by and large consistent across countries. The public/private-mix is estimated according to the share of inpatient beds owned by public agencies. ‘Private ownership’ includes private for-profit as well as non-profit hospitals. This practice will tend to underestimate state-involvement, because the state supports non-profit providers in several ways. Generally, governments grant tax reductions or other subsidies to non-profit institutions. In Switzerland, some cantons even guarantee to cover the deficits of hospitals in private ownership (Bundesamt für Statistik 2001). As expected, the public share of inpatient beds is traditionally high in NHS countries. In the Nordic countries and Britain, the share exceeded 90 per cent in the early 1990s. In Iceland, the public share has even increased: all inpatient beds are now provided by public hospitals (Sigurgeirsdottir 2006). In contrast, we see a moderate decline of public provision in Britain and Denmark and no major changes in Finland or Norway (Statistics Norway 2007; WHO 2007). In the early 1990s, the NHS systems of Australia and New Zealand already had a larger proportion of private hospitals, accounting for about 30 per cent of inpatient beds. Since then, the private share has increased moderately in Australia to about one third, and significantly in New Zealand to almost 50 per cent (AIHW various issues; Statistics New Zealand 2005). In the case of New Zealand, the role of public hospitals in medical care is probably underestimated, since the statistics do not exclude all long-term care beds, most of which are provided by private hospitals (Mays and Devlin 2005: 226). Amongst the SHI systems, Austria (2003: 77 per cent) and France (2005: 65 per cent) show a continuing high share of public hospital ownership compared to Germany, Japan, and the Netherlands, underlining the strong public elements in the healthcare systems of France and Austria (Henke and Schreyögg 2005; Ministère de la Santé et des Solidarités 2005; Österle 2006; Statistisches Bundesamt various issues). In Germany the share of public inpatient beds has declined by almost nine percentage points since 1990 to less than 52 per cent. In Japan (2001: 27 per cent) and the Netherlands,

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public hospital beds are clearly outnumbered by beds in private ownership. In the Netherlands the state only runs the teaching hospitals, which were responsible for nearly 15 per cent of hospital beds in 2005 (Centraal Bureau voor de Statistiek 2007; Henke and Schreyögg 2005). The small public share is similar to the US, where public provision with inpatient beds declined to 20 per cent in 2005 (see Chapter 7). A closer look at the private hospital sector reveals that in Austria, Germany, Switzerland, and the US, private ownership is dominated by non-profit providers (Farsi and Filippini 2006; Österle 2006). In Japan the state prohibits for-profit management of healthcare services and the private hospital sector is therefore completely non-profit (Henke and Schreyögg 2005). By the same token, the Dutch government substantially restricted private for-profit clinics in the 1980s and 1990s (Maarse and Okma 2004: 110). In Australia, France, and Italy, for-profit providers dominate provision of private hospitals beds (Busse et al. 2002; Hall and Savage 2005; Rochaix and Hartman 2005). Often, material privatization of hospitals also means that for-profit provision is strengthened. In Australia, for-profit hospitals have increased their share from five per cent of the private sector to more than 50 per cent (Hall and Savage 2005: 254). In Germany, the decline of the public share in service provision has been overwhelmingly in favour of for-profit providers, which made up some 15 per cent of all beds in general hospitals in 2007. In the US, for-profit and non-profit providers have gained equally from the relative decline of public hospital beds. For-profit providers increased their share from seven to 13 per cent until 2004, while the overwhelming majority of beds are supplied by non-profit organizations. This is somewhat at odds with expectations concerning the ideal type of private healthcare system. In the small British private hospital sector niche, by contrast, for-profit providers have outnumbered non-profit providers (see case studies, Part III). In the Netherlands, the government has begun to tolerate forms of organizations which create opportunities for for-profit providers to enter the market. Private clinics, which often specialize in the field of elective surgery, therefore have to establish a formal collaboration with a non-profit hospital (Maarse and Okma 2004: 110). Likewise, in Australia, France, New Zealand, the UK, and the US, private for-profit providers tend to specialize in the delivery of lucrative services such as short-stay surgical interventions, while public hospitals sustain emergency units, high-tech medical care and teaching facilities (Hall and Savage 2005; Mays and Devlin 2005; Rochaix and Hartman 2005). This specific division of labour may set limits to the expansion of for-profit hospitals. However, in Australia, private providers are now operating emergency units and offer treatments for ‘complex cases with sophisticated diagnostic and therapeutic technology’ (Hall and Savage 2005: 254). In Germany, the sale of the University hospital Gießen and Marburg to a private hospital chain indicates that the expansion of

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private ownership is not restricted to small and highly specialized units (see Chapter 6). These kinds of detailed developments will have to be left to subsequent case studies, while broader trends of the public/private-mix can be mapped by the PPI. Changes in the public/private-mix: The public service provision index Combining the information on resources across and within healthcare sectors outlined in the previous sections, we now construct the Public Service Provision Index (PPI). Its values, which represent the share of public provision over all healthcare sectors, are provided in Table 4.3. In the previous section we have ascertained that in most countries outpatient and dental services, as well as pharmaceuticals, are overwhelmingly provided by private actors. Therefore, as a rule, the PPI is constructed by multiplying the share of public inpatient beds with the share of resources devoted to the inpatient sector. But there are exceptions for some countries based on the public/private-mix within healthcare sectors identified in the previous section. Thus, in Iceland and Norway, outpatient services are partly provided by public GPs. This has been allowed for by adding the public share of outpatient services as indicated by the share of employed GPs.

Table 4.3 The Public Service Provision Index (in per cent)

1970 Finland Iceland Denmark Norway Italy Austria France Australia Germany Japan Netherlands USA Mean England Switzerland New Zealand

1975 1980

1985

1990 1995 2000

76 – – – – – – – 19 – 10 –

76 – – – – – – – 21 – 11 14

79 61 66 – – – – – 20 – 9 13

83 58 66 – – – 34 38 21 – 8 11

84 58 60 – – – 32 34 22 11 8 9

77 – 59 51 40 35 – 31 21 – 8 8

75 62 58 50 39 34 32 25 19 12 7 6

– – –

– – –

– – –

– – –

81 – –

78 43 34

75 40 27

Recent Trends 1990/95– 2002–5 2002–5 74 64 57 46 38 34 32 26 18 12 8 6 35 – 38 26

Minus Plus Minus Minus Minus Minus 0 Minus Minus Plus 0 Minus Minus Minus Minus

Source: See Tables 4.1 and 4.2.

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Due to lack of data it was not possible to consider public (PMS-scheme) GPs in England. In Finland, outpatient services are mainly provided by municipal health centres and public employees. Therefore we classify the Finish outpatient sector as public. Before discussing the results of Table 4.3, some further qualifications of the presented data must be mentioned. For England and New Zealand we had to use different kinds of national data on resource flows, which are not directly comparable across countries. The Swiss index is overestimated because public hospital beds include private non-profit hospitals that receive cantonal subsidies. It was not possible to adjust the Swiss data to the public/ private definitions used for the other countries. Since the cross-sectional comparability of these countries is impaired we have listed them separately, while the other countries are listed according to the PPI-value in 2002–5, ranging from six to 74 per cent, with a mean of 34.6 per cent. As expected, private (non- and for-profit) provision prevails in marketbased and SHI systems, while NHS systems rely more often on public service delivery. In comparison to the financing dimension the service provision database is still fragmentary, and cross-sectional comparability is limited. Conclusions will therefore have to be tentative. Nevertheless, it can be seen that public provision is most pronounced in the Nordic countries, where not only the hospital sector is characterized by public service provision, but outpatient care is also partly delivered by public employees. The PPI for England is not comparable to the other countries. But considering in part public outpatient services through salaried GPs, the high share of public hospital beds and the dominance of inpatient care, we can assume that the state plays a significant role as a provider of health services. Conversely, Australia’s and New Zealand’s NHS stand out with a comparatively low PPI. In SHI countries, too, the PPI varies considerably from eight per cent in the Netherlands to 34 per cent in Austria. Direct service delivery through public providers is marginal in the market-based US healthcare system. Yet the US is not exceptional in the service provision dimension. It shares the low PPI and the dominance of non-profit providers in the inpatient sector with the Netherlands and Japan. Looking at those countries with a comparable PPI for 1990 and 2002–5, the average PPI declines from 38.6 to 36.4 per cent. Despite data limitations, we also observe that public provision is declining in all countries apart from Iceland, the Netherlands, and Japan. The Dutch healthcare system recently experienced an increase in the share of public beds. Public hospital beds are located in teaching hospitals and in medical university centres. Here the state has to sustain provision levels in order to secure the training of physicians and high-tech medicine, while other hospitals share the general downward trend in bed supply. Public provision in Finland increased from 1970 to 1990 but dropped considerably thereafter. However, in the majority of countries the state is

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retreating from the provision of health services. Put differently, healthcare provision is becoming privatized in most countries. The degree of privatization as measured by the PPI is quite substantial in most NHS countries, while there is much less change in other systems. Before we draw any conclusions from this observation we have to bear in mind the components of the PPI. As explained, we weighted the sectors where a substantial share of healthcare services is delivered by public providers using the resource flows to the respective healthcare sector. The decrease of the PPI in Australia, England and Finland, for instance, is more influenced by the decline of resource flows to inpatient care than by shifts in the public/private-mix within the inpatient sector. In these countries we therefore observe implicit privatization. In the US the change in the PPI is not only due to an increase in private hospital beds but is also related to the fact that private outpatient services have been given more weight since the early 1980s. By contrast, the change of the PPI in Germany, New Zealand, and Norway is influenced mainly by developments in the structure of inpatient (and in the case of Norway, also outpatient) service provision. Public inpatient beds have declined at a fast pace, especially over the last decade and – in the case of Germany – mainly to the benefit of private for-profit providers. To sum up, we can distinguish changes in the public/private-mix taking place within healthcare sectors from changes in the public/private-mix which occur when resources are shifted across sectors, that is, from sectors that are characterized by public provision to sectors that are dominated by private provision. In the latter case we speak of implicit privatization, while changes within healthcare sectors can be defined as explicit privatization. Though we also observe explicit privatization in NHS countries (for example: the material privatization of hospitals in New Zealand or the shift from salaried to contracted GPs in Norway), privatization is mainly implicit. In SHI systems, by contrast, resource flows to healthcare sectors are more stable and the privatization process is more often explicit. We find that in most countries the state refrains from providing healthcare services comprehensively through its agencies and largely leaves healthcare delivery to private for-profit and non-profit providers. Private provision is also strong in countries that rely predominantly on public financing. While private elements appear to be traditionally strong in the service provision dimension, in most countries, the PPI reveals no dramatic shift towards more private provision. The service provision dimension tends, however, to strengthen private healthcare delivery through implicit privatization. Moreover, there are forms of privatization in the inpatient sector not captured by the PPI because its focus is on material privatization. Functional and formal privatization may serve here as functional equivalents to material privatization. Finally, we observe a virtually universal trend towards more private service provision. Do these changes lead to convergence in service provision? If

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we look at the countries for which the PPI is comparable, we can see that public provision in 2002–5 ranges from six per cent in the US to 74 per cent in Finland. The PPI is widely dispersed with a coefficient of variation of about 64 per cent. Looking at countries for which data is available for 1990 and 2000/2002–5, we find a weak decline in variance but a slight increase in the coefficient of variation which controls for changes in the mean PPI. Repeating this exercise for the country sample for which data is available from 1995 and 2002–5 yields slight increases in the coefficient of variation. Therefore, we have no evidence of (sigma) convergence.

Conclusion In order to assess the changes in the service provision dimension we have developed a Public Service Provision Index (PPI) which indicates the share of public involvement in health service delivery. According to the PPI, the role of the state in service provision is weaker than in the financing dimension. Our analysis demonstrates that in most countries there is a retreat of the state from healthcare provision. These findings are by and large consistent with assumptions about the service provision dimension set out at the beginning of this chapter. A substantial part of the trend towards private provision is caused by a shift of the sector weights, and is thus implicit privatization. The latter may be driven by medical technological change as well as policy reforms which give incentives to reduce inpatient services in favour of outpatient and pharmaceutical sectors. While most countries have a declining PPI, there is no evidence of convergence in the service provision dimension: the coefficient of variation of the PPI remains fairly stable over time. Furthermore, recent PPI levels show considerable heterogeneity, ranging from overwhelmingly private health service provision in the US to public provision dominance in Finland. Interestingly, we also find some variation of the PPI within types of healthcare systems. While the Nordic National Health Service (NHS) countries display high levels of public provision, the NHS of Italy and Australia more readily make use of private provision. As for Social Health Insurance (SHI) systems, Austria and France are characterized by a comparatively high PPI, whereas Japan and the Netherlands display PPI levels that compare more closely to the market dominated system of the US. These variations in the public/private-mix of healthcare delivery highlight the need to include the service provision dimension in the classification of healthcare systems. The PPI can therefore be considered a useful tool for describing the role of the state as a provider of health services in a concise way, not least because its construction helps to identify modes of change in the public/private-mix represented by implicit and explicit privatization. From an empirical perspective it seems necessary to strengthen the power of the PPI by increasing

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its cross-national comparability and through the inclusion of further countries and longer time periods. Moreover, the PPI would gain leverage if private provision was systematically divided into for-profit and non-profit provision, the latter often denoting an indirect influence of the state. A distinction between for-profit and non-profit provision would transform the PPI into a trichotomous index of service provision. From an analytical perspective the PPI may serve as a starting point for investigating the causes and effects of the changing role of the state in healthcare provision.

Notes 1. Generally, we use the term ‘physician’ as a broad category for the whole profession, that is, for primary and specialist care doctors, surgeons etc. in service provision. 2. The selection of healthcare sectors reflects different provision structures in these sectors. Further differentiation, however, is limited by data availability. 3. Spending on inpatient care includes health-related spending on long-term care. The latter tends to slow down the decline of the inpatient spending share. 4. The term implicit privatization has also been used by Maarse (2004a: 26) to describe the side-effects of policy decisions or effects of non-decisions, that is, the incapacity or reluctance to react to healthcare problems which triggers the emergence or expansion of private alternatives.

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Part III Case Studies

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5 The Role of the State in the British Healthcare System – Between Marketization and Statism Simone Grimmeisen and Lorraine Frisina

... we are anxious to ensure that this is the start for opening up the whole of the NHS supply system so that we end up with a situation where the state is the enabler, it is the regulator, but it is not always the provider. (Tony Blair 2003 as quoted in Pollock 2004: 69)

Introduction Since the phenomenon of globalization hit the field of comparative social policy in the 1990s, scholars have discussed whether the changing context of modern nation states has had an impact upon welfare state development, and if so, how welfare states or single welfare schemes have adapted to this new environment (Pierson 2001b). Taking this debate as a starting point, this chapter addresses the changes in the British healthcare system – the core scheme of the British welfare state. In doing so, it focuses particularly on the question of how the role of the state in the British healthcare system has changed since the early 1970s, the time when the oil price shocks and their repercussions caused severe disruptions to economic growth in all European states, including Great Britain. The chapter begins with a brief outline of the major policy changes that have taken place since the inception of the National Health Service (NHS) in 1948. In the following three sections, it then analyzes the changing role of the state in the British healthcare system along the main functional dimensions of a healthcare system, namely financing, service provision and regulation. Finally, the chapter concludes by reflecting on the changing nature of statehood in the healthcare system of Great Britain.

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Major healthcare reforms in Britain Almost entirely funded by general taxation, the NHS, which started its operation in the summer of 1948, provided all British1 citizens with access to services ranging from ambulatory, primary, dental and pharmaceutical care to specialist and hospital care. While most of the health services were provided by public hospitals with doctors and nurses as public employees, as well as by the state in the form of local authorities, in the case of primary care, service was delivered by general practitioners (GPs) tied to the NHS via exclusive contracts. Hence it is reasonable to argue that the NHS for the first time ‘put the state and the professionals together as principal and agent in making health services available’ (Greer 2004a: 35; Greer 2004b). With these characteristics, the service only left a very limited space for private health insurance and provision.2 This trait corresponds with the core objective of the NHS, according to which a comprehensive range of health services should be freely made available to all citizens in need – an objective that still prevails today (Oliver 2005: 75). Upon its initiation, the services provided by the NHS were basically divided into three main parts: the hospital and specialist services, family practitioner services (including the general practitioner and pharmaceutical services, the general dental service and the ophthalmic service), and finally community services (focusing on maternity and child welfare, domiciliary midwifery, health visiting, home nursing, domestic help, vaccination and immunization, prevention of illness, care and after care, ambulances, and local mental health services as well as health centres) (Abel-Smith 1978: 8). Generally speaking, during the first two decades of its existence, the British healthcare system, despite some initial retrenchments, for instance in the pharmaceutical sector, was characterized by constant growth (AbelSmith 1978). Nevertheless, the period 1948–1970 was also one of continuing discussion about the organizational structure of the service, especially as regards remedying certain malfunctions specific to the system’s original institutional arrangements (Levitt and Wall 1986). First organizational adaptations It was only in 1974 that the newly elected Conservative government finally passed the first substantial reform of the NHS, the 1973 NHS Act. In order to provide a better co-ordinated NHS as well as to provide the medical profession with a greater say in the actual operation of the system, this reform unified all NHS services (apart from GP services) in a new organizational structure. Combining administrative tasks, the new structure of the NHS contained three administrative tiers beyond the national Department of Social Security: the regional, the area and the district level (Baggott 2004: 89) – with Regional Health Authorities, Area Health Authorities and Local Health Authorities. Generally speaking, this new management structure

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matched the organizational principle of ‘maximum delegation downwards’ by ‘maximum accountability upwards’ (Rivett 1998: 267). During the period following its first reorganization, the NHS found itself in a context in which, on the one hand, demands and problems from within the NHS were increasing while, on the other hand, the stagflation that characterized the economic situation of the times substantially limited the scope of the government to meet these demands (Klein 2001: 80). The combination of both developments contributed significantly to a growing sense of crisis in the NHS. This feeling was finally taken up by the Tory government under Margaret Thatcher after her victory in the general election of 1979. Under her leadership, the organizational structure of the British healthcare system basically saw two major changes: the NHS reform of 1982/1983 and the internal market reform of 1990. General management and (Quasi) markets The main feature of the first reform was the abolition of the Area Health Authorities and the concomitant introduction of 192 District Health Authorities. With these newly established bodies being made responsible for the planning, development and the management of services, the 1982/1983 reform led to a flattening of hierarchies and to devolution of power to the frontline staff and administration of the NHS. Only one year later, the government-commissioned Griffiths Report suggested a transformation of the management structures within the NHS. In his report, Roy Griffiths, deputy chairman of the supermarket chain Sainsbury’s, recommended a switch from the predominant consensus management, which put the responsibility for the NHS on a multidisciplinary management team with backgrounds in administration, financing, nursing and medicine – towards business-like management with general managers taking responsibility for the performance of the NHS at its different administrative levels (Baggott 2004: 102ff.). The second reform of the British healthcare system under the Conservative government was introduced by the 1989 White Paper ‘Working for Patients’, which followed a winter crisis for the NHS, during which intense media coverage directed the attention of the British population towards growing waiting lists, bed shortages and staffing problems within the NHS (Iliffe and Munro 2000: 310). The reform effort of the government, which cumulated in the NHS and Community Care Act of 1990, was an organizational shake-up of the British healthcare system, as it introduced for the first time in the existence of the NHS elements of competition as well as an ‘internal market’ for the buying and selling of healthcare services. In this newly established (quasi-)market for healthcare goods, purchasers of healthcare services were separated from providers of healthcare services. In order to encourage market interactions within the NHS, the reform, which was closely linked to the ideas of the American health economist Alan Enthoven, established

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two new organizational entities: GP fund holders and hospital trusts. The former were GPs who were allowed to hold their own budgets, with which they could both purchase (specialist) services on behalf of their patients and improve the primary care services offered within their own practices. Hospitals, for their part, were given the opportunity to become an NHS trust, which gave them more freedom in their provider function. The underlying idea of the reform was that hospital trusts, as providers of specialist care, should compete for contracts with secondary care purchasers such as GP fund holders and District Health Authorities, and that in this context, NHS resources, for the first time since 1948, would follow the individual patient. However, after the implementation of the internal market, the government felt increasingly ‘uncomfortable with the potentially destabilising effect of the changes it had introduced’ (Higgins 2004: 154). This might have contributed to the fact that the internal market reform did not, after all, challenge the fundamentals of the British healthcare system. Another contributing factor was the inadequate understanding of professional and managerial motivation of the actors in the healthcare field on which the reform was based (Iliffe and Munro 2000; Le Grand et al. 1998). Health policy under New Labour While the internal market introduced competition between providers and purchasers of healthcare services as a mode of co-ordination in the British healthcare system, by the mid-1990s, the Conservative government was anxious to shift the policy emphasis away from markets towards issues of public health and primary care (Ham 2004: 50ff.). As a result, in terms of health policy, the transition from the Conservative to the (New) Labour government was relatively smooth. Coming into office in 1997, Labour promised a third way for the NHS, between the centralized command and control system of the early post-war decades and the (internal) markets of the late Thatcher period. This resulted in another reorganization of the service, the main feature of which was the introduction of 481 Primary Care Groups (PMGs) in England,3 designed to replace GP fund holders. Responsible for public health issues, for primary and community care services as well as for the commissioning of secondary care service, these newly established bodies constituted the foundation of the intended transformation towards a primary care-led service based on integrated service delivery. Another organizational innovation of the early Labour years was the establishment of the National Institute for Clinical Excellence (NICE) in 1999, which, together with the introduction of treatment guidelines (National Service Frameworks) and the creation of the Healthcare Commission, signalled the government’s strong interest in a nationally uniform quality of service delivered by the NHS. Another major wave of reorganization within the NHS came with the NHS Plan of 2000, which, amongst other things, abolished the NHS Executive

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and established the first wave of Primary Care Trusts. The NHS Plan also introduced the principle of Payment by Results (PbR) which would be gradually implemented, starting in 2003. The purpose of PbR was to link the allocation of funds to hospitals to the activities they undertook. Essentially, hospitals were to be paid for elective activities. At the heart of this reform of the financial system was the rewarding of good performance, the support of reductions in waiting times for patients, and the aim of making better use of available capacity. Meanwhile, in 2001, a second major reform, the Shifting the Balance of Power Initiative, was introduced, which instituted a devolution of power and control to frontline staff and patients (Ham 2004: 65). The organizational core of the reform was the reduction of the Health Authorities from 95 to 28 Strategic Health Authorities and the concomitant transformation of all Primary Care Groups into Primary Care Trusts (PCTs), which then received control over 75 per cent of the NHS budget. PCTs, initially serving an average population of about 200,000, are entities responsible for the full range of healthcare services for their population. For the first time since 1948, general practice/primary care and community care were brought into a single organization with a unified budget (Rivett 2007). In this respect, PCTs have certain similarities to American Health Maintenance Organizations (HMOs), the big differences being that, in the case of the former, there is no competition at the consumer level and PCTs do not purchase as aggressively and selectively as many American HMOs (Enthoven 2000: 115). Besides the introduction of the PCT structure, another organizational innovation – finalized in the Health and Social Care (Community Health and Standards) Act 2003 – was the abolition of Community Health Councils and Regional Directorates of Health and Social Care, as well as the creation of the NHS Modernisation Agency, the body that would later become the NHS Institute for Improvement and Innovation. The Health and Social Care Act also established Foundation Trusts, which were to operate alongside regular NHS Trusts as hospitals with more freedom to develop their services and less interference from the Department of Health. Following these structural changes, subsequent years of reform focused much more on patients and patient choice with the initiation of A Patient-led NHS in 2005; Our Health, Our Care, Our Say in 2006; and Our NHS Our Future in 2008. Having outlined the major changes and developments in the British healthcare system since 1970, we can see that the field of health policy was not only subject to constant change but also subject to consecutive reform efforts by different governments. Historically, the British state has increasingly taken over the responsibility for financing, provision and regulation of healthcare for its citizens (Ham 2004: 13f.). Based on this observation, the main focus of the chapter is now to analyze how the policy changes outlined have subsequently altered the role of the state within this context.

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The financing dimension of the British healthcare system We begin our study of the changing role of the state in the British healthcare system with changes in the financing dimension. This dimension can be evaluated in terms of four main indicators: the level and public/privatemix in financing; the public/private-mix within healthcare sectors; territorial shifts in financing; and, finally, the role of the state in financing. Each of these indicators will be evaluated in turn in what follows. Level and the public/private-mix in financing

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If we look at total healthcare expenditure as a percentage of GDP, we find that the growth rate of total healthcare expenditure in Britain4 reveals a clear upward trend: between 1975 and 2000, the share of total healthcare expenditure increased by two percentage points. Looking closer, however, we see that this upward trend has not been constant over the three decades. In three periods – from 1977 to 1978, 1983 to 1987, and 1995 to 1998 – total healthcare expenditure as a percentage of GDP stagnated or even dropped. However, these periods of stagnation were usually followed by periods of growth in which total healthcare expenditure as a percentage of GDP grew faster than the long-term trend (Propper 2001: 153, and see Figure 5.1). In terms of pounds sterling, healthcare expenditure in Great Britain has grown continuously over the last 30 years. Particularly strong growth took place in the first years of the new century, reflecting the pledge made in 2000 by Prime Minister Tony Blair to bring British healthcare

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Role of State in the British Healthcare System

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spending up to the European Union average. This pledge was followed by the Wanless Review of UK healthcare financing, as a consequence of which, Chancellor Gordon Brown committed the government to an increase of 7.4 per cent p.a. in NHS resources in the years 2003/04 to 2008/09 (Glennerster 2003: 60f.). A central indicator of the changing role of the state in British healthcare is the changing public/private-mix in healthcare financing. Here we generally find that since the inception of the NHS in 1948, the British healthcare system has been strongly dominated by public financing. The public contribution to total healthcare expenditure peaked in the mid-1970s after the NHS underwent a major expansion phase, with just over 90 per cent of overall British healthcare spending being financed from public sources (see Figure 5.2). From this point in time, the public share in financing has increasingly lost ground over the last 25 years. The bottom line of this development was reached in 1998, though even at this point 83 per cent of British healthcare expenditure was still funded from public sources. Thus even when taking this retrenchment of public resources into account, there is no doubt that the British healthcare system, in terms of financing, is still best characterized as a public healthcare system. For a more in-depth study, however, it is necessary to distinguish developments in public funds derived from general taxation on the one hand, and from the National Insurance (NI) fund – funded by the contributions of employees and employers – on the other (for details, see Adam and Shaw 2003).

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The British literature tends to classify NI contributions as ‘social insurance contributions’ or ‘social security contributions’ (Bailey and Fingland 2004: 164; Keen et al. 2001: 26), but given the fact that NI contributions are tantamount to an income tax and, moreover, eligibility for NHS treatment does not depend on any contributions having been made, this classification may be misleading (Booer 1994; European Observatory on Health Care Systems 1999: 33). The NI fund is not self-administered but state managed by the Inland Revenue. It thus differs considerably from the parafiscal insurance funds in social insurance-based healthcare systems. Nonetheless, it is interesting to distinguish the two sources of public healthcare financing, to see whether and how the balance between these sources of financing has changed over the years (see Figure 5.3). When analyzing the data, we find that starting from the peak of public spending from 1975/1976 to 1989, public funds derived from general taxation steadily declined by almost ten percentage points. This major decrease was partly compensated for by an increase in public resources stemming from the NI fund, so that overall public sources only decreased by about five percentage points. In the subsequent period, during the first four years of the premiership of John Major, the balance between general taxation and NI contributions changed yet again: while the NI fund contributed less in relative terms to overall healthcare expenditure, the proportion of tax financing increased again. From 1993/1994 onwards the percentage of public financing, as well as the balance between the two sources of public financing, stagnated. Figures for the years after 2003 will probably show a change, as from then on we will be able to see the effects of the decision by the Labour government to increase NI contributions by one percentage point for both employers and employees, and to allocate the additional revenues of the fund, with an estimated net effect of eight billion pounds, directly to the NHS budget (Bailey and Fingland 2004; Heald and McLeod 2002; Maynard 2005: 64).

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As with public funds, the proportion of British healthcare expenditure funded from private sources can be further differentiated between funds deriving from private insurance and funding from out-of-pocket payments, which includes consumer expenditure on medical products and services (over-the-counter payments) as well as NHS charges (co-payments). Adding the changing figures for both sources, we find that the share of total healthcare expenditure met by private funds decreased until 1976. From then until 1998, private financing increased by around eight percentage points. Only in the last three years of our data, that is between 1999 and 2001, did the private share decline again (see Figure 5.3). In a more differentiated picture, we see that the proportion of total healthcare expenditure met by private medical insurance has more than tripled since the oil crisis, with the major expansion taking place in the decade between 1983 and 1993 – the heyday of Tory rule in post-war Britain, and a period of sustained economic growth (Laing and Buisson 2002b: 10; OHE 2003: tables 2.1, 2.22). Since Labour assumed office in 1997, the share of private financing through private insurance has stagnated. With respect to out-of-pocket payments, the data available for the period under study shows that they decreased until 1976. From then on, however, out-of-pocket payments as a percentage of total healthcare expenditure rose from 8.7 per cent in 1977 to 13.5 per cent in 1998. This development also holds for both specific components of outof-pocket payments: consumer expenditure on medical products and services and NHS charges faced a significant growth under the Conservative government. While the proportion of over-the-counter expenditures almost doubled in the period between 1980 and 1997 (from 5.8 per cent to 10.6 per cent), co-payments as a proportion of total healthcare financing peaked in 1992 at 3.2 per cent. After that they decreased to 1.6 per cent and remained constant until 2002. A similar decrease can also be observed more recently in the development of private expenditure for medical goods and services (OHE 2003: tables 2.1, 2.19, 2.22). The public/private-mix of financing within healthcare sectors While so far we have only analyzed developments in the public/private-mix of total healthcare financing, it is also interesting to see whether there are any sector-specific changes in the role of the state in healthcare financing. When approaching this question we have to bear in mind that in the British case international and national data sources provide no information that would enable us to break down the data on overall healthcare expenditure into the different sectors and – within the sectors – to distinguish between public and private funds. Nevertheless, it is possible to make a preliminary evaluation of the changing public/private-mix in the financing of different healthcare sectors on the basis of secondary literature. By and large, this literature reveals that the most interesting change in the public/private-mix of healthcare financing has occurred in the dental

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sector. While at the inception of the NHS the full cost of dental care was met from public sources, first exemptions to this rule were already introduced as early as 1951. Today, more than half of NHS patients in need of dental care are required to pay up to 80 per cent of the cost of their treatment out-ofpocket. This increase in co-payments, along withe difficulties encountered in accessing the NHS dental service, have given rise to an annual growth of about 13 per cent in out-of-pocket expenditure on private dental care since the mid-1990s (Office of Fair Trading 2003: 21). Consequently, in 2001, 20 per cent of general dentistry in Britain was both privately financed and provided, and a further 23 per cent privately financed and publicly (NHS) supplied (Keen et al. 2001: 95). It therefore comes as no surprise that a data survey conducted by the Office of Fair Trading (Office of Fair Trading 2003: 23) reveals a growth in nominal expenditure on private dental treatment of 64 per cent between 1997 and 2001, while in the same period expenditure on the NHS General Dental Services increased by only 17 per cent in nominal terms. Apart from dentistry, another example of shifting boundaries between public and private financing can be found in the ophthalmic sector, which is part of the primary care sector. In 1989 the Conservative government abolished free eyesight tests for nearly the whole adult population, with the effect that by the late 1990s, 50 per cent of eyesight tests previously financed from public funds were now financed privately (Keen et al. 2001: 96). Both developments are also reflected in the NHS statistics, which show that the percentage of NHS (and thus public) resources spent on dental and ophthalmic health have been decreasing continuously over the last decade (OHE 2003: table 2.19). As far as inpatient care is concerned, the healthcare market survey conducted by Laing and Buisson (2003) reveals a massive increase in overall spending on private inpatient healthcare (expenditure on private hospitals, clinics, NHS pay beds and specialist fees). Starting with a volume of 50 million pounds in 1973, private expenditure on the inpatient sector skyrocketed to 3.8 billion pounds in 2002. In the 1980s, expenditure on private inpatient care saw an annual real growth of between 11 and 36 per cent. Recently, however, these growth rates have stagnated at around five to seven per cent a year. Nonetheless, this expansion has substantially changed the public/private ratio in the financing of inpatient care, as public spending on inpatient care in the same period did not grow at an equivalent rate. In 1992 the Conservative government introduced the Private Finance Initiative (PFI), a policy scheme targeted at the massive backlog in British hospital building caused by the unfulfilled hospital plan of 1962. While it initially opposed the PFI, after its electoral victory in 1997 the New Labour government pushed the PFI vigorously, believing that it could secure additional capital investment without significantly increasing public expenditure and thus raising general taxes. The idea behind the PFI was that ‘the

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private sector designs, builds, finances, owns and operates hospital services’ (Gaffney et al. 1999: 48). In return, the NHS hospital trust would pay an annual fee to cover both the capital cost, including the cost of borrowing, and maintenance of the hospital buildings and any non-clinical service provided over the 25–35-year life of the contract (Pollock et al. 2002: 324). While reliance on private capital in the hospital sector only started in the mid-1990s, in the primary care sector reliance on private loans for building, maintaining, and refurbishing premises had already begun in 1989, when the government sold the General Practice Finance Corporation, which until then had provided loans to general practitioners (GPs) for practice premises. In 2001, the Labour government set up the Local Improvement Finance Trust (LIFT) scheme. Forming a public–private partnership between the local NHS and the private sector, the purpose of LIFT was to ‘purchase, develop and sell land and establish subsidiarities to generate income in joint undertakings with other parties’ (Pollock 2004: 149). Once a LIFT has set up premises, primary care providers can lease space on these premises. In the long-term perspective this might result in a different ownership structure of primary care premises; there is, however, no evidence that in the long-run LIFT will be a more cost-effective scheme than those funded wholly out of public resources (Baggott 2004: 267f.). The underlying assumptions and the (long-term) effects of both the PFI and the LIFT scheme have been discussed feverishly in recent literature (for a summary of the arguments, see Baggott 2004: 143–5; Mohan 2002: 205–10; Pollock 2004). Territorial shifts in healthcare financing Apart from the changing role of the state along the organizational axis, this chapter also highlights the changing role of the state with respect to the territorial axis. The first interesting territorial movement in the financing dimension we witness is an upward shift from the national towards the international level in the context of private health insurance. As we have seen above, over the last 30 years monetary input from private health insurance into the British healthcare system has grown constantly. This growth implies a change on the territorial axis of the British healthcare system, as financial resources stemming from private insurance predominantly come from companies operating in a global (health) insurance market. This fact not only holds for British United Provident Association (BUPA), the market leader with 37 per cent share of Private Medical Insurance (PMI) sales, which since 1971 has operated on a global level, but also for PPP healthcare, which is part of the globally operating AXA group. Indeed, AXA describes itself as ‘a worldwide leader in financial protection and wealth management, with major operations in Western Europe, North America and the Asia/Pacific area’. Similar statements can be found for another big player on the British PMI market, namely Aviva Healthcare, which is part of the internationally operating Aviva group.

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Given the company profiles of the insurers who share three quarters of British PMI sales (Laing and Buisson 2002b: 85–97), one can argue that in terms of financing we see not only a slight boundary shift between public and private, but also a very modest movement on the territorial axis, with a small but constantly increasing part of total healthcare spending stemming from multi-national companies. Another trend towards internationalization or upward shift in the area of healthcare financing can be observed in the operation of the Private Financing Initiative, in the context of which multi-national consortia of banks, builders and operators are involved in public–private partnerships in the development of healthcare infrastructure. Spotlight evidence from a research project (Pollock et al. 2001) suggests that multi-national companies such as Norwich Union have committed a substantial amount of financial resources to PFI schemes. In this respect, the infrastructure of the British healthcare system increasingly depends on the supply of capital from international sources, which is further evidence for internationalization within the financing dimension. Apart from tendencies to an upward shift in healthcare financing, we also see decentralization tendencies in the financing dimension. These do not concern the origin of NHS resources, as a change towards a system of healthcare financing from national to local taxation has not been considered in Britain so far (Glennerster 2003: 67). What has changed over time, however, is the administrative level of the NHS responsible for the spending of the NHS budget. Until 1991 the organizations receiving and administering the major part of the NHS budget were the Regional Health Authorities. With the introduction of the internal market, the District Health Authorities as well as, later, GP fund-holding practices, have become responsible for the allocation of major parts of the NHS budget. Finally in the course of the New Labour reforms, the NHS Plan of 2000 abolished the NHS Executive and with the ‘Shifting of Power Initiative’ of 2001, Primary Care Trusts have become the organizations receiving and (re)distributing the main part of the healthcare budget. As a consequence of this organizational decentralization of the British healthcare system, the PCTs now handle 85 per cent of the total NHS budget. This downward shift of healthcare financing is complemented by recent efforts of the Department to introduce a practicebased commissioning scheme. Somewhat similar to GP fund holding, this scheme ‘devolves decision making power over the use of resources either to individual practices or to groups of practices, along with the associated accountability for the use of those resources’ (Smith et al. 2004: 5).5 Overall, this effort leads to a devolution of financial responsibilities from corporate PCTs to constituent practices (Lewis 2004: 4). As a result, what we witness is not a gradual devolution of tax sources but an increasing devolution of the allocation flows, with ever smaller and decentralized units within the organization responsible for the management of the bulk of NHS resources (Lewis and Gillam 2003).

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The changing role of the state in financing Summing up developments in the public/private-mix of total healthcare expenditure in Britain, we can conclude that over the past three decades, British healthcare has indeed seen an increase in the proportion of private financing, suggesting that the state has slightly retreated from its role as financer, especially in some exposed healthcare sectors such as dental and ophthalmic care and in capital investment. However, one has also to bear in mind that at any time during this period, which is characterized by continuous austerity and increasing pressure from globalization, public funds accounted for at least 83 per cent of overall healthcare expenditure. Particularly when taking into account the latest investments, there is no indication so far that the financing of the British healthcare system, which has always been characterized by an immense degree of public penetration, is on a steep path to privatization (Laing and Buisson 2004: 89). Regarding the trends on the territorial axis of the financing dimension, we see both a shift towards a greater reliance on financial resources provided by multi-national insurance companies on the one hand, and a shift towards local responsibility with respect to the allocation of financial resources on the other. Combining these trends with changes in the public/private-mix, we can conclude that the role of the state in the financing dimension of the British healthcare system during the last decades has indeed changed with respect to the organizational but also the territorial dimension.

The service provision dimension of the British healthcare system We now turn to service provision, our second dimension of healthcare policy under review. Here, the level of service provision; the changing public/ private-mix within and across sectors; territorial shifts in service provision; and the changing role of the state in service provision will be examined in the sections that follow. The level of service provision We begin our study of the service provision dimension with changes in total healthcare employment as well as in the total number of beds provided by the British healthcare system. With regard to general developments in the field of hospital employment, we see an increase in hospital employment per 1000 population from 12.6 in 1970 to 18.0 in 1982. Since this turning point, however, the hospital employment ratio has decreased steadily, reaching a ratio of 15.9 in 1995 (OHE 2003: table 3/ own calculations). Interestingly, since 1998, we again see a small but sustained increase. The grounds for the decreasing staff levels in the 1980s and early 1990s mainly lie in the outsourcing of domestic and ancillary services under the Conservative government. Despite massive outsourcing measures, changes in the overall staff

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level have nonetheless remained relatively modest. An analysis of the data reveals that to a large extent this is due to the fact that the decreasing staff levels in ancillary and domestic services as well as in nursing and midwifery were offset by a vast increase in non-medical and non-nursing professional staff, and in administrative services, in the years following the Griffiths Report, and particularly in the years following the introduction of internal markets6 (OHE 2003: table 3). With regard to developments in the employment of different medical professions, we witness a divergent picture: while the ratio of practising specialists to practising physicians increased steadily from 1970 to 2000 (OHE 2003: table 3), the increase in the number of practising GPs came to a halt in the mid-1980s. Since then, the GP ratio within the British healthcare system has stagnated (OHE 2003: table 4.7). A similar development can be seen in the dental profession, where the density of NHS dental practitioners has remained on the same level since 1978 (OHE 2003: table 4.60). Concluding our observations on the last three decades of healthcare employment in Great Britain, it is noteworthy that the turning point for almost all employment areas was between 1978 and 1983, when apart from the specialists, the ratios for all professional groups offering health services changed from growth to stagnation or even decrease. However with the new financial incentives from the NHS Plan, staff ratios have increased slightly during the last five years. Finally, as far as the development of inpatient beds7 is concerned, the inpatient bed ratio in the public (NHS) sector has more than halved over the last three decades. When analyzing national data that focuses on Great Britain alone, however, we see that this significant decrease was mainly due to the massive reduction in specialty beds. While the number of acute beds in NHS hospitals was reduced by 25 per cent between 1970 and 2000, the number of hospital beds for mental illness, learning disabilities and geriatrics was cut by 70 per cent over the same period (OHE 2003: table 3.13). The changing public/private-mix within and across sectors Coming to changes in the public/private-mix of non-monetary resource flows that have occurred since the end of the ‘golden age’, we now focus on the public/private-mix in healthcare employment as well as on the development of the public/private-mix in inpatient beds. The public/private-mix in healthcare employment As far as healthcare employment is concerned, a very interesting development in the public/private service provision mix can be observed in specialist care taking place in the inpatient and outpatient care units of British hospitals. In order to make sense of this development we must first bear in mind that specialist care in Great Britain is generally undertaken by consultants and other experienced doctors working in NHS hospitals and employed under NHS contracts. Following our definition, therefore,

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specialist employment in Britain is, in theory, public employment. However, it is also a central characteristic of the British healthcare system that specialists with consultant posts in the public domain of the British system also have a virtual monopoly over the supply of private specialist care. This is partly due to the referral chain from GPs to consultants, but also to common private medical insurance rules which, with a few exceptions, restrict reimbursement for treatment provided by specialists who have already attained consultant status.8 Going back to a historic bargain between the state and the profession, consultants within the NHS have always had the right to practice privately alongside their NHS work.9 Basically, they were allowed to treat patients in private beds located within NHS hospitals (pay beds), or in beds located in private hospitals, and to bill them privately for the treatment provided10 (Keen et al. 2001: 80). Until 1980, the consultants’ right to practice privately was restricted to some extent: full-time NHS consultants were not allowed to engage in private healthcare provision at all, while consultants with a maximum part-time contract (10/11) or any other type of part-time contract were authorized to engage in unrestricted private practice in return for a small salary reduction (Webster 2002: 26). This restriction, however, was relaxed by the Conservative government in the early 1980s, allowing both part-time and full-time consultants to engage in private practice without losing any income from their NHS job, the only constraint being that consultants with a full-time contract were only allowed to earn up to ten per cent of their income from private work11 (Döhler 1990: 241). As snapshot data shows, the private consultancy work of part-time consultants, who form the major part of the specialist workforce, almost doubled their NHS incomes (Keen et al. 2001: 85), so it comes as no surprise that ‘consultants and specialists total gross private practice earnings [...] increased almost eightfold between 1980 and 1992’ (Monopolies and Mergers Commission 1994: 45). As a consequence of this measure, specialist employment in the British healthcare system is still characterized by an extremely high degree of public penetration. However, closer examination reveals that the public/ private-mix in the provision of specialist care has changed substantially. The new consultant contract for England agreed upon in 2003, on the one hand, lifts restrictions on private practice but, on the other, obliges consultants on a full NHS contract to work 40 hours a week for the NHS, instead of 35 hours as stipulated under the old contract. Those wishing to do private work on the side must complete an additional four-hour session for the NHS (Maynard 2005: 73). Basically, the new contract aimed at greater managerial control of the consultants, but it ‘rapidly became obvious that consultants had frequently and genuinely been working more than their contracted hours. Now the Department and NHS management wished everything to be spelt out, consultants did just that’ (Rivett 2006). This, however, resulted in escalating pay bills.

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Focusing on the development of the public/private-mix in the area of inpatient nursing employment, we find that over the last two decades, private sector nurse employment in Britain has increased substantially (Laing and Buisson 2003: 96). This also becomes evident when reviewing the data published by the statistical bulletin on private nursing homes, hospital and clinics, which indicates that the number of nursing staff at private hospitals and clinics in England increased by 17 per cent in the period between 1996 and 2001, while over the same period of time the total number of nursing staff employed in England actually decreased (Department of Health 2002b: 16). Before turning to the changing public/private-mix in primary healthcare, it should be pointed out that primary healthcare in Britain is provided by general practitioners who are strictly speaking self-employed professionals (Salter 1995: 22), and thus can be subsumed under private healthcare employment. However, when analyzing the reality of British general practice we learn that there are only around 200 GPs who operate exclusively in the private sector (Keen et al. 2001: 67). Until the late 1990s, the overwhelming majority of GPs were independent contractors to the NHS, which implies that they earned well over 95 per cent of their income from the NHS – and thus from public sources. However, this substantially changed in the course of the ‘Personal Medical Services’ scheme piloted in 1997, which for the first time allowed organizations (e.g. groups of primary care professionals) to hold a contract for primary care provision. This resulted in a shift ‘from the independent contractor status of GPs towards a salaried and thus public service, allowing salaried GPs to work alongside “independent contractor” GPs’ (Rivett 2006). Data from the British Household Panel Survey reveals that in 2001, only 3.5 per cent of all GP consultations were privately offered and privately paid for and that there has been no significant growth in such consultations over the last decade(s) (Laing and Buisson 2003: 169). As regards the public/ private-mix in primary care, the most interesting change has taken place in the city centres of booming urban areas: since the late 1990s, private companies have tried to establish private walk-in centres, their target groups being ‘younger professional people whose primary care needs are not met by NHS general practice, or who are dissatisfied with the NHS service and are willing to pay again (in addition to their taxes) for a private alternative’ (Laing and Buisson 2003: 171). Another scheme was initiated by the insurance company PPP Healthcare, which, in line with managed care principles, nominated NHS GPs to provide private primary care services to patients insured with PPP on the basis of per capita remuneration (Pollock 2004: 146f.). So far, however, it seems that there is hardly any potential for private primary care provision to achieve more than a niche market status. This is partly due to barriers such as the considerable cost of private prescriptions ensuing from a private GP visit, or the fact that private GPs are

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not allowed to refer their patients to specialist outpatient or inpatient care within the NHS. Nevertheless, several British retail chains, including Tesco and Boots, have recently piloted the provision of private primary care services at selected locations. A very different picture arises in dental practice however: as outlined by Pollock (2004: 39), due to capped spending on dental services and consequently stagnating income prospects for dentists in the late 1980s, ‘fewer and fewer dentists were willing to provide their service within the NHS’. As a result, in 1999 less than a third of all dentists worked exclusively for the NHS, and over the last decade, in the prosperous areas of the country, the number of dentists working exclusively or mainly for the private sector has risen substantially (Office of Fair Trading 2003). The public/private-mix in inpatient bed provision Coming now to the second indicator of changes in the public/private-mix in service provision, namely the public/private-mix in inpatient bed provision, the OECD reports a decline in total beds per 1,000 head of population and a simultaneous increase in private beds (OECD 2002). This development was also confirmed by a national survey run by the Independent Hospital Association (IHA) and by data collected by Laing and Buisson (2003). Starting with 7,035 beds in the UK’s independent (private) acute medical/ surgical hospitals in 1981, the total amount of inpatient beds increased by 40 per cent to 11,681 beds in 1995. After that, however, the number decreased again by 19 per cent to 9,533 in 2003 (Laing and Buisson 2004: 75) – a development which appears to be related to decreasing occupancy rates in the private sector. As far as the ownership structure of these private beds is concerned, in 2004 32 per cent of beds were owned by non-profit providers, while 68 per cent were owned by for-profit providers (Laing and Buisson 2003: 76). In 1979 this relation was inverted, with 72 per cent of the beds owned by charitable or religious non-profit providers and only 28 per cent owned by for-profit providers (Laing and Buisson 1995: 124). Hence we witness not only an increasing privatization but also an increasing ‘profitization’ of British hospital beds (Baggott 2004: 149f.; Klein 2005: 53). Apart from beds in private independent hospitals, we also find an interesting public/private hybrid in so-called ‘NHS pay beds’. For a long time these pay beds were standard beds in NHS hospitals which could be used by consultants for a certain number of days every year. Since the introduction of the internal market, however, these pay beds have been mainly concentrated in so-called NHS Private Patient Units (PPUs) (Keen et al. 2001: 81). PPU beds occupy an entire ward or wing of an NHS hospital and are dedicated to private patients only. As for the long-term development of pay beds, we see a constant decrease in pay beds in the late 1970s and during the 1980s following an unsuccessful attempt by the Secretary of State Barbara Castle to completely eliminate NHS pay beds (Webster 1996: 613–27). After the

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introduction of the internal market, which for the first time in the history of the NHS allowed NHS hospitals/trusts to make profits from private services, the number of PPUs in England rose from 13 to 74 and the number of beds within these PPUs went up from 361 to 1,30012 (Williams 1997). Current figures indicate, however, that in recent years this trend has slowed down, due to a stagnation in the number of dedicated NHS beds in the London area (Laing and Buisson 2003: 80). In addition to keeping pay beds, the New Labour government in 2002 invited the private sector to establish so-called Independent Diagnostic and Treatment Centres (Department of Health 2005). These were intended to supplement public provision in the field of low-risk, routine surgery, and as a consequence to increase the number of private inpatient beds. In 2005 there have been 14 Independent Sector Treatment sites delivering a full service and three sites delivering an interim service. The biggest shift in the public/private-mix in service provision within the British healthcare system is, however, indicated by developments in the provision of long-term care beds. As outlined by Klein (2001: 136), the 1980s were marked by an explosion in the private provision of residential and nursing-home care that was far more dramatic than in the acute care-sector. In 1970, Britain had a total of 270,300 places for nursing, residential and long-stay hospital care for the elderly, of which 40 per cent were provided by the local authorities and 29 per cent by the NHS. The remaining 31 per cent of long-term care beds were provided by the private sector (consisting of for-profit providers and voluntary, not-for-profit providers). By 2003, however, the picture had changed completely: out of a total of 501,900 long-term care places, 11 per cent were provided by the local authorities, six per cent by the NHS and 83 per cent by the private sector (Laing and Buisson 2003: 208 / own calculations). Thus, while the number of long-term care beds in Britain almost doubled during the past three decades, this enormous growth was accompanied by a substantial reduction of the role of the public sector, with both local authorities and the NHS halving their stock of long-term care beds. Basically, the massive increase in private long-term care beds was accomplished by a growth in the private for-profit sector, which since 1987 has more than tripled the number of its beds and places in the nursing-home sector. The private nonprofit sector has also expanded, but not to such a large extent as the private for-profit sector. Another interesting development in the public/private-mix in the provision of inpatient and outpatient hospital care is the introduction of socalled foundation hospitals. Under the Health and Social Care Act of 2003, all NHS hospitals and all PCTs will eventually be eligible for foundation status. Having achieved that status, foundation hospitals/trusts will no longer be ‘subject to control by the Department of Health and its regional arms, the strategic health authorities’ (Pollock 2004: 71). Moreover, they

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will be public interest companies,13 which means that they will be free to set their own pay scales and recruit their own staff, and borrow on the private market, and they will have greater scope to retain any operating surpluses, enter contracts with private providers and set their own priorities. Nevertheless, foundation hospitals remain within the remit of the NHS and will have to perform in accordance with national targets and standards like other NHS hospitals, but unlike their non-foundation NHS counterparts they will enjoy substantially more freedom in deciding how to achieve this.14 Foundation hospitals will be awarded that status by ‘Monitor,’ the independent regulator which is also responsible for monitoring their performance. Territorial shifts in service provision As far as the changing role of the state in the territorial dimension of service provision is concerned, we first of all focus on the developments in the area of private hospital beds. In 2004, more than 75 per cent of this market was shared by five companies: the General Hospital Group (which owns 24.7 per cent of all private beds), Nuffield Health Hospitals (18.4 per cent), BUPA (17.3 per cent), Capio UK (acquired by Ramsey Health Care in 2007) (9.5 per cent) and Hospital Corporation of America (HCA) (8.0 per cent) (Laing and Buisson 2004: 70). From the evidence provided on the website of the different companies, it becomes clear that Nuffield Health Hospitals is the only company operating within the British market alone. All other players are internationally focused hospital groups: For example, the General Healthcare Group, now market leader, was originally a foundation of American Medical International (AMI), a leading US for-profit hospital provider, in 1970. Since then, the company has changed ownership structure several times and is currently owned by the multi-national private equity firm Cinven. BUPA, as described above, is an internationally operating company based and founded in Britain, while what was formerly Capio Healthcare, one of the smaller players in the private hospital market was Swedish-based, but since the 1990s also operates more widely and is presently owned by the Australian company Ramsay Health Care. Finally, HCA International is part of the Hospital Corporation of America, which runs hospitals in America, Switzerland and Great Britain. Using an analysis of the market shares the different companies hold since the mid-1990s,15 we can see an increasingly multi-national penetration of service provision within the private hospital market. Apart from the development regarding private hospital beds, it was also the increasing plurality of provision advocated by New Labour that opened the door to an international involvement in British service provision. From data on the providers of Independent Diagnostic and Treatment Centres, which is published in Dash (2004), we see that the majority of successful bidders for these centres are not British but overseas-based healthcare companies, the bulk of which have a US background. However, Canadian and South African companies are also involved in the provision of care through

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Independent Treatment Centres, which mainly provide general and specialist surgery services. Interestingly, other companies holding a stake in the private healthcare market such as BUPA, Capio or HCA have not been successful in bidding for the centres: a development which, according to Dash (2004: 340), can be attributed to the fact that traditional private healthcare providers ‘have a higher cost base than the new providers, partly as a result of the higher fees traditionally paid to British consultants working for these companies’. Apart from the increasing involvement of international providers with respect to private hospital beds and Independent Treatment Centres, the British healthcare system has recently also drawn on international companies when it comes to new models of service delivery. The first instances of partnerships between US-based healthcare companies and the NHS have been set up, which ‘are focusing on the adaptation by the NHS of managed care techniques like case management, risk stratification and predictive modeling’ (Ham 2005: 597). In 2002, for instance, the British Department of Health signed a framework agreement with United Healthcare Group, under which the company carried out scoping work with ten PCTs on the question of how the Evercare Model (a managed care model for the at-risk elderly developed by the United Healthcare Group) could be implemented by the PCTs concerned. In the follow-up to the pilot studies in Spring 2003, nine of the ten PCTs entered into contracts with United Healthcare for supporting their implementation of the Evercare Model. Recently, the Department of Health has commissioned United Health Europe to implement an Integrated Cancer Care Programme across several PCTs. The changing role of the state in service provision Concluding our discussion of developments in the public/private-mix of service provision, we find that public involvement in the provision of healthcare in Britain has clearly declined over the past three decades. What started with the privatization (outsourcing) of catering and laundry services in the NHS hospitals in the wake of the Griffiths reforms, continued with increases in private provision in the dental and long-term care sectors. But in hospital services, too, the public/private-mix has undergone further change, with an increasing number of private consultant hours worked and an increase in the numbers of beds and services provided by private forprofit facilities, particularly in the urban and wealthy areas of the south. Consequently, there is good reason to assume that since the mid-1970s the monopolistic role of the state in providing healthcare services has weakened in both primary and specialist care. Summing up the territorial changes in the service provision dimension, we mainly see shifts from national or sub-national entities towards the international level. Bringing this evidence together with the findings

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concerning the public/private-mix outlined above, it is evident that the role of the state in service provision, particularly during the last decade, has changed not only with respect to the organizational but also the territorial axis.

The regulation of the British healthcare system Apart from the financing and provision of healthcare, the role of the state can also change with regard to the regulation of healthcare systems. In broad terms, the state can be engaged to a greater or lesser extent in the regulation of the relationships between the three major stakeholders of a healthcare system, that is financing agencies, service providers, and (potential) beneficiaries. Alternatively, it can leave this task to corporate self-regulation mechanisms or to markets. As a result, the changes in the role of the state in the regulation of healthcare systems can be most systematically analyzed by considering the six regulatory relationships of the healthcare system, as displayed in Box 2.1 in Chapter 2. Coverage Basically, any person deemed to be ordinarily resident16 in Britain is entitled to access the NHS, and thus receive primary and specialist care. For patients this treatment is free at the point of delivery. As a consequence, neither nationality nor past or current payments of British taxes and NI contributions are taken into consideration when establishing eligibility for healthcare treatment. Anyone who is not an ordinary British resident is subject to the NHS Charges to Overseas Visitors Regulations. These regulations were introduced in 1982 and tightened in 2003, with the effect that foreign patients and failed asylum seekers now ‘have to demonstrate their eligibility before they [...] receive health care’ (Pollock 2004: 32). As the government argues, this restriction of the residence principle was introduced to ‘remove some of the anomalies [...] and to ensure that the NHS is freely available to all who are entitled to it, but not to those who are not’ (Department of Health 2003c: 15; on its effects, see Pollock 2004: 32). While the British public healthcare system is characterized by universal coverage, survey results show that in late 2001 around 11 per cent of the British population were covered by supplementary private medical insurance (Laing and Buisson 2002b). With an additional 740,000 persons covered by non-insured (self-insured) medical expense schemes administered by third-party administrators and insurers, PMI penetration in Great Britain has risen to 12.3 per cent. In contrast to PMI, which offers full indemnity for private medical treatment, individuals wanting supplementary private health insurance can also opt for so-called ‘Health Cash Plans’ (HCPs). These provide cash benefits towards the cost of a wide range of health-related contingencies, including the costs of primary care treatment, expenses

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associated with hospital treatment, and post-operative care (Laing and Buisson 2002a). Benefits from HCPs do not cover the full costs of primary care treatment, however. Instead, HCPs pay a fixed percentage of the cost for private treatment as a cash benefit. Benefits for secondary care treatment and post-operative treatment are paid according to a list of fixed prices (Laing and Buisson 2002a: 7). While ten per cent of the British population are covered by HCPs alone, it is estimated that about five per cent have both PMI and HCP coverage.17 This implies that in 2001, around 17 per cent of Britons were covered by some form of supplementary private health insurance (Laing and Buisson 2002b: 79). As regards the long-term development of private supplementary insurance, PMI coverage has generally grown over the entire post-war period. This growth was only interrupted temporarily in the mid-1970s by the coincidence of rapidly rising PMI prices and the anti-private attitude of the Labour government. In the second half of the 1980s, the growth of PMI coverage was stimulated by a booming economy and by the Thatcher government, which re-introduced tax relief for insurance schemes operated by employers (Klein 2005: 47). During the course of the internal market reform, additional tax relief on private insurance premiums was made available to people over 60.18 Growth in PMI demand was interrupted once again in the early 1990s, when a further rapid PMI price increase coincided with an economic recession19 (Laing and Buisson 2002b: 16f.). Generally speaking, coverage and access to NHS services is regulated via primary and secondary state legislation20 (NHS acts/NHS regulations). As far as the regulation of private medical insurance is concerned, PMI is chiefly regulated as a financial product (Keen et al. 2001: 172ff.). Following the European Insurance Intermediaries Directive, the British government announced in 2001 that the sale of private medical insurance in Britain would henceforth be regulated by the newly established Financial Service Authority (FSA). On its homepage, the FSA, which regulates the sale and administration of non-investment insurance contracts as from 2005, describes itself as an ‘independent organisation funded solely by levies on the financial businesses it regulates, such as banks and insurers – accountable to the Treasury and ultimately to Parliament for its own performance’. As its principal concern is the regulation of the insurance market as a whole, the FSA first of all authorizes companies or persons engaged in selling and managing PMI. Second, it monitors prudential business practices on the one hand, and consumer protection on the other. The notion behind this dual responsibility for the insurance market is that in this way the FSA not only focuses on the capital adequacy of individual insurers, the adequacy of risk transfers and the soundness of reinsurance arrangements, but also takes ‘a proactive interest in consumer rights during selling and marketing of PMI – monitoring the transparency of the relationship between intermediaries and insurers, the transparency of policy regulations for example policy

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exclusion as well as the suitability of policies for consumers’ (Laing and Buisson 2002b: 56). As an instrument of last resort, the FSA may withdraw licences or even freeze the assets of PMI insurers and intermediaries violating the prudential standards and conduct of business regulations set out in the FSA Rules and Guidance Handbook. Before the establishment of the FSA through state legislation, the regulation of the PMI market took place on the basis of voluntary self-regulation by the insurance industry itself. Formerly, this self-regulation was undertaken by the General Insurance Standards Council (GISC), an independent, non-statutory organization responsible for regulating the sales, advice and service standards of its (voluntary) members (PMI insurers and intermediaries). In a similar way to the FSA, the GISC has tried to enforce a minimum standard of good practice in the PMI market, the overall objective being ‘to ensure all general insurance policyholders are adequately protected and fairly treated’ (Laing and Buisson 2002b: 54). Overall, we can conclude that the state remains the central actor in regulating coverage within the British public healthcare system. In terms of private insurance the state has become even more deeply involved in regulation over the past few years. Systems of financing With regard to the regulation of the financing systems, the object of regulation can be divided into private and public healthcare financing. Private healthcare financing comprises two main categories: out-of-pocket or selfpayments for different kinds of healthcare services and goods, individual co-payments for NHS services and individual spending on private insurance. Under the first category, we subsume over-the-counter payments for pharmaceuticals, individual or employer payments into private medical insurance, self-payment for hospital care as well as individual out-of-pocket payments for complementary therapies (for example, osteopathy and acupuncture). The second category of private healthcare expenditure is made up of individual co-payments for NHS services, mainly in the form of charges for prescriptions, dentistry and ophthalmic services (Keen et al. 2001: 59–62). In terms of regulation, the first category depends indirectly on state regulation, in the sense that the overall level of out-of-pocket financing is influenced by the regulations the state lays down for the level of supply or scope of the NHS services, as well as by the financial incentives provided for private insurance. Ultimately, however, the level of out-of-pocket financing is nevertheless determined by individual spending decisions. The overall level of co-payments for NHS services, by contrast, has been subject to direct state regulation ever since the establishment of the NHS.21 As far as public healthcare financing – in other words, the financing of the NHS – is concerned, the overall budget is funded from two sources: the National Insurance (NI) Fund and general taxation. The amount of money transferred from the NI Fund to the overall healthcare budget of Britain

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is regulated by the NI Contributions Act, which defines both employer and employee contributions to NI, as well as the amount of the NI contribution which is directly allocated to the overall NHS budget (earmarked contribution) (Adam and Shaw 2003: 9f.). Apart from the NI transfer, the main bulk of the NHS budget derives from general taxation. Until 1998, this part of the healthcare budget was determined in the process of the so-called ‘Public Expenditure Survey’ (PES), in which all Whitehall spending departments – including the Department of Health – submitted their bids for the following financial year to the Treasury. Through a process of consultation, negotiation and bargaining – the ‘annual blood bath of hopes’ (Klein 2005: 48) – the Chancellor of the Exchequer then determined the amounts to be allocated to each spending department as part of the total expenditure plan (European Observatory on Health Care Systems 1999: 34). Following the Comprehensive Spending Review in 1997, however, the government moved away from the annual PES cycle and opted for a threeyear-planning-cycle in which the total amount of general taxation income allocated to the NHS is ‘updated annually in line with government priorities, projections of the likely economic position and the government revenue position’ (Healthcare Financial Management Association 2004: 17). Apart from this formal process, however, the size of the NHS budget – and thus the major portion of total healthcare expenditure in Britain – is, and always has been, highly dependent on the state of the British economy and on the priorities the British government attaches to different spending programmes. To conclude, then, we can argue that the state has always played a major role in regulating the financing of the healthcare system. This is clearly demonstrated by the fact that the state determines both the level of the overall public expenditure on healthcare as well as the source of this spending, namely the amount of taxes and national insurance contributions raised in Great Britain. In the financial planning process, the Treasury and the Chancellor of the Exchequer have always had a strong position vis-à-vis the Department of Health. This powerful position, which allegedly accounts for the effective control of the British healthcare budget, was even strengthened in the late 1970s and early 1980s, when a switch was made from volume planning to cash planning and cash limits were introduced.22 Access of healthcare providers to the healthcare market Medicine is one of the few university degree courses in which the British government can decide on the intake of undergraduates. The significant increase in intake that has taken place over the last three decades (from 3,500 undergraduates in the late 1960s to 4,970 in 2000) was based on the recommendations of the Todd Commission on Medical Education of 1968 (Rivett 1998). While the Merrison Report and the subsequent Medical Act of 1978 generally strengthened the regulatory competences of the

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professional association of British doctors – the General Medical Council (GMC) – in terms of control over the entrants to medical faculties and standards in medical education, the medical schools became virtually autonomous from GMC interference in 1970 (Moran 1999: 108). In 2005, as a consequence of the recent accumulation of cases of severe professional misconduct, the newly established Postgraduate Medical Education and Training Board (PGME) assumed the regulatory responsibility for establishing and maintaining postgraduate medical education and training standards in Great Britain. The PGME, a body drawing on members from the medical profession, patients, the general public, and the NHS, assumes the regulatory tasks which were formerly undertaken by a fragmented system of professional self-regulation (Salter 2001). In doing so, the PGME is accountable to the Secretary of State on behalf of British health ministers. With respect to the access of providers to the healthcare market in Britain, it is important to distinguish between the access of public/private providers to the hospital market and their access to the primary care market. Generally speaking, for doctors to gain access to both NHS hospitals and the NHS primary care market there are two requirements that must be met: doctors must be registered as medical practitioners, and they must hold a contract with an NHS organization. With regard to the first requirement, since the foundation of the NHS, the GMC has been responsible for keeping the medical register on which a doctor must be registered in order to gain access to the public market. Basically, doctors who finish their training in the Great Britain or elsewhere in the European Union 23 are allowed to register on a provisional basis. Once they have gained a year of practical experience, they receive full registration (Montgomery 2003: 141). While keeping the medical register has always been central to professional self-regulation in Britain, this was overruled in 2003 by the General and Specialist Medical Practice (Education, Training and Qualifications) Order, which forced the GMC to introduce two registers: the General Practitioner Register, and the Specialist Register. Furthermore, for the first time in the history of the NHS, clear rules were laid down for the administration of these two lists. Apart from this, professional self-regulation was also squeezed by the establishment of the Council for Healthcare Regulatory Excellence – an Arm’s Length Body24 set up in 2003, which monitors the regulation of healthcare professions performed by the nine statutory regulators and which, in doing so, can recommend changes to the regulators’ rules. With respect to the primary care market, doctors, once registered, may apply for a contract with the NHS to run a GP or general dental practioner’s (GdP) practice anywhere in the country. Until 2003, the respective Local Health Authorities contracted with the GPs/GdPs, who then received the status of independent contractors. With the new General Medical Service

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Contract, or GMS Contract, which was approved by the profession in 2003, GPs no longer gain access to the healthcare market through individual contracts with the respective Health Authorities, but through a contract between GPs and Primary Care Trusts (PCT). Under the new regulation, PCTs may conclude contracts with a variety of primary healthcare providers: with individual GPs, with partnerships that include at least one GP, or even with certain types of limited share companies. This implies that for the first time in the history of the NHS, it is possible for specialists within a partnership with a GP to gain access to the primary care market in Britain (Ham 2004: 89). The general terms of the contracts for primary healthcare (GP, dental, pharmaceutical) are laid down in the so-called ‘General Medical Service (GMS) Contract’ (Montgomery 2003: 54). For GP services, these regulations are translated into the Standard GMS Contract, which is negotiated between the General Practitioners Committee of the British Medical Association, the Department of Health and the NHS confederation (the membership body for organizations comprising the NHS) – and which provides the template for all contracts between individual primary care providers and the NHS. From 1948 until 2002, the Medical Practice Committee had the discretionary power to refuse applications from GPs/GdPs wishing to practice in a specified district if that district was already covered by an adequate number of GPs. The most recent healthcare reform delegated decision-making responsibilities for GP vacancies to the Primary Care Trusts, which are, however, now required to aim for specific workforce targets set out in a National Workforce Development Strategy and monitored by new Strategic Health Authorities. For doctors intending to enter the hospital care market, their registration as medical practitioners on the GMC register is also the first necessary step towards access to that market. Once registered, a doctor can then apply for an appointment as a physician, surgeon, or medical officer at a NHS hospital. Access to the inpatient healthcare market is even more restricted than to the outpatient market (for details, see Rothgang 1994). This is mainly due to the fact that GPs have remained independent contractors, while doctors engaged in hospital health services within the NHS are public employees. For a long time, the most powerful regulators in the inpatient sector were the Regional Health Authorities, which were not only responsible for appointing consultants and junior doctors in their respective regions, but also played a decisive role in the regional staff planning process. This has partly changed with the internal market reforms: since trust status was granted to hospitals, new hospital staff are now appointed by the respective NHS trust on local terms and conditions. Staff employed prior to the NHS reform have, however, often used their right to retain their previous contracts and terms of employment (Montgomery 2003: 89). As with staffing issues, the hospitals and beds available in NHS facilities were for a long time also subject to centralized planning, which found expression

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in the hospital plan of 1962 (Rivett 1998: 176). Interestingly, under the PFI (see above) it is still the state that ultimately decides on the planning of hospital facilities and capacities: PFI projects with a capital value of over £25 million are prioritized according to health service requirements as specified by the Department of Health. As a consequence, only those schemes that are on the priority list can proceed to procurement (Healthcare Financial Management Association 2004: 88). For a long time, the regulation of access for private hospitals and premises to the healthcare market was rather weak. 25 For private providers it was easy to gain access, as with the Health Service Act of 1980 an authorization by the state was only required for private surgical facilities with more than 120 beds. This regulation was abolished with the internal market reforms when the Conservative government ‘ended most of the remaining central government restrictions on [private] development activity’ (Laing and Buisson 2004: 87). The subsequent non-regulation of private provision in terms of access to the market as well as standards in private healthcare delivery was finally ended by the Blair government, which strengthened the role of the private healthcare sector in the provision of services for NHS patients and introduced guidelines for an increased involvement of the private sector in the so-called ‘concordat’ between the Department of Health and the Independent Healthcare Association. At the same time, the government introduced the Care Standards Act, which for the first time in the history of the NHS created a comprehensive legal framework for the regulation of independent hospitals and clinics in England and Wales, with the regulatory responsibility allocated to the National Care Standards Commission – a newly created Arm’s Length Body of the Department of Health. In 2004, finally, the functions of regulating access for the private healthcare sector to both the inpatient and outpatient market were merged and assigned to the newly established Commission for Healthcare Audit and Inspection (CHAI) (Laing and Buisson 2002b). All independent healthcare providers must henceforth be registered with CHAI before being allowed to practice. The CHAI, which was re-labelled the Healthcare Commission in 2004, is responsible for carrying out annual inspections of such providers and revoking their registration if they do not meet the standards set out in the national minimum standards guideline issued by the Department of Health in 2002. For the purposes of our study, it is important to bear in mind that, despite being an extra-departmental body, the Commission is very closely linked to the Department of Health (Walshe 2003: 136). Concluding this section on developments in the regulation of access for healthcare providers to the healthcare market, our principle finding is that state regulation of private market providers wishing to enter the healthcare market has increased. What is more, the state has assumed more regulatory responsibility for standards in medical education – a field which for a long

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time was dominated by professional self-regulation. With regard to access for doctors to the healthcare market, the state has recently de-centralized regulatory responsibilities to NHS Hospital Trusts and Primary Care Trusts, and hence strengthened the regulatory capacities of the two central actors of the quasi-market structure. Remuneration of healthcare providers The remuneration structure for primary healthcare is regulated by the GP standard contract. Similarly, remuneration for General Dental Practitioners is regulated by the GdP standard contract and for consultants by the standard consultant contract. Apart from the features regulated in the consultant and GP contracts, the Department of Health decides on the annual adjustments in remuneration for doctors on the basis of recommendations which it receives from the Review Body on Doctors’ and Dentists’ Remuneration (DDRB). This independent body, which was set up in 1963, draws up its annual recommendations on the basis of evidence which it receives from the British Medical Association as well as from the Department of Health. Since 1980, the recommendations of the Review Body have been fully implemented by the government on nine occasions, implying that the state has retained a strong role vis-à-vis the profession and still has the final word in the regulation of the remuneration structure (Booer 1994: 1081). As the new GP and consultant contracts that were approved by the profession in 2003 not only incorporate three-year adjustments in remuneration but also allow local pay bargaining between the PCT and GP practices (Gnani and Pollock 2003: 354), the Review Body no longer makes recommendations for consultants or GPs working under the new contract. However, it still makes recommendations on the incomes of consultants continuing under the old contract, salaried general practitioners and the remaining remit groups (BMA 2004; on the DDRB, see also Webster 1996: 158–65). Until 1991, the British hospital service was financed via annual budgets allocated by the relevant District Health Authority. The introduction of the purchaser/provider split fundamentally transformed this arrangement. Generally, the idea of the internal market reform was that financing arrangements between the hospital (trust) and the respective Health Authority or GP fund holder should be based on three contract models: block contracts, cost and volume contracts, or cost-per-case contracts (Booer 1994: 1097f.; Ferguson and Smith 1997: 97–101). As the Audit Commission (1996) shows, during the first five years of the internal market, most Health Authorities opted for block contracts and used cost-per-case contracts for extra-contractual referrals. By contrast, the majority of contracts concluded between GP fund holders and inpatient care institutions were either based on the costper-case model or on the cost and volume model, and only around 20 per cent of the contracts between GP fund holders and hospitals based on block contracts. During the implementation of the internal market reforms it

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became clear that hospitals had massive problems calculating their costs and that there were vast differences in the cost-calculation methods applied. In order to improve this situation, the NHS Executive initiated a standardization process, which resulted in the introduction of the Health Care Resource Groups (HRGs), the British equivalent to DRGs (Diagnosis Related Groups) (Schölkopf and Stapf-Finé 2003: 34). With the implementation of the NHS Plan, HRGs, which are set up by the Department of Health, became particularly important. It is intended that in the medium term PCTs will ‘commission most acute care on the basis of cost-and-volume agreements at specialty level, using HRGs to adjust funding to reflect the complexity of the mix of patients treated’ (Department of Health 2002a: 10). From 2005/06 onwards, all hospitals providing services to PCTs will have to charge identical prices specified in a national tariff26 for the inpatient treatment of cases that fall within the same HRG. While the HRG system is presently limited to acute services, in the medium term HRGs are also projected for outpatient, community care and mental health services. Meanwhile, Payment by Results (PbR) was intended by the Labour government to replace price competition with competition for quality, efficiency and access. Gradually being implemented since 2003, PbR means that hospitals will face financial risks but also financial rewards for their service delivery. This situation will be particularly interesting for foundation hospitals, which will be allowed to retain operating surpluses. In terms of remuneration for healthcare providers, therefore, the evidence provided above indicates that the state still plays an important regulatory role. Although in the primary care sector the state has started to devolve regulatory control to local PCTs, the remuneration structure is still centrally regulated on the basis of corporatist negotiations between the state, the profession and the NHS confederation. An interesting seesaw effect can be seen in the area of hospital remuneration, however: while the state partially withdrew from the regulation of remuneration when the internal market was introduced, it re-emphasized its role in the framework of regulation foro the recent introduction of HRGs and the national tariff. Access of patients to healthcare providers Generally, the overall responsibility for the availability of outpatient healthcare services in Britain rests with the Health Authorities, and now the Primary Care Trusts, rather than with the Secretary of State for Health. These entities were, and still are, responsible for ensuring access for British citizens to primary healthcare provided by GPs and GdPs. They also maintain lists of local practitioners and – even more decisively for patients’ access to outpatient healthcare – they administer the patient lists. British residents who are not registered as patients on a GP and/or GdP list have no access to general or dental care – the only exception being access to emergency care, which is unrestricted and consequently does not require

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prior registration. Basically, the NHS Act of 1977 gave patients the right to choose a GP. Potential patients apply to a GP, who then decides whether to accept them on his or her patient list. While under the old GMS contract doctors had the right to refuse patients without giving any reasons, Health Authorities may now force GPs to treat patients who cannot find any other doctor who is willing to treat them (Montgomery 2003: 55f.). Since patient lists were abolished in 2004, patients are now no longer registered with a GP but with a PCT contractor – usually the practice in which their GP works. According to the new regulations, patients may decide which PCT contractor they want to apply to for registration. They are, however, required to live in the contractor/PCT’s practice area and the contractor’s list must still be open.27 When patients register with a contractor, the latter is required to ask patients if they want to name a preferred practitioner. The choice of practitioner, however, ultimately depends on availability, appropriateness, and reasonableness (Department of Health 2003b: 29). While the de facto access of patients to GP services can still be deemed universal, this can no longer be said of GdP services: in the more affluent parts of the country, where most dentists are only prepared to offer private services to adults, some people – especially those exempted from NHS charges – find it very difficult to gain access to an NHS dentist (Keen et al. 2001: 95; Office of Fair Trading 2003: 33f.). As far as outpatient specialist care is concerned, access to the outpatient units of NHS hospitals is almost exclusively regulated by GPs. Ever since the introduction of the NHS, GPs have acted as gatekeepers, managing and regulating access to consultants by means of the referral process and thus ultimately controlling ‘the gate to expensive consumption in the hospital’ (Moran 1999: 64). However, in the wake of the NHS Community Care Act of 1990, and as a consequence of the healthcare reforms of the Blair government, the role of GPs in regulating access to outpatient specialist healthcare has changed substantially. With the introduction of GP fundholding and with the PCT reform, the formerly very narrow gateway to specialist healthcare was widened. For the first time in the history of the NHS, GPs were encouraged, through fundholding, to offer a range of (specialist) services previously only available at hospitals, and the most recent reform allows outpatient specialist care in a PCT setting for the first time, offering consultants the opportunity to become part of a PCT contractor partnership. In a way that is very similar to the regulation of access to outpatient specialist care, access to inpatient care within the British NHS is strongly regulated by GPs, who also act as gatekeepers to hospitals. Access to inpatient care is also regulated by consultants, who are responsible for the allocation of the scarce NHS resources available for inpatient care. As a result of such scarcity, actual access to the hospital service is also severely constrained by waiting lists, especially in the case of elective surgery. With the introduction of the internal market, the powerful role of consultants in regulating

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access to inpatient care was undermined by the fact that GP fund holders, and meanwhile the PCTs, are allowed to directly purchase or commission inpatient services on behalf of their patients. This development has been accelerated further by a policy introduced in 2005 under which patients requiring elective surgery are ‘offered the choice between 4–5 hospitals (or other appropriate providers such as Independent Diagnostic and Treatment Centres and practitioners with a Special Interest) the moment their GP (or other primary care professional) makes a referral to more specialist care’ (Department of Health 2003a: 4). Also in 2005, Treatment Centres were established to supplement inpatient care for pre-booked day and short-stay surgery and diagnostic procedures in specialties such as ophthalmology, orthopaedics, and a range of other conditions. Services are typically made available within six weeks of referral, thereby reducing waiting time for hospital care. To sum up, our evidence reveals that patient access to the British healthcare system has always been highly regulated by the state. While the state itself draws up the framework regulation, on a day-to-day basis access to healthcare is assigned to professional gatekeepers.28 However, the ‘choice agenda’ has increasingly penetrated the gate-keeping principle in favour of a strengthened role for patients in choosing providers. The benefit package Like most other national health service systems, the British NHS does not have a codified ‘benefit catalogue’. However, as stated in the NHS Plan for 2000, ‘the NHS will provide a comprehensive range of services for all, based on clinical need, not ability to pay’. This somewhat vague specification of what patients can expect from the NHS had been the dominant principle since the inception of the NHS (Mason 2005). The result was that over the years, within the constraints of a tight and highly controlled budget, local practitioners and clinicians came to enjoy an immense degree of discretion as to the scope of benefits available to individual patients. This discretion was apparently a contributory factor in the huge variations in quality of services provided throughout Great Britain, which became known as a ‘postcode lottery’ of service provision (Bungay 2005: 37). In a move to fulfil their commitment to end the manifest disparity in healthcare available for individual citizens, the Labour government in 1999 introduced a new body, the National Institute for Clinical Excellence (NICE) – now National Institute for Health and Clinical Excellence (also NICE).29 The government’s concept was that NICE should set uniform national standards for the NHS and bring ‘both rationality and national direction to the use of new and existing health technologies and to clinical practice more broadly’ (Walshe 2003: 130). This was to be achieved through a gradual centralization of decisions on treatment that had formerly been made locally, and through a more precise definition by NICE over the scope of the NHS (Montgomery

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2003: 61). In actual fact, however, the Department of Health has hardly any statutory legal power to require individual clinicians to comply with NICE guidelines or with other forms of quasi law such as the National Service Frameworks, so clinicians still feel at liberty to prescribe any treatment they see fit (Cookson et al. 2001; Newdick 2001). While the Department of Health has introduced statutory obligations on the Strategic Health Authorities and the PCTs to introduce NICE guidelines within a certain period, GPs, for instance, can still only be barred from using a particular drug through an amendment in their contract. The implementation of NICE guidelines thus still depends to a large degree on local discretion (Dent and Sadler 2002; for a critical discussion on the effects of NICE, see Sheldon et al. 2004). In contrast to the general outpatient and inpatient services, for the General Dental Service there is an NHS list, which includes the different treatments (in 2003 the list included over 400 items of service) that dentists are obliged to provide to their NHS-registered patients. The items of service are regulated by the Department of Health. We thus see that over the past few years the state has struggled hard to increase its leverage on the regulation of benefits and thereby on the medical profession. However, whether the increased involvement of the state will actually strengthen its role vis-à-vis service providers is still very much an issue of current health policy debates. Interestingly, latest evidence suggests that the role of the state in the regulation of services is also limited by the decisions of the courts who judge on patients’ claims for certain medical services. Territorial shifts in regulation Territorial shifts in the field of healthcare regulation are either downward shifts induced by decentralization, namely the ‘transfer of authority and power in planning, management and decision-making from higher to lower levels of organizational control’ (Saltman as quoted in Peckham et al. 2005: 221) or upward shifts, which result from the increasing integration of the western welfare states and their healthcare schemes in international organizations and treaties (the EU, WTO etc.). Here we concentrate on regulatory decentralization in the British healthcare system, which has taken place in the course of the devolution process30 and in the course of the ongoing organizational decentralization within the NHS. ‘Internal’ decentralization – organizational decentralization within the NHS Right from the start of the NHS in 1948, the responsibility for governing and thus regulating the service was very much centralized at Westminster. This resulted in a high level of accountability of the minister of health and his department, which can be illustrated by Aneurin Bevan’s famous quote ‘when a bedpan is dropped on a hospital floor, its noise should

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resound in the Palace of Westminster’ (Powell 1998: 58). There is strong evidence that this organizational and administrative centralization, which characterized the first decades of the NHS, has considerably weakened in the course of the policy reforms implemented during the last two decades: while the NHS for a long time was indeed centrally governed and monitored, with clear hierarchical reporting patterns running from Whitehall to the different parts of the service, this pattern has recently changed a great deal. It was particularly the introduction of the internal markets in 1991, which – inter alia – provided local GPs but also the District Health Authorities with more autonomy in addressing the needs of their patients by allowing direct negotiation between them as purchasers and the hospitals as providers. Hospitals, in the context of this reform, were generally release from many rules governing their activity from the centre and thus gained autonomy through the newly introduced NHS trust status. Before the introduction of the internal market, the Conservative government had already substantially simplified its directive planning and professional advisory system (Baggott 2004: 100). Thus, during the 16 years of Tory rule, the NHS generally put a new emphasis on horizontal relationships within the NHS, with responsibility for regulation generally moving ‘closer to locality and the locus of decision making moved downwards’ (Peckham et al. 2005: 224), a development which continued under the succeeding government, particularly with the establishment of Foundation Trusts in 2003. ‘External’ decentralization – political devolution and the NHS When Labour assumed office in 1997, it underscored its intention to devolve power to Scotland, Wales and Northern Ireland. Wanting to ensure ‘that decisions, which affect the lives of local people, are taken by their own directly elected and accountable representatives’ (HM Treasury 2003 as quoted in Jones et al. 2005: 399), Labour used its overwhelming majority in the House of Commons in order to push through political devolution, which finally superseded the administrative devolution to the Scottish, Welsh and Northern Irish Office going back several decades. Overall, the process of devolution has been notably asymmetric over the three countries concerned: while Scotland now enjoys a Parliament with legislative powers over a wide range of domestic affairs, the National Assembly of Wales, in contrast, has power only over secondary legislation relating to such issues and thus continues to require primary legislation to be enacted through Westminster. The Northern Ireland Assembly, like the Scottish Parliament, enjoys legislative powers, but the Northern Ireland Act of 1998, in contrast to the other two countries, ‘requires the executive in that province to contain representatives of each of the two warring communities’ (Bogdanor 2005: 81). England, the fourth country of the United Kingdom, with 85 per cent of the British population, continues to be governed from Whitehall,

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although there are calls for devolution of power to regional assemblies here as well. Generally speaking, the three devolved countries enjoy a broad range of devolved competencies, including the responsibility for a wide range of public policies, including health and social care (for details see Keating 2005: 16–9). Although the legislative powers of the countries differ in detail, all have important freedoms with respect to NHS policy. Thus devolution not only allowed each country to decide on health policies suited to its circumstances but also subjected the making of health policy, its regulation and the performance of health services to greater democratic accountability (Woods 2004: 326). Unlike other federal systems in Europe, the developing federalism in the UK is characterized by only a few reserved and shared competencies and by the lack of framework legislation from the centre (Keating 2005: 455f.). This said, however, the countries’ policy-shaping power is severely constrained by fiscal arrangements, under which neither the National Assembly of Wales nor the Northern Ireland Assembly enjoy revenue-raising powers and only the Scottish Parliament has the right to vary its income-tax rate by three percentage points – which in terms of the general budget is not a large amount. The absence of fiscal autonomy together with the block funding arrangements via the Barnett formula,31 under which increases or decreases in English spending programmes corresponding to the devolved services are allocated to Scotland, Wales and Northern Ireland in proportion to their populations, ties the three countries to fiscal developments in England, which, particularly in times of English austerity policy, also substantially limits the room for policy manoeuvre in the other parts of the UK. For a summary of developments in devolution in the UK, see Box 5.1 below. Box 5.1 Excurse: The effects of devolution on the British healthcare system Over the 60 years of its existence, the NHS has seen many reforms. Until the late 1990s, however, these were applied fairly uniformly across the four countries of the UK (England, Scotland, Wales, and Northern Ireland), mainly because politicians and administrative bodies in these countries were bound to the political orthodoxy of the Westminster government and to collective policy responsibility, which left them with little room for manoeuvre (Woods 2004: 325). The result of such practices was an essentially homogenous National Health Service, in which the policy differences between the countries have generally speaking been marginal compared to their similarities32 (Alvarez-Rosete et al. 2005: 946). The changes in the political system of the UK leave us with the basic question as to whether, in the context of devolution, we still can speak of a single National Health Service or whether we in now encounter distinct systems, such as NHS Scotland, NHS Wales, the Northern Ireland Health and Social Service, and ‘the’ NHS only in the English case. Indeed, it is in favour of this latter scenario that Greer (2004b: 222) and Jervis and Plowden (2003) have recently argued, speaking

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of a family of health services now existing in the UK. In the context of this chapter, the most important question to ask is, in what respect have the territorial changes described in the regulation dimension affected the role of the state in the British healthcare system, for example in the different countries? In addressing this issue in what follows, we shall compare the development of the Scottish and Welsh33 healthcare systems over the last five years to the development of the healthcare system in England. In doing so, we analyze the emerging differences not only with respect to policy, but also to the organization or governance of the NHS in the different countries. Generally, the divergence process within the British healthcare system took off with the publication of the NHS Plan in 2000, in the aftermath of which Scotland and Wales outlined their own health policy ideas in the documents ‘Our National Health’ (NHS Scotland 2000) and ‘Improving Health in Wales’ (NHS CYMRUWales 2001). Already apparent from the wording of the titles, the Celtic plans more broadly focused on (public) health, while the English plan from its very outset was a plan for the NHS only. Interestingly, the Scottish and Welsh plans also stressed the issue of national identity, whereas the English proposal failed to say that the NHS Plan is a plan for England (only) (Woods 2002: 47f.). In the wake of implementing the NHS Plan, England, as we have seen, relied very much on a combination of market mechanisms, private involvement in the financing, service provision and infrastructure of the NHS, and on a strong regulatory role on the part of the state. With a prevalence of managerial thinking in the health policy community in government, parliament, and the civil service, but also throughout the think tanks, the English healthcare system passed its reforms on the ‘assumption that the health service will be run by management and organised into autonomous units (trusts) with contractual relationships between them’ (Greer 2004a: 9). With these characteristics, the English policy developments stand in clear contrast to the developments in Scotland, which over the last five years has gradually abolished market elements and rolled back corporate rationalization (Greer 2004b: 81). In doing so, the Scottish health decision makers not only distanced themselves from recent developments in England such as the introduction of PCTs, but they also abolished the internal market and its central components, namely NHS trusts, the purchaser–provider spilt and also, as a result, the reliance on contractual arrangements. Following a range of reform measures, the Scottish NHS currently is run from 15 health boards, which have (re)integrated the functions previously taken by trusts, primary care organizations and Health Authorities and are now providing care in a unitary body. Interestingly, the recentralization of management within the Scottish NHS, which very much resembles the (English) NHS ideas of the 1970s, is complemented by a strong emphasis on partnership between the public/policy and the profession (Deffenbaugh 2002). Basically, the Scottish healthcare system bets on the profession in providing effective, efficient quality healthcare and healthcare rationing and thus grants it a more central role compared to English policy, which has squeezed the profession between managerialism and market elements (Greer 2004b: 63). Apart from growing divergence in the governance of the NHS in Scotland and England, which are depicted in Table 5.1 below, the Scottish government has also taken a different attitude towards the public/private-mix in service provision. Compared to England, it has neither emphasized the notion of choice in healthcare nor brought in private providers for diagnostics and treatment services, nor has it

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110 Simone Grimmeisen and Lorraine Frisina introduced Foundation Trust Hospitals (recently the Scottish NHS has even purchased Scotland’s largest private hospital (Woods 2004: 334). The only mechanism Scotland has adopted, though, is the Private Finance Initiative. In terms of policy, the biggest departure from the English path has been the introduction of free personal care in Scotland – a change which has provoked a lot of publicity.

Table 5.1 Emerging divergence patterns within the UK England

Scotland

Wales

Governance structure

• 28 Strategic Health Authorities • ca. 300 Primary Health Trusts • NHS Hospital Trusts • Foundation Hospital Trusts

• No Health Authorities • 15 Health Boards • No Primary Care Trusts • No NHS Hospital Trusts • No Foundation Hospital Trusts

• No Health Authorities • 22 Local Health Boards • No Primary Care Trusts • 16 Trusts • No Foundation Hospital Trusts

Public/ private-mix

• Increasing reliance on private providers (for example diagnostic and treatment centres) • Emphasis on choice (also from the private sector) • PFI

• Very small private • No independent sector diagnostic and • No independent treatment centres diagnostic and • Emphasis on social treatment centres solidarity rather • No emphasis on than on choice choice • Very limited use • PFI used but of PFI renamed as PPP

Policies

• English status quo

• Free social care • Strong emphasis on public health • Mental health policy

• No charges for eye test (for over 60-year olds) • No dental charges (for 16 to 25-year olds and over 60-year olds • No prescription charges (for the same age group, a total abolition projected for 2007) • Strong emphasis on health improvement/public health

Source: Own depiction and Woods (2004).

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Scotland also has placed more emphasis on public (preventative) health. (For a summary of the emerging differences between Scotland and England, as well as Wales and England see Table 5.1.) Like Scotland, Wales has also refrained from introducing PCTs and has also abolished the Health Authorities. In addition, the country in the West has introduced a governance structure ‘designed to shift the centre of gravity of the health service downward and better integrate local government and social services’ (Greer 2004a: 14). This has meant that the Local Health Boards (LHBs), the main commissioning bodies, are coterminous with the boards of local government, and local government has a strong representation on the boards. The 22 Welsh LHBs commission from the prevailing NHS Trusts and fund the services in accordance with a locally developed Service and Financial Framework. Basically keeping the purchaser–provider spilt, the new structure in Wales has undeniably kept ties with the NHS in England, although Wales has opted for a more localized solution. As regards the public/private-mix, Wales has made only limited use of the PFI, it has rejected Foundation Trusts and has explicitly ruled out the use of private diagnostic and treatment centres. This development mainly reflects the critical attitude of the Welsh health policy community towards the privatization and choice agenda pursued in England: ‘While Tony Blair stressed the role of the market, praises the efficiency of the private sector and emphasizes consumer choice, the language of Labour politicians in Wales is more likely to refer to citizenship, equality of outcome, universality, collaboration, and public rather than private provision’ (Davies 2003: 13). These ideological differences have also caused policies that visibly diverge from the English pattern: so far the Welsh administration has not only abolished prescription charges for young and old people and frozen them for the rest of the population, it has also pledged to totally abolish them by 2007. Apart from this, it has relieved certain age groups from dental charges and from eye-test charges (McClelland 2002). Another difference to English health policy can be seen in the strong emphasis put on public health, for example the reduction of health inequalities and the improvement of the wider determinants of health.

To sum up the developments in the three countries of the UK which are also depicted in Figure 5.1, we see that the shift of regulatory competencies from the national to the sub-national level that has taken place in the context of the devolution process has been the starting point for patterns of divergence34 within the British NHS – even allowing for the fact that there was already some divergence before 2000. Second, our analysis of the development in the different parts of the UK has revealed that each of the healthcare systems has started to develop a genuine role for the state. This is particularly evident with respect to the public/private-mix in healthcare and with respect to government structure. Both reveal that England, much more than Scotland and Wales, has lowered the profile of the state at the expense of market interactions and private sector involvement, while the latter countries seem willing to preserve a much more comprehensive state role in their healthcare systems.

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Discussion and conclusion As the British healthcare expert Allyson Pollock (2004: 78) has correctly pointed out, ‘the transformation of something as big and complex as the NHS can only be summarized at the cost of many simplifications and omissions. Even so, it can be hard to see the overall picture, especially since so many of the changes are still in process while others are just beginning’. In what follows, we will nonetheless attempt to draw some preliminary conclusions regarding the changing role of the state in the British healthcare system. Our analysis of the financing, service provision and regulatory arrangements of the British healthcare system has revealed that changes in the role of the state have taken place in all three dimensions, albeit with different intensities and different timing patterns. Despite the fact that the state still plays a crucial role in the British healthcare system, it has partially retreated from its role as financer and service provider, while at the same time has both diminished and enlarged its role in the regulation of the British healthcare system. In an effort to pinpoint the most crucial changes, we find that apart from the financing dimension, where the most important shift was the introduction of the Private Finance Initiative, developments particularly in service provision and regulation come to the fore. As regards service provision, the most important conclusion that can be drawn from this analysis is that over the last three decades, the British state has increasingly retreated from its role as a monopolistic provider of healthcare. While in the late 1970s Labour made a final attempt to irrevocably crowd out private provision in the NHS, since the mid-1980s private provision has increasingly gained ground. The precedent to this development was set by the Griffiths reform, which brought with it a first wave of outsourcing (ancillary) hospital services to private providers. A further milestone on the way to a new diversity in service provision within the British healthcare system was the introduction of the internal market, which allowed purchasers – Health Authorities and GP fund holders – to buy health services from ‘whatever source – including private providers’ (Klein 2005: 52). Paradoxically, the incoming Blair government, which at the end of the 1990s in theory abolished the internal market and exchanged ‘purchasing’ for ‘commissioning’, not only upheld the processes of the internal market (Bradshaw 2003: 85), but also very much advocated a growth in private healthcare provision (Higgins 2004). This policy strategy, which falls into line with that of the preceding Conservative governments, is reflected in an interview with former Labour health secretary Alan Milburn, who argues that ‘where we can use the private sector, we should do so – whether this means taking advantage of private finance to build new hospitals [ ... ] or using spare capacity in private sector hospitals

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to treat NHS patients’ (Timmins 2002: 130). Together with their focus on the advancement of patient choice in healthcare, New Labour developed the concept of public/private plurality in service provision as a lever for promoting the efficiency of the British healthcare system (Greener 2003) and as an essential step towards delivering NHS targets and making efficient use of the additional resources fed into the system (Laing and Buisson 2004). Overall, one possible interpretation of the developments in service provision is that the two post-Griffiths decades have witnessed a concentric retreat of the state from the provision of healthcare services in Great Britain. This concentric retreat started at the periphery of healthcare provision, with the NHS hospitals handing over cleaning, catering, laundry, maintenance and portering to the private sector. From this point onwards, the privatization of service provision gradually moved towards the central elements of the NHS, including all routine ophthalmic care, a substantial degree of dental care and major elements of long-term care for the elderly. Recently, even the core features of the NHS were opened up to private provision, with the government encouraging private providers to take over the running of failing NHS hospitals and to provide routine NHS surgery at private Diagnostic and Treatment Centres (Pollock 2004: 34; 214). Interestingly, the evidence provided in this chapter also suggests that the retreat of the state from the provision of healthcare services has been complemented by a seemingly contradictory development in the regulatory dimension, where we find that the role of both the market and the state have been strengthened considerably. The growth of market mechanisms in the British healthcare system began with the introduction of the internal market in the early 1990s, which injected a market system ‘into the shell of a hierarchical paternalistic institution’ (Klein 1996: 243f.). While there can be no doubt that the purchaser–provider split triggered profound organizational changes, evidence from the initial years of the internal market reveals little measurable change relating to these policy developments (Le Grand et al. 1998). This low impact has mainly been attributed to weak incentives and strong constraints implanted in the original structure of the internal market, which were only addressed in the more recent healthcare reforms of the Labour government. The recent changes in the financing mechanism serve as a useful illustration: while under the old structure of the internal market providers had little or no incentive to compete with one another – as they were not permitted to make use of any financial surpluses they had generated – this changed with the establishment of PCTs and Foundation Trust Hospitals, which are now allowed to retain and re-invest their surplus (Le Grand 2002: 118). Another example of the increased market impetus is the recent boost in private healthcare provision which, together with the above-mentioned changes in the financing structure, has increased

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choice as well as actual exit options for purchasers acting on behalf of their patients. Interestingly, however, this increased prevalence of market mechanisms in the British healthcare system has been accompanied by a constant or even stronger state-involvement in the regulation of healthcare (Klein 1996: 241). One indicator of this development is the increasing role of the state in the regulation of private and public service providers. As outlined by former health secretary Alan Milburn, it is only the last few years that have brought an end to a period during which the NHS had neither common standards nor defined responsibilities for inspection (Timmins 2002: 131), a fact which is underlined by Walshe (2003: 13), who argues that healthcare organizations within the NHS have for a long time escaped the regulatory attention of the state. One possible interpretation of the new regulatory commitment of the state is that parts of the existing NHS arrangements became unsustainable against the backdrop of increasing private participation in the delivery of NHS services and in the light of severe quality failures within the NHS, which undermined public trust in the effectiveness of professional self-regulation (Dixon 2005; Klein 1998; Salter 2001). In the context of these changes, the Department of Health in 1998 issued a consultation paper entitled, ‘A first class service – quality in the new NHS,’ in which it laid the foundation for a comprehensive regulation of healthcare delivery in Britain. Based on this paper, the government introduced standard-setting institutions such as the National Service Frameworks, which specified standards for key conditions, and NICE, which evaluates and recommends the utilization of new health technologies within the NHS (Stevens 2004: 39f.). It also set up the Commission for Health Improvement (CHI), as a means for inspecting quality and performance in the public sector, while at the same time the newly established National Care Standards Commission was made responsible for monitoring, inspecting and licensing private sector providers (Montgomery 2003: 92f.). Finally, in 2002, the Commission of Healthcare Audit and Inspection (CHAI) was established. Now known as the Care Quality Commission, CHAI came about from a merger of the CHI, the national value-for-money functions of the Audit Commission, the National Care Standards Commission and the Mental Health Act Commission. This super-regulator, responsible for both the public and the private sector, now sets standards, engages in the inspection and assessment of performance, clinical governance and finance as well as in the promotion of improvements in healthcare provision (Dewar and Finlayson 2002). As these developments show, over the last decade the state, or the state in the form of its Arm’s Length Bodies,35 has gradually increased its involvement in the regulation of healthcare (Department of Health 2004: 5f.; Walshe 2002: 970). This is a development which was anticipated by Day and Klein (1987: 11), who – more than two decades ago – predicted

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that ‘the more the state depends on the private production of welfare, the more it is drawn into extending its responsibilities for the public regulation of such provision. Equally, such regulation of the private sector will inevitably open up the question of the control of quality and standards in the public sector.’ Apart from expanding its role in the regulation of the provision of healthcare services, the state has also increasingly engaged in the framework regulation of the emerging market. One example of this development is the introduction of the ‘national tariff’ through which the state regulates a central parameter in the competition between PCTs and Hospital Trusts/Foundation Hospital Trusts, namely the price of specialist services. Considering the long-term developments of British healthcare policy, the overall picture is thus one of ‘progressive privatisation of all elements of health care, alongside a reduction in the state’s role except as market regulator’(Iliffe and Munro 2000: 323). Apart from the depicted changes on the public–private axis, we also observe substantial changes in the role of the state on the territorial axis: the British healthcare system, due to both internal and external shifts, has seen a substantial decentralization over the last two decades. When evaluating the outlined developments in terms of our three functional dimensions, it is the shift from the national to(wards) the sub-national level that has been most substantial in the area of regulation and decision-making within the healthcare system, where a large degree of regulatory power has been devolved to Scotland, Wales and Northern Ireland. However, also in terms of financing, we have seen a devolution of the allocation flows, with the size of the organization responsible for the management of the bulk of the NHS resources becoming ever smaller and more decentralized (Lewis and Gillam 2003). Continuity as regards the role of the state, however, can be seen in the area of service provision, where the NHS ever since its inception has operated a decentralized structure based on local and/or regional provision of primary and secondary care through GPs and the NHS. Apart from decentralization, we also see the first signs of an increasing internationalization in the healthcare state, mainly in financing and service provision, where more and more funds coming into the system draw on international sources and an increasing degree of service providers are (also) operating in a multi-national context. Taken as a whole, our analysis shows that the British healthcare system has fundamentally altered since the oil price shocks severely hit the country in the early 1970s. There can be no doubt that the shifts in British healthcare policy have led to a fundamental transformation in the role of the state in the British healthcare system. However, whether it can be said that the current developments mark the end point of the transformations of the state’s position in the British healthcare system, or that they merely serve as the first milestones in a more fundamental transformation of the role of the state in social policy, remains an open question.

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Notes 1. Strictly speaking, the NHS Act only promised healthcare services for the people of England and Wales. However, Scotland also introduced an NHS during the first post-war years in order to serve its citizens. In general, findings in this chapter refer to developments taking place within the English NHS, unless otherwise noted. 2. As such, the first section of this paper mainly focuses on the development of the NHS. 3. As outlined in Box 6.1, from this point onwards, the policy developments and reforms in the different parts of Great Britain were increasingly divergent. Keeping this in mind, the following policy development refers to England only. 4. On the differences in healthcare expenditure in the different parts of the United Kingdom, see Box 6.1 below. 5. Unlike the old scheme, however, the new GP practices will be able to keep up to 100 per cent of any savings they make from the direct commissioning of services. However, GPs must re-invest the savings in developing or providing services for patients. Options for re-investment include more specialist care, diagnostics, equipment, facilities and staff. 6. Between 1986 and 1995 the number of general senior managers in the NHS rose from 1,000 to 26,000 (Pollock 2004). 7. Here, inpatient beds exclude long-term care beds. On the developments of longterm care beds, see below. 8. It should therefore come as no surprise that the Monopolies and Mergers Commission, in its report on private medical services published in 1993, estimated that there was only a very small group of 200 privately practising specialists who had never held an NHS consultant post (Laing and Buisson 2003: 97). 9. For the medical profession ‘private practice was a symbol of independence, reflecting their status as professionals as distinct from hired hands’ (Klein 2005: 46). 10. In 1997/98, ten per cent of all private patients were treated in NHS hospitals (Williams et al. 2000: 904). 11. As outlined by Yates (2000), during the late 1990s, the loss of central control over contractual arrangements between specialists and NHS trusts has led some trusts to relax the regulations, so that in some areas it has become possible for full-time consultants to undertake private work without restriction. 12. On the (side) effects of this growth in private beds and private practice in NHS facilities see (Pollock 2004: 109). 13 ‘Public Interest Companies can be said to have three core characteristics: they do not have shareholders (if they do they are restricted in terms of profits); they deliver a public service; and they are legally independent of government’ (Flinders 2005: 219). 14. In terms of accountability, Foundation Trusts have a Board of Governors consisting of the representatives of the members of the public benefit corporation elected by its local stakeholders and by individuals who have been appointed by the public benefit corporation to represent certain interests – the Board of Governors will decide on the board of directors. Generally speaking, Foundation Trusts transfer ownership and accountability from Whitehall to the local community. 15. Before that point in history, hardly any data on the ownership of private hospitals is available.

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16. ‘Ordinarily resident’ is a common law concept interpreted by the House of Lords in 1982 as someone ‘who is living lawfully in the United Kingdom voluntarily and for settled purposes as part of the regular order of their life for the time being, with an identifiable purpose for their residence here which has a sufficient degree of continuity to be properly described as settled’. 17. On the non-negligible interaction effect between the level of public supply and the level of private demand/spending see (Keen et al. 2001; Laing and Buisson 2002a). 18. In July 1997, shortly after Tony Blair assumed office, tax relief for both employers and over 60-year-olds was abolished (Laing and Buisson 2004: 88). 19. PMI penetration is determined to a large degree by socio-economic and age factors, with the highest level of PMI coverage among middle-aged professionals, employees and managers (Laing and Buisson 2002b: 35f.). Health Cash Plans, by contrast, are more affordable and thus attract mostly individuals and families in lower income ranges (Laing and Buisson 2002a: 7). Generally, however, very few people in the non-professional skilled and unskilled socio-economic groups have been persuaded to take on any form of supplementary private health insurance. 20. Until the end of the 1990s, primary legislation was the responsibility of the UK Houses of Parliament at Westminster, while regulations were drafted and enacted by the Department of Health, leaving very little regulatory discretion to the different countries of the UK (Woods 2004: 325). 21. This is also illustrated by the fact that since devolution, the Welsh Assembly has committed itself to abolishing prescription fees in Wales by 2007. 22. Additionally, the 1992 PES reform introduced top-down cash limits and thus vitally strengthened central control over the budgets of the spending departments (for details, see Fattore 1999: 735–8; Thain and Wright 1995). 23. There are different regulations and also a different register for overseas doctors. 24. ‘Arm’s Length Bodies’ (ALBs) are stand-alone national organizations, sponsored by the Department of Health, that undertake executive functions. Their remit ranges from back office administrative functions to complex ethical or clinical-related work. ( ...) ALBs are accountable to the DH and sometimes directly to Parliament. Most ALBs receive substantial funding from the DH. There are three main types of ALB: Executive Agencies of the Department of Health, Executive Non-Departmental Public Bodies (set up in primary statute with their own powers), and Special Health Authorities (set up in secondary legislation to perform functions delegated to them by the Secretary of State)’ (Department of Health 2004: 5). 25. For an early critique of the regulatory instruments (see Higgins 1984; Walshe 2003: 13). 26. The national tariff, which will be adjusted by the market forces factor (MFF) in order to compensate geographical cost differences, will be based on the reported cost for the respective service and will be reviewed annually (on details of the tariff structure, see Appleby 2004; Gnani and Pollock 2003: 354; Healthcare Financial Management Association 2004: 118–21). 27. As the new GMS contract re-introduced a cash limit/global budget on GP practices, there were fears that GPs would ‘cherry pick’ younger and healthier patients for their lists in order to minimize their financial risk (Pollock 2004: 145). 28. A new access route to both inpatient and outpatient care was opened in 2000 with the initiation of the NHS walk-in centres, a government-funded service run

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29.

30.

31.

32

33.

34.

35.

by highly qualified nurses, who provide health advice and treat minor illnesses without a prior appointment, but who also can refer patients to GPs or even to hospitals (Jones et al. 2005: 398). While NICE produces guidance on the NHS in England and Wales, Scotland introduced a precursor to NICE, the Scottish Intercollegiate Guidelines Network (SIGN). Devolution in the British context stands for the process of transferring power and responsibility from the nation state downward to other units of government and governance (Talbot et al. 2004: 9f.). The so-called ‘Barnett formula’ was introduced in 1978. It basically set a notional population ratio for each country (England 85, Scotland ten, Wales five), which in turn determined how any share of the increases or decreases (not the total amounts) in a Whitehall spending programme would be translated into budget for the different offices. Effectively this fixed the spending patterns of that time, and thus favoured Scotland, Wales, and Northern Ireland against England (1999). Nonetheless it is important to bear in mind that due to the fiscal arrangements between the different countries, the NHS in Scotland, Wales, and Northern Ireland received relatively more funding than the NHS in England. Because there is no available data on the individual GDP figures in the countries, it is not possible to obtain data on the expenditure development disaggregated for the four countries. However, snapshot data on total healthcare expenditure per capita for the different countries provided by Dixon (2005) and Alvarez-Rosete et al. (2005) indicates that healthcare spending has been considerably higher in Scotland, Wales, and Northern Ireland compared to England. We will not refer to the developments in Northern Ireland, where the devolution process seems to be fragile and has been interrupted and stalled from time to time. Despite the fact that we can see first signs of an internal divergence, these developments can only be an indicator of the subsequent health policy development in the United Kingdom, as potential for divergence remains in so far as there is an ever decreasing need for English health policy makers to share an emerging policy. Considering the argument of Walshe (2002: 969) that Arm’s Length Bodies in the field of healthcare are ‘essentially agents of the government accountable to the Department of Health and have their boards appointed by the secretary of state [and thus have] little independence,’ we count these bodies as part of the state sphere. This is supported by Hofmann-Riem (2005: 204), who argues ‘Staat umfasst die Gesamtheit aller Akteure, die über eine durch Recht abgeleitete Handlungsmacht als Träger hoheitlicher Befugnisse verfügen, die ihnen – normativ betrachtet – nicht im eigenen Interesse sondern in Ausrichtung auf öffentliche Interessen (Gemeinwohl) übertragen sind, und zwar über Befugnisse, die den sonstigen Akteuren nicht offen stehen’ (translation available upon request).

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6 The Self-Regulatory German Healthcare System Between Growing Competition and State Hierarchy Heinz Rothgang, Achim Schmid and Claus Wendt

Introduction Statutory Health Insurance is the central pillar of the German healthcare system. For many years, the German system operated predominantly on a self-regulatory basis, but since the early 1990s the self-regulatory German healthcare system has increasingly incorporated modes of co-ordination that are characteristic of other types of healthcare systems. Our main thesis states that both the role of the state and modes of co-ordination are changing in the direction of stronger market mechanisms and more direct state intervention while at the same time the principle of self-regulation is waning. In order to evaluate this thesis, our case study analyzes changes in healthcare financing, health service provision, and regulation in Germany from 1970 until today. Main characteristics of the system In Germany 88 per cent of the population is included in the Statutory Health Insurance (Gesetzliche Krankenversicherung, GKV), while almost all of the rest has either private insurance (about 11 per cent) or is covered by specific schemes for police, military, firemen etc. The GKV is therefore the core of the German healthcare system. With respect to GKV, the federal government is responsible for the legislative framework, while the specific conditions of healthcare financing and provision are regulated by social insurance institutions through mutual self-governance (Gemeinsame Selbstverwaltung). The Self-Government Act (Selbstverwaltungsgesetz) of 1951, which basically reconstituted the system that had emerged in the German Empire and the Weimar Republic, gave stakeholders of the social insurance system (Sozialversicherungsträger) the status of autonomous collective actors (Wasem et al. 2005: 73). Until recently, the GKV has almost exclusively been financed by income-related 119

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contributions on a pay-as-you-go basis. Up to a certain income ceiling (48,600 Euro per annum in 2009), white and blue collar employees are compulsorily integrated into the social insurance scheme, and until 2004 social insurance contributions were shared equally between employers and employees. Non-employed spouses and children are covered without paying their own insurance contributions. Since pensioners, farmers, handicapped persons, students, and artists are also incorporated, the current system differs fundamentally from the original purely workers’ insurance of the late 19th century. The sickness funds are self-administered by a professional board and a supervisory board, generally consisting of employees (mostly trade unionists) and employers’ representatives. Sickness funds and their federal and regional associations have been public bodies (Körperschaften des öffentlichen Rechts) since 1955. In the same year, their negotiating partners in the provision of ambulatory medical care – the associations of panel doctors (Kassenärztliche Vereinigungen) – also received the status of public corporations. The Federal Association of Hospitals, which was designated as the legal bargaining partner for this sector in the 1980s, has remained a private association. The panel doctors’ associations were assigned the task of guaranteeing health service provision (Sicherstellungsauftrag) in the outpatient sector and controlling the suitability and economic efficiency of the medical services provided by panel doctors. To this end the associations received by state regulation the monopoly for providing outpatient healthcare services. Most patients have free and direct access to general practitioners and specialists. The Reforms of the 1950s determined the structure and the development of the German healthcare system over the next decades. A ‘complex system of multiple regulation’ (Alber 1992: 29) was institutionalized through the co-operation between government (both federal and state governments) and self-regulatory associations. This system of regulation has been deemed responsible for the subsequent lack of structural reforms in the German healthcare system until the late 1980s (Rosewitz and Webber 1990). After re-unification in 1990, the East German healthcare system was integrated into the West German GKV system (Manow 1994). Sickness funds were founded in the East German Länder, and thousands of office-based physicians established new practices, while special features of the old East German system, such as polyclinics,1 did not survive (Wasem 1993; 1997). Thus, today, the structure and the regulatory conditions of the healthcare system in both parts of Germany are virtually the same. In addition, because of the increased pressure on the healthcare system related to the extraordinary task of German unification, healthcare reforms have been implemented at an accelerating speed since the 1990s. In 1993 the Christian DemocraticLiberal government (1982–98) started a process of structural reforms which was continued during the Social Democratic-Green government (1998–2005),

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as well as the Grand Coalition (2005–9). Competition among sickness funds has been introduced, and the government intervened increasingly in the self-regulatory system to reduce expenditure, as well as to improve the quality of healthcare services (Busse and Riesberg 2004). Negotiations between social insurance funds and associations of panel doctors therefore increasingly took place in what Scharpf (1993) has called the ‘shadow of state hierarchy’. This means that collective bargains between corporatist actors had to consider the state’s interest in order to avoid direct state intervention. Major healthcare reforms since 1970 In the early 1970s, health policy in Germany was still on an expansion course. The hospital financing Act of 1972 (Krankenhausfinanzierungsgesetz, KHG) introduced a dual system of hospital financing. The Länder (that is the regional state-level) in cooperation with the federal government (until 1984) were made responsible for investments (hospital construction, renovation, and so forth), while the health insurance funds had to finance cost-covering hospital allowances (Simon 2000; Wiemeyer 1984). Under the Service Improvement Act of 1974 (Leistungsverbesserungsgesetz) and through subsequent reforms in the same year, additional healthcare services were included in the benefit package. By the mid-1970s, coverage had expanded with the compulsory inclusion of farmers, people with disabilities, students, and artists in the GKV scheme (Vincenti et al. 2006: 504ff). The recessions of the 1970s provided the signal for cost-containment measures in the field of health policy. A first sign of this reorientation was the Health Insurance Development Act (Krankenversicherungs-Weiterentwicklungsgesetz) of 1976 that obliged panel doctors’ associations, in co-operation with sickness fund associations, to develop need plans for outpatient medical services. This led to a weak form of control over the number of panel doctors in the outpatient sector (Alber 1992: 46f). One year later, the Health Insurance Cost Containment Act (Krankenversicherungs-Kostendämpfungsgesetz) introduced a first attempt at ‘global regulation’ within the German healthcare system. The Act stipulated that in their negotiations over total reimbursement (Gesamtvergütung), medical doctors and sickness funds now had to consider developments in the size of the payroll tax base (Grundlohnsumme). As part of these reforms, the ‘Concerted Action in the Healthcare System’, and from 1985 onwards the ‘Advisory Council for Concerted Action in the Health Care System’ (Sachverständigenrat für die Konzertierte Aktion im Gesundheitswesen) were set up.2 The former was made responsible for recommendations for the total reimbursement of panel doctors on the basis of national economic developments. The Cost Containment Amendment Act of 1981 (KostendämpfungsErgänzungsgesetz) extended the authority of panel doctors’ associations and sickness fund associations to increase control over individual service

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providers (Rosewitz and Webber 1990). Initial restrictions on the benefit package, such as co-payments for dentures, pharmaceuticals, and remedies, were also introduced during this period. The Healthcare Reform Act of 1989 (Gesundheitsreformgesetz) increased co-payments and deductibles (Pfaff et al. 1994). It granted the state the right to greater direct intervention in the GKV scheme while at the same time requiring it to retreat from direct service provision and financing. As an example, some preventive healthcare services, which had traditionally been under the supervision of governmental organizations, were now transferred to the ambit of the GKV (Rothgang and Dräther 2003). The Healthcare Structure Act (Gesundheitsstrukturgesetz, GSG) of 1993 can be considered the first path-breaking structural reform of the German healthcare system (Jost 1998). It has also to be considered a ‘victory over pressure group politics’ (Blanke and Perschke-Hartmann 1994) and as a break with the ‘stalemate of opposed interests and consequent immobility of policy’ (Dyson 1982: 34). By 1997 a free choice of sickness funds had been installed under this Act for almost all of the insured population. Until then only white collar workers could choose among sickness funds, while blue collar workers were assigned to funds. Besides these and other structural changes, budgets for different healthcare sectors were implemented by state regulation (Perschke-Hartmann 1994; Pfaff et al. 1994). While both the GRG 1989 and the GSG 1993 led to increased co-payments, in 1994 the Long-Term Care Insurance Act (Pflege-Versicherungsgesetz) was passed, introducing a fifth pillar to Germany’s social insurance system and the first new branch of social insurance since 1927 (Rothgang and Igl 2007). In 1996/7 the so-called ‘third step’ of health reform was introduced, consisting of the Health Insurance Contribution Rate Exoneration Act (Beitragsentlastungsgesetz) and the First and Second Statutory Health Insurance Restructuring Acts (1. und 2. GKV-Neuordnungsgesetz) (for details, see Busse and Riesberg 2004: 192ff.). As part of the GRG 1989, the GSG 1993, and subsequent health reforms, hospitals gained additional rights to provide outpatient healthcare. The 1993 Act had already marked the beginning of changes in the hospital financing system. The Statutory Health Insurance Reform Act of 2000 (GKV-Gesundheitsreformgesetz) set the frame for a ‘diagnosis related groups’ (DRG) system, which was then introduced by the Case Fees Act of April 2002 (Fallpauschalengesetz) (Schmid and Götze 2009). Following full DRG implementation in 2009, hospital financing is now mainly based upon DRGs. The Risk Structure Compensation Scheme Reform Act of 2002 (Gesetz zur Reform des Risikostrukturausgleichs in der GKV) was a reaction to the incomplete control of morbidity in the old risk structure compensation scheme, which had led to considerable cream-skimming (Höppner et al. 2006). As a kind of short time measure, it made switching between sickness funds more

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difficult, introduced disease management programmes (DMPs) for certain groups of the chronically ill, and a pool for covering excess expenditure of high spenders. At the same time, the introduction of a morbidity-oriented risk structure compensation scheme (RCS) was announced by 2007. The Statutory Health Insurance Modernization Act (GKV-Modernisierungsgesetz, GMG), which came into force in April 2004, entailed cuts in the benefit package and introduced a so-called ‘office fee’ (Praxisgebühr), which means that in any quarter of the year for the first visit to a doctor a fee of 10 Euro has to be paid. This doctor can then provide referrals for any other doctors visited within the same quarter. Apart from this, the GMG grants patients the (limited) right to choose between different health service packages, the opportunity for voluntary insured members to opt for a cost reimbursement of the GKV scheme, and the right to obtain a receipt for the healthcare services they receive. These measures aim at increased information and transparency. The introduction of a German ‘Institute for Quality and Efficiency in Healthcare’ (Institut für Qualität und Wirtschaftlichkeit im Gesundheitswesen, IQWiG), based on the example of Britain’s NICE (National Institute for Health and Clinical Excellence: see Chapter 5) and the extension of the Federal (Joint) Committee’s ([Gemeinsamer] Bundesausschuss) competences through the GMG mark the departure from an eminencebased approach and the dawning of more evidence-based regulation in Germany’s healthcare system. Both include the possibility of improving costeffectiveness and thus strengthening the efficiency of the self-regulatory system. With new regulations in the area of integrated care the GMG makes it easier for sickness funds to contract on a selective basis, thus increasing competition among providers for selective contracts (Götze et al. 2009). In 2007, the grand coalition passed the Statutory Health Insurance Competition Strengthening Act (GKV-Wettbewerbs-Stärkungsgesetz, GKV-WSG) as a compromise between distinct reform strategies announced by the Social Democrats and the Christian Democrats during their respective election campaigns. The GKV-WSG consists of a structural reform, an organizational reform, a financing reform, and a reform of private substitutive health insurance. As a result of the structural reform, mandatory coverage has been extended to the whole population forcing both private and social insurance to accept a part of the (small number) of those hitherto uninsured. Thus the Reform Act marks the end of an ongoing inclusion process that started in the 19th century and led to the coverage of the whole population by 2009. Once again co-payments and deductibles were increased, but the sickness funds were also given the right to vary the benefit package slightly and the range of integrated care was enlarged. The core of the organizational reform was the creation of a single association of sickness funds. As a result, the Ministry’s ability to influence health policy is expected to increase now that it has to intervene in only one body. The reform of financing included the introduction of a federal health fund by 2009, which collects the contributions of all

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Table 6.1 Major healthcare reforms in Germany since 1970 Year

Title

Substance

Expansion Period ( – 1976) 1972

Hospital Financing Act (Krankenhausfinanzierungsgesetz, KHG)

Guarantee to hospitals for the refund of their costs; dual financing (sickness funds and states); hospital planning competence for the ‘Länder’

1974

Service Improvement Act (Leistungsverbesserungsgesetz)

Improvements in benefit package: coverage of unlimited hospital stay; pay in the event of sick children requiring care

Cost-Containment Period (1977–92) 1976 Health Insurance Development Introduction of need plans for outpatient Act (Krankenversicherungsmedical services Weiterentwicklungsgesetz, KVWG) 1977

Health Insurance Cost Containment Act (KrankenversicherungsKostendämpfungsgesetz, KVKG)

Starting point of the cost-containment period: introduction of ‘concerted action’, rhetoric shift towards ‘revenue-oriented spending policy’; negotiations between sickness funds and panel doctors on total reimbursement of panel doctors; introduction of co-payments and deductibles

1981

Cost Containment Amendment Act (KostendämpfungsErgänzungsgesetz, KVEG)

Additional cuts in the benefit catalogue; extension of authority for doctors’ associations and insurance fund associations to increase control over individual service providers

1989

Healthcare Reform Act (Gesundheitsreformgesetz, GRG)

Codification of healthcare system legislation into the German Social Code Book V (Sozialgesetzbuch V, SGB V); introduction of numerous co-payments and deductibles; introduction of benefits for home-based long-term care; introduction of reference prices for pharmaceuticals and medical aids (Festbetragsregelung); choice for blue collar workers above a certain income to opt out of SHI

Structural Reform Period (1993 – today) 1993

Healthcare Structure Act (Gesundheitsstrukturgesetz, GSG)

Major reform: introduction of competition as a governance mode in its own right: free choice of sickness funds for almost all of the insured population by 1997 combined with the introduction of a risk structure compensation scheme; sectoral budgets, more co-payments

1995

Long-term Care Insurance Act (Pflege-Versicherungsgesetz, PflegeVG)

Introduction of Social Long-term Care Insurance for all GKV insurants and Mandatory Private Long-term Care Insurance for all persons who have private substitutive health insurance

Continued

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Table 6.1 Continued Year

Title

Substance

1996/7

‘Third Step of Health Reform’ Health Insurance Contribution Rate Exoneration Act (Beitragsentlastungsgesetz) 1st Statutory Health Insurance Restructuring Act (1. GKVNeuordnungsgesetz) 2nd Statutory Health Insurance Restructuring Act (2. GKVNeuordnungsgesetz)

More co-payments; obligation for funds to decrease contribution rate by 0.4 percentage points; experimental clauses for selective contracts with providers; right to change sickness funds in the event of an increase in contribution rate

1999

Act to Strengthen Solidarity in Statutory Health Insurance (Solidaritätsstärkungsgesetz)

Cut of certain co-payments

2000

Statutory Health Insurance Reform Act 2000 (GKVGesundheitsreformgesetz, GKVGRG 2000)

Set up of a ‘diagnosis related groups’ (DRG) system; introduction of ‘integrated care’; re-introduction of benefits for prevention

2002

Risk Structure Compensation Scheme Reform Act (Gesetz zur Reform des Risikostrukturausgleichs in der GKV)

Temporary switches among sickness funds made more difficult, disease management programmes (DMP) leading to higher payments from the risk structure compensation scheme for any insured in a DMP and a high-risk pool; introduction of a morbidity-oriented risk structure compensation scheme to be implemented by 2007

2003

Case Fees Act (Fallpauschalengesetz)

Introduction of DRG-based case fee system for financing German hospitals

2004

Statutory Health Insurance Modernization Act (GKVModernisierungsgesetz, GMG)

Transformation of integrated care into a means of managed care with the potential to substitute collective contracts by selective contracts between sickness funds and providers of care; (limited) right to choose between different health service packages

2007

Statutory Health Insurance Competition Strengthening Act (GKV-Wettbewerbs-Stärkungsgesetz, GKV-WSG)

Structural Reform: coverage of the whole population in either GKV or private insurance by 2009; increased co-payments; more variation in benefit packages Organizational Reform: introduction of a single organization of sickness funds; Financing Reform (by 2009): introduction of a federal health insurance fund; identical state fixed contribution rate for all funds, opportunity for individual funds to collect additional contributions; morbidity-oriented risk structure compensation scheme; additional tax revenue from 2009 onwards; Reform of private health insurance: introduction of ‘basic tariff’

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sickness fund members based on an identical contribution rate. Out of this fund resources are allocated to sickness funds with respect to a morbidityoriented RCS, introduced in 2009. Thus a central parameter of healthcare policy, the fixing of the contribution rate, has been transferred from the selfregulating individual sickness funds to the state.

The financing dimension In 2007 about 253 billion Euros were spent on healthcare in Germany, amounting to 10.4 per cent of GDP. This makes Germany one of the most expensive healthcare systems relative to economic power, being placed fourth in the OECD world. The main part of healthcare expenditure (7.1 per cent of GDP) is financed through social insurance contributions, while government institutions add 0.9 per cent, leaving the remaining 2.4 per cent to be covered by private sources (OECD 2009). Describing the development of healthcare financing over the past four decades is complicated by a break in healthcare financing data that limits comparability over time. First of all, German unification has caused a break in time series. The new Länder have been integrated comprehensively into the West German social insurance system (Busse and Riesberg 2004). However, German unification had an immediate impact on the level and structure of healthcare financing.3 The second source of a time series break is the change of methods for estimating healthcare expenditure. In 1998 the estimation methods changed from national accounts to the System of Health Accounts (SHA).4 Healthcare data has been adjusted for the years 1992 to 1998, which leaves a time series break in 1991, when the ‘statistical integration’ of the new Länder took place. In the following, we use OECD data (Figures 6.1 to 6.3) and national data sources (Figures 6.4 to 6.6). We distinguish between two periods: 1970–90/91 based on the old classification system, and 1992–2007 based on the new SHA. The level of healthcare financing The development of German healthcare expenditure as a percentage of GDP is characterized by long periods of successful cost containment, interrupted by short and marked expansions. The most dynamic increases in spending took place from 1970 to 1975, and again from 1994 to 1996. Since 1970 health expenditure has increased from 6.0 per cent of GDP to 10.4 per cent (2007), including the ‘leap’ induced by German unification. As we can also see from Figure 6.1, real healthcare expenditure per capita (deflated by GDP prices) has been growing throughout the whole observation period and has roughly tripled. Periods of soaring healthcare costs, particularly in the early 1970s and again in the early 1990s, alternate with less steep increases and some cutbacks, indicating the immediate and often short-term impact of policy interventions to control healthcare costs.

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Self-Regulatory German Healthcare System 127 12 Total health expenditure in % of GDP

Real total health expenditure per capita (Price 2000)

3000 Health expenditure in % of GDP (right y-axis) 2500

10

2000

8

1500

6 4

1000 Health expenditure per capita (left y-axis)

2

500 0 1970

0 1975

1980

1985

1990

1995

2000

2005

Figure 6.1 Total healthcare financing as a percentage of GDP and per capita Note: Time series break in 1991 due to German unification and the change from national accounts to the OECD System of Health Accounts.

3000

12

2500

10

2000

Public health expenditure per capita (left y-axis)

1500

1000

6

4 Private health expenditure in % of GDP (right y-axis)

500

0 1970

Figure 6.2 capita

8

Public health expenditure in % of GDP (right y-axis)

2

Total health expenditure in % of GDP

Real total health expenditure per capita (Price 2000)

Source: OECD (2009).

Private health expenditure per capita (left y-axis) 0 1975

1980

1985

1990

1995

2000

2005

Public and private healthcare financing as a percentage of GDP and per

Note: Time series break in 1991 due to German unification and the change from national accounts to the OECD System of Health Accounts. Source: OECD (2009).

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128 Heinz Rothgang, Achim Schmid and Claus Wendt Public financing as a percentage (a) of total health financing 100 90 Total public financing 80 70 60 Social insurance financing 50 40 30 20 Tax financing 10 0 1970 1975 1980 1985 1990 1995 2000 2005

(b) Private financing as a percentage of total health financing 100 90 80 70 60 50 40 30 Total private financing 20 Out of pocket 10 Private insurance 0 1970 1975 1980 1985 1990 1995 2000 2005

Figure 6.3 Public and private financing as a percentage of total health financing Note: In the 1970–91 series the financing category ‘non-profit institutions’ has partly been classified as tax financing because it is overwhelmingly represented by public employers’ contribution to the treatment costs of civil servants and their dependants. Source: OECD (2009).

The rise of healthcare expenditure in the early 1970s took place in a period of continuing health service expansion. In the outpatient sector, for instance, doctors’ associations managed to push through a system of feefor-service payment that, in combination with a growing number of doctors, entailed cost increases. In the inpatient sector, the number of doctors grew even faster while acute-care hospital beds peaked at about 490,000 beds in 1975 (Bundesministerium für Gesundheit 1991; Rosenbrock and Gerlinger 2006). This was the effect of an Enquete Commission of the German Parliament stating that there was undersupply in the hospital sector, and a constitutional amendment accordingly allowing federal money to be used for increasing hospital capacities. Between 1970 and 1975 social insurance expenditure5 on inpatient care almost tripled (more than doubled in real terms) and can be considered a major cause of increasing costs in that period (Rosenbrock and Gerlinger 2006: 160). A further crucial aspect shaping healthcare financing as a percentage of GDP was the economic recession following the oil price shock of 1973. The combined effect of rising healthcare costs and economic decline made healthcare expenditure jump to 8.4 per cent of GDP in 1975. At the same time, the recession prompted a wide range of measures to control healthcare costs. Cost-containment issues began to dominate the political agenda (Henke 1992; Wörz and Busse 2005: 136). Health spending per capita kept on growing after 1975, but at a much slower pace, and remained broadly in line with overall economic growth until German unification. The 1989 GRG, in conjunction with a flourishing German economy, even brought healthcare spending below the 1975 value, to 8.3 per cent of GDP, a development as worthy of note as the health expenditure increases of the years before. By and large, from 1975 to 1990 the share of economic wealth going into the healthcare system remained

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constant, and public healthcare expenditure as a share of GDP remained exactly constant, thus contradicting claims of a ‘cost explosion’. A second period of marked expansion of healthcare spending occurred after German unification. Spending growth accelerated, particularly between 1994 and 1996. The cost-intensive upgrading of healthcare infrastructure in East Germany, where health services were restructured according to the West German healthcare system, contributed to cost increases. Moreover, the introduction of long-term care insurance (LTCI) in 1995 can be considered as a major factor driving up public health expenditure, as the new scheme has increased public spending by about 154 per cent (Rothgang 1997: 171). The fact that Germany ranks among the most expensive healthcare systems is also related to the drop in average GDP per capita caused by the integration of the East German Länder. Figure 6.2 disaggregates total healthcare spending into its private and public components. We can see that public expenditure climbs from 4.4 per cent in 1970 to 8.0 per cent of GDP in 2007. The expansions of the 1970s and the 1990s were fuelled by public sources. Except for these periods, private spending growth rates tend to outnumber the growth rates of public financing. Since 1992, average annual growth of real public spending per capita has amounted to 1.5 per cent while private expenses have grown by 3.4 per cent, albeit from low levels (OECD 2009: own calculation). Cost containment in the public sector ‘took predominantly the form of successive increases in user charges and exclusions of minor benefits which resulted in a noticeable increase of the amount of privately financed health care’ (Wörz and Busse 2005: 136). The public/private-mix in healthcare financing Breaking down the healthcare budget into different healthcare funds reveals that public sources, which include social insurance and tax financing, cover about 77 per cent of total spending on health. In 2007, the lion’s share is provided by social insurance (67.8 per cent), while tax revenues provide only nine per cent of total sources. Private healthcare spending, which accounts for less than a quarter of healthcare expenditure, is split into private insurance funds (9.3 per cent), private households’ direct (out-of-pocket) payments (13.1 per cent), and the spending of non-profit corporations (0.8 per cent, not shown in Figure 6.3). In the 37 years covered by Figures 6.3a/b, the public/private-mix did not undergo fundamental changes. The share of public financing peaked in 1975 and declined continuously but moderately thereafter. Considering public spending, social insurance funding has clearly gained importance throughout the observation period. At the same time, the government’s contribution through tax-financing decreased in relative terms. The decline is related to the Hospital Financing Act 1972 (KHG) which came into effect in 1974. Prior to the KHG, it was mainly municipalities that had to

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cover the deficits of public hospitals, which often suffered not only from underinvestment, but also from insufficient allowances. The KHG was designed to improve healthcare infrastructure and to guarantee that insurance funds fully reimbursed the operating costs of inpatient services. As a result, the financing share of Länder and federal governments declined in relative terms because operational costs skyrocketed, but they no longer had to cover deficits; the improvements in inpatient health services were mainly financed through social insurance (Simon 2000: 83f). Since the 1980s, the Länder’s budgetary restraints have caused a further relative decline of investment costs and the tax-financing share. Despite a federal programme set up after re-unification to improve healthcare infrastructure in the eastern Länder, tax-financing lost ground (Rosenbrock and Gerlinger 2006). The introduction of LTCI in 1995 gave social insurance financing even more weight. The scheme now covers much of the cost that had been financed by tax-funded municipal social assistance (Fachinger and Rothgang 1995; Gawel 1995). Funding responsibilities were shifted from the government, but also from private households to social insurance. Over the whole observation period, the financing share of social insurance has increased from less than 58.3 per cent to 67.8 per cent. In order to cover these increases, GKV contribution rates had to be raised, on average, from about eight per cent in 1970 to 14.9 per cent in 2009.6 Hence, the social insurance principle is even stronger now than at the beginning of our observation period. The state (the federal government and especially the Länder), however, has reduced its direct responsibility for healthcare financing. This said, expenditure data do tend to underestimate state-involvement in healthcare financing, because the state grants tax exemptions on the contributions to the GKV, private health insurance, and LTCI. In health and long-term care insurance about half of the contribution is paid by the employer. This implicit part of wages and salaries is not taxed at all. The value of these tax exemptions for employers has been estimated at 18.6 billion Euros in 2003, equivalent to nearly 1.7 percentage points of the contribution rate (Nachhaltigkeitskommission 2003: 171f) or eight per cent of total health expenditure. The aggregate volume of tax exemptions on health insurance contributions for employees, the self-employed, and civil servants is hard to specify, since they can only claim tax exemptions up to a certain ceiling for all expenses named in German income-tax law, which include charges for health insurance as well as unemployment, disability, long-term care, accident insurance, and the like.7 Nevertheless, disregarding tax exemptions tends to underestimate the role of government in health financing and to overstates the role of social insurance and – to a much smaller extent – private sources. Turning to private financing, we can distinguish between private health insurance expenditure and private households’ out-of-pocket spending. The private financing share decreased in the early 1970s as social insurance expanded. Since 1975 there has been a moderate, but continuous, increase

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in private financing. Similarly, private insurance as a source of financing declined in the early 1970s and remained below six per cent until 1980. Since the 1980s private insurance has grown from six to 9.3 per cent, reflecting increasing numbers of people covered through primary private insurance as well as supplementary insurance for services no longer covered under the public system. Out-of-pocket payments decreased from 14 per cent in 1970 to less than 10 per cent in 1975, followed by slight increases during the 1980s and thereafter. Healthcare reforms, which included decisions to raise co-payments for pharmaceuticals and outpatient care, raised the share of out-of-pocket payments from 9.5 per cent in 1996 to 13.1 per cent in 2007. Sources of financing within healthcare sectors Since the public/private financing mix differs among healthcare sectors it is useful to take a closer look at various parts of the healthcare system. Because of the aforementioned time series break we have to base our analysis on two different data sources. The definitions of healthcare sectors therefore differ between the 1970–91 series and the 1992–2007 series. In the 1970–91 series, healthcare sectors are defined by functional categories as expenses for inpatient care, outpatient care (including dental care) and pharmaceuticals. On the basis of the 1992–2007 series it has been possible to separate the sectors much more thoroughly along institutional categories. We distinguish current expenditure for hospitals plus hospital investment, current expenditure for outpatient physician practices, dental practices, and pharmacies.

(b)

Inpatient services 1970–91

(a) 90 80

Social insurance

80

70

70

60

60

50 40

Social insurance

50 40

Tax financing

30

30

20 10

Hospital sector 1992–2007

90

20 Private insurance

0 1970

Out-of-pocket 1975

1980

1985

Private insurance Tax financing

10 1990

Out-of-pocket 0 1992 1994 1996 1998 2000 2002 2004 2006

Figure 6.4 Public and private financing of inpatient care/hospitals Source: Statistisches Bundesamt (1991–2001); GBE (2009ff.). 1970 to 1990 data refers to West Germany only. Health expenditure of employers has been allocated to tax financing because the bulk of expenditure is made by public employers. For civil servants, the government as an employer covers a percentage of treatment costs (Beihilfen). The hospital sector includes current expenditure on hospitals plus investment costs covered by the Länder (Deutsche Krankenhausgesellschaft 2009: 96).

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Starting with the inpatient sector (1970–91) and the hospital sector (1992– 2007) respectively, Figure 6.4 shows that throughout our observation period these sectors were overwhelmingly financed out of public sources. About 90 per cent of spending was contributed by social insurance and taxes, indicating a high degree of public responsibility in hospital care. Consequently, private funds only account for about 10 per cent of total expenditure in this sector. Although co-payments were introduced for hospital stays in 1983 (and increased through further reforms), private out-of-pocket payments remained marginal. With respect to the hospital sector, private financing has grown slowly since 1992. Private health insurance increased its share from 8.8 per cent in 1992 to 9.7 per cent in 2005. At the same time, out-ofpocket spending for hospitals increased from 1.6 to 2.5 per cent. By contrast, the public financing components have changed substantially since 1970. Tax financing decreased from about a third of total inpatient expenditure in 1970 to some 18 per cent in 1991, while the share financed out of social insurance contributions increased from 55.5 to 74 per cent in the same period. These shifts indicate a retreat of the state from direct financing responsibilities. The development can, however, only partly be explained by specific healthcare reforms. The large increase in social insurance financing of hospital services in the 1970s, for instance, results from the implementation of the KHG, which introduced cost-covering hospital allowances for the insurance funds. The decline in government funding through the 1980s is mainly a result of lower investment in hospitals, thus, a failure to respond to needs for updating hospital infrastructure rather than a consequence of policy revision. Hospital sector data (Figure 6.4b) shows that tax financing dropped further in the early 1990s as federal extra-investment into the healthcare structure of East Germany was phased out. From this point onward, tax financing continues to decline incrementally because the Länder have failed to endow hospitals according to investment needs (Rosenbrock and Gerlinger 2006: 163). If the Länder’s hospital investment had developed in line with GDP, as this was the case in the early 1990s, they would have accounted for some 5.3 billion Euros in spending in 2007. Instead, actual investment costs dropped to only 2.7 billion Euros. Summing up the yearly differences produces an investment gap of almost 19 billion Euros since 1991 (Deutsche Krankenhausgesellschaft 2009: own calculation). Other studies have estimated investment gaps even larger than 19 billion Euros (SVR 2007: paragraph 408). As a consequence, hospital owners have to bear investment costs and an increasing number of hospitals are sold to private investors. Moreover, in the long run, insufficient investment tends to increase running costs. As we can see from Figure 6.5, in the outpatient healthcare sector social insurance is also the dominant source of financing, accounting for around

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Self-Regulatory German Healthcare System 133 (a)

Outpatient care (Including dental care)

90 80 Social insurance 70 60 50 40 30 20 Out of pocket Tax financing 10 Private insurance 0 1970 1975 1980 1985 1990

Outpatient physician practices (b) 90 Social insurance 80 70 60 50 40 30 20 Tax financing Private insurance 10 Out of pocket 0 1992 1994 1996 1998 2000 2002 2004 2006

(c) Dental practices 90 80 Social insurance 70 60 50 40 30 Out of pocket Private insurance 20 10 Tax financing 0 1992 1994 1996 1998 2000 2002 2004 2006

Figure 6.5 Public and private financing of outpatient care Source: Statistisches Bundesamt (1991–2001); GBE (2009e).

70 per cent of total outpatient financing. The tax-financing share, mainly represented by public employers’ contributions to the treatment costs of civil servants and their dependents, covers less than eight per cent. According to the old classification system, private sources contributed between 17.6 and 22.8 per cent of total outpatient care spending from 1970 to 1991. Here outpatient care is defined as outpatient services delivered by physicians, dentists and other medical personnel. The decline of out-ofpocket payments in the early 1970s is related to the inclusion of dentures in the benefit package in 1972 (Alber 1992: 144). Starting with the Health Insurance Cost Containment Act of 1977, several cuts in the benefit package and co-payments entailed increases in out-of-pocket payments. Since the development of out-of-pocket spending within healthcare sectors in the 1970–91 series is based on crude estimates, further interpretations are precarious. Based on the new classification system, we can distinguish between outpatient physician practices and dental practices. The breakdown in separate categories reveals distinct financing patterns as well as similarities. Private sources of financing are more important with respect to dental care. While the financing share of private insurance is similar, out-of-pocket payments

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(a) 90 80

Social insurance

70

80

Social insurance

70

60

60

50

50 40

40 30

Pharmacies

(b) 90

Pharmaceuticals

Out of pocket

20

Private insurance 1975

1980

Out of pocket

20

Tax financing

10 0 1970

30

1985

1990

10

Private insurance

Tax financing

0 1992 1994 1996 1998 2000 2002 2004 2006

Figure 6.6 Public and private financing of pharmaceuticals/pharmacies Source: Statistisches Bundesamt (1991–2001); GBE (2009e).

account for a larger share of financing in dental practices. In 2007, almost 20 per cent of spending on dental practices was spent out-of-pocket compared to nine per cent in physician practices. The private insurance component is growing steadily in both categories and the implementation of an office fee through the GKV Modernization Act (GMG) raised out-of-pocket spending in dental and physician practices in 2004. Moreover, doctors have increasingly offered individual health services (IGeL), which are paid privately. The pharmaceutical sector is characterized by a substantial share of outof-pocket spending. Private households’ direct expenses make up roughly a quarter of total expenditure on pharmaceuticals. In 1977, co-payments for pharmaceuticals were introduced, and from then on increased regularly. Again, detailed interpretations of the out-of-pocket-spending data until 1991 are precarious. However, Figure 6.6b shows that the 1993 and 1997 Reforms resulted in an increase of co-payments for pharmaceuticals, while the Act to Strengthen Solidarity in Statutory Health Insurance of 1999 shifted the financing responsibility back to social insurance. Since the GMG 2004, patients have to co-pay 10 per cent for prescription medicine, with a minimum of five Euros (or the full price if the cost is five Euros or less) and a maximum of 10 Euro. Apart from substantial private contributions, of which private insurance accounts only for some five per cent of total spending on pharmaceuticals, the major source of financing is social insurance. The territorial axis While both international and national data sources allow a detailed analysis of the organizational axis, a description of developments on the territorial axis turns out to be more difficult. Since tax financing is of low and declining importance for the German healthcare system, only limited conclusions can be drawn from changes in tax financing between the federal (national), regional (Länder) and local (sub-national) level. The KHG of 1972 shifted

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the financing responsibility for hospital investment from municipalities (that is, hospital owners) to the regions and the federal government. At the same time, municipalities were relieved from hospital deficits, as the KHG obliged social health insurance to pay cost-covering hospital allowances. The federal government’s limited participation in hospital financing aimed to retain some control over hospital planning, which the Länder claimed as their own responsibility. In 1985, the national government withdrew from hospital financing (Simon 2000: 106f.), which can be interpreted as a process of decentralization. Besides hospital financing, taxes are used to contribute to the treatment costs of civil servants and their dependants. Since most civil servants are on the payroll of regions and municipalities, tax financing in the field of healthcare can be mainly classified as sub-national. Recently, however, the federal state has seemed willing to increase its financing share again. In 2004, a tax-financed grant to the GKV was introduced. This was financed by raising tobacco tax and justified as compensation for health service costs related to pregnancy, classified as a responsibility of society as a whole, not only GKV members (Busse and Riesberg 2004: 73). This idea is taken up by the 2007 Health Reform, which constitutes a stepwise increase of grants from the federal budget to the new health fund. The grants are legitimized to cover healthcare costs which are considered to be ‘going beyond the duties of the insurance community’, such as health costs caused by co-insured children. With respect to the GKV, the merging of sickness funds led to a centralization process (see Table 6.2). However, this development mainly involved a shift from the local to the regional level. The Regional funds (AOK), which cover almost 24 million insurants, are generally organized at Länder level. Most company-based funds – responsible for 13.5 million people – are open to regionally-defined populations (44 per cent), whereas roughly 27 per cent of them are available nationwide and the remainder are closed funds available only to certain professions or to employees of a given company (Bundesministerium für Gesundheit 2009). Only the substitute funds which cover almost 25 million people are completely accessible to potential beneficiaries nationwide. While the concentration processes represent an upward move on the territorial axis, the decline of the tax-financing share in favour of social insurance financing can be considered as decentralization because of the regional organization of the majority of GKV funds. By the same token, the increase of out-of-pocket spending supports decentralization in healthcare financing, since out-of-pocket spending takes place at the local level. On the private health insurance market an incipient process of internationalization can be detected. In 2008, 46 private health insurance companies, covering more than 99 per cent of the total private health insurance market, were members of the Association of Private Health Insurance

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Table 6.2 Number of statutory sickness funds 1970 1975 1980 1985 1991 1995 2000 2005 2008 All statutory 1815 1479 sickness funds, of which: Regional funds 399 314 (AOK) Company-based 1119 965 funds (BKK) Guild funds 178 164 (IKK) Farmers’ funds 102 19 (LKK) Sailors’ fund 1 1 (SeeKK) Miners’ fund 1 1 (BKn) Substitute funds 15 15 (Ersatzkassen)

1319

1215 1.209 960

2009

420

267

219

186

272

270

276

92

17

17

15

15

855

754

721

690

337

210

170

140

156

155

174

140

32

19

16

13

19

19

21

21

20

8

8

9

1

1

1

1

1

1

0

0

1

1

1

1

1

1

1

1

15

15

15

15

12

11

9

8

Source: Bundesministerium für Gesundheit (2006: Tab. 9.4), GBE (2009d); 1970 end of year, 1975–2008: January, 2009 August.

Companies (Verband der privaten Krankenversicherung, PKV). The three largest companies cover about 42 per cent of the population with substitutive (primary) private health insurance (PKV 2008). Since corporations such as the AXA Group and the Allianz Group are global players, a further increase in private health insurance funding would, in part, also lead to a process of internationalization. The role of the state in healthcare financing The role of the state in healthcare financing has been measured by the development of the tax funding share. Based on this, we observe a retreat of the state from healthcare financing. First and foremost the developments in the inpatient sector, where tax financing has decreased from about one third to some 10 per cent of total spending, are responsible for this retreat, but the introduction of LTCI also adds to the effect. The decline in tax financing has mainly been compensated for by social insurance funding, which today covers about 80 per cent of total inpatient financing. In the outpatient, dental and pharmaceutical sectors, the role of the state as a financer of healthcare expenditure has traditionally been inferior and has changed only marginally since 1970. In all healthcare sectors, social insurance is the dominant funding source and was even strengthened from 1970 to 2007. Since the mid-1990s, however, the relative importance of private

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funding (which had decreased from 1970 to 1975 to a level of about 15 per cent) has expanded. In 2007, private insurance contributed 9.3 per cent and out-of-pocket payments a further 13.1 per cent to overall health financing. Most notably, a process of privatization has taken place in the fields of outpatient physician and dental healthcare, where patients today cover between 23 and 35 per cent privately. In the pharmaceutical sector, where private financing fluctuates at around 30 per cent, the privatization trends of the 1980s and early 1990s have been stopped and partially reversed for the time being. Changes on the territorial axis are more difficult to assess. The increased importance of social health insurance funding and of growing out-ofpocket outlays indicates a process of decentralization with regard to healthcare financing. At the same time, however, the statutory sickness funds are undergoing concentration processes and supra-regional mergers occur. Moreover, the importance of private health insurance has increased, dominated by corporations that operate partly at an international level. This incipient process of internationalization also contributes to a weakening of the national level.

The service provision dimension The main purpose of this section is to measure the role of the state in providing health services. We therefore use the public service provision index (PPI) introduced in Chapter 4 of this book. Since we have data on nonprofit and for-profit providers in Germany, we will also produce a modified version of the PPI, which takes into account the trichotomous classification of service providers developed in Chapter 2. In order to do so, we quantify the weight of each healthcare sector. In a further step, we take a closer look at the public/private-mix within each sector before combining both sources of information in the PPI. After having discussed changes on the territorial axis, we summarize the changing role of the state in health service provision. However, before turning to the public share of service provision and the PPI, we first provide some information on the total level of health services. The level of health service provision For a brief description of health service levels we focus on three indicators: total health employment density, physician density and hospital beds per 1,000 of population. The general trends of these indicators can be derived from Figure 6.7. Hospital bed density increased in the early 1970s, contributing to the expansion trends described earlier in this chapter. In the mid1970s the number of hospital beds started to decline. In contrast, physician density has been growing continuously, and total health employment density has also increased considerably since 1990.

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Index 2000 = 100 (Based on hospital beds, practicing physicians, and total health employment per 1,000 of population)

130 Hospital beds (General hospitals)

120 110 100 90

Total health employment

80 70

Practicing physicians

60 50 40 1970

1975

1980

1985

1990

1995

2000

2005

Figure 6.7 Hospital beds, health employment and physicians per 1,000 of population Source: Bundesministerium für Gesundheit (1991) for the years 1970–89; GBE (2009c; 2009f) for hospital beds and practising physicians; OECD (2009) for total health employment.

Employment in the health sector includes, of course, not only the medical profession but all kinds of paramedical personnel such as nurses, physiotherapists and chiropractors. Given the differences in qualification and hence earnings for the various categories of personnel, total health employment is only a crude but nevertheless useful indicator of the manpower input to the health system (Wendt and Thompson 2004). While in other countries the expansion of health employment is mainly driven by the growing number of health service providers in the inpatient sector, in Germany healthcare providers mainly work in the outpatient sector. Total health employment has increased from 36.5 to 52 per 1,000 of population since 1991, while hospital employment declined from 15 to 14.4 per 1,000 during the same time span (OECD 2009). Since for many years not only general practitioners but also specialists were free to establish their own practices, Germany also experienced a steep increase in practising physicians. The index of physician density shown in Figure 6.7 more than doubled between 1970 and 2007. With 3.8 practising physicians per 1,000 of population in 2007, the German healthcare system is very well endowed with physicians by international standards (GBE 2009c; Wendt 2009). While the level of healthcare personnel has escalated, the number of inpatient beds has declined. From 1991 to 2007 the number of acute-care hospital beds decreased from 7.5 to 5.7 beds per 1,000 inhabitants. Compared to other OECD countries this decline has been relatively modest, and in

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the beginning of the 21st century, capacities with regard to acute hospital beds were still about 50 per cent above the EU-average (Figueras et al. 2004). Developments across healthcare sectors When analyzing the allocation of funds among healthcare sectors we see that outpatient care, which mainly includes outpatient physician and dental services, consumes the main share of personal expenditure on healthcare (see Figure 6.8).8 Spending on outpatient care has declined continuously since 1980 from about 40 per cent to 31.2 per cent in 2007, mainly due to less expenditure on dental services (not shown). Since 1992 most resources have been devoted to inpatient care, though resources spent on inpatient rehabilitative and curative care have also declined in favour of long-term care. In 2007 about 32 per cent of personal health expenditure was devoted to inpatient care. Medical goods (including pharmaceuticals) account for 20 to 23 per cent of total resources. The respective expenditure share increased in the 1980s and after a decline in the early 1990s currently reaches a level of about 23 per cent of total spending. The public/private-mix of service provision within healthcare sectors In order to evaluate the public/private-mix within healthcare sectors we have to categorize services along the public/private axis. For this purpose,

Resources in % of personal health expenditure

40 35 Inpatient care 30

Outpatient care

25 20

Medical goods (Pharmaceuticals)

15 10 Inpatient longterm care

5

Outpatient longterm care 0 1970

1975

1980

1985

1990

1995

2000

2005

Figure 6.8 Percentages of resource flows in all sectors Source: OECD (2009). Break in time series 1991. Outpatient care includes physician services, dental services other outpatient services and ancillary services. Medical goods include pharmaceuticals and therapeutic appliances.

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we use the employment status of doctors, dentists and pharmacists in the outpatient and pharmaceutical sectors. Self-employed professionals are classified as private, while the employment status ‘public employee’ stands for public provision. The inpatient sector is classified by ownership categories. The degree of public penetration with respect to service provision is then approximated by the share of inpatient beds owned by public institutions. Therefore, with respect to privatization tendencies in service provision we focus on material changes as opposed to formal or functional categories (see Chapter 4). In the outpatient sector of the German healthcare system almost all health service providers can be defined as ‘private’. The incomes of panel doctors, dentists, pharmacists, and other outpatient service providers are determined to a large extent by negotiations between corporatist actors or by state regulation. However, these healthcare professionals work as private service providers on a contractual base and not as employees of public or social insurance institutions (Pfaff and Kern 2005: 211). Also, office-based physicians and other healthcare providers in the outpatient sector run their practices at their own financial risk (Greiner and von der Schulenburg 1997). This, however, does not mean that office-based doctors provide healthcare services exclusively for private patients. In 2003, out of 132,400 active physicians in ambulatory healthcare, only a minority of 6,600 provided services solely for privately insured patients (Busse and Riesberg 2004: 96). At the same time, roughly 3,500 physicians are employed by the municipal public healthcare services (ÖGD), which are primarily responsible for the promotion of public health (Walter 2005: 1100). Hence, a minor share of physicians in the outpatient sector could be classified as ‘public’. Since there is only little information on the development of numbers of physicians in ÖGD-employment and due to their negligible share, we continue to classify the outpatient sector as private.9 Medical goods, mainly pharmaceuticals, but also including therapeutic appliances, are provided entirely by private companies or self-employed professionals. Thus significant public service provision can only take place in the inpatient sector. Inpatient care and long-term care is delivered by public, private non-profit, and private for-profit institutions. Public hospitals are mainly owned by municipalities and Länder (university hospitals, psychiatric hospitals); public nursing homes are in general owned by municipalities. The second group of facilities consists of private non-profit institutions, most of them in the ownership of charitable institutions. Traditionally, many private for-profit hospitals have been owned by renowned medical specialists. Nowadays, however, this group of providers is dominated by hospital chains. Similar developments can be observed for nursing homes. Outpatient long-term care is almost exclusively provided by private for-profit (45 per cent) or nonprofit providers (53 per cent) (GBE 2009a). The relative weight of each type

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of provider is measured by the number of hospital beds, in order to control for different sizes of hospitals. By the same token, places in nursing homes and the number of recipients of outpatient long-term care by provider are used to measure the public/private-mix. Figure 6.9 gives respective figures for the inpatient care sector. As we can see from Figure 6.9a, before 1990 the share of public, private non-profit and private-for-profit hospital beds was fairly stable. From the mid1990s, however, a strong increase in private for-profit beds and a decrease in public beds, and more recently also of private non-profit beds, can be detected. The process of German unification led to an increase in public at the expense of private non-profit providers. In Figure 6.9a, this is reflected by the jump in both curves from 1989 to 1991, with the curves from 1991 onwards representing a unified Germany. Since then, the number of hospital beds in private for-profit hospitals has increased from 24,000 to more than 70,000, while the respective numbers in public and private non-profit hospitals have decreased by about 176,000 beds. Consequently, the share of private for-profit hospital beds as a percentage of total hospital beds has more than tripled from four per cent in 1991 to 15 per cent in 2007. While throughout the 1990s private for-profit and non-profit owners increased their share at the cost of public hospital owners, since about 2000 the share of private non-profit hospital beds has declined. In contrast, the rise of forprofit provision has recently accelerated. Considering nursing homes (Figure 6.9b), public ownership has traditionally been low, accounting for less than 30 per cent of nursing home places in 1969, while more than 60 per cent of places in nursing homes were owned by private non-profit providers. Responsible for 10 per cent of nursing home

Inpatient hospital beds by ownership 60

70 Public hospital beds

50 40 30

Private non-profit hosptial beds

20 10

Places in nursing homes by ownership

(b)

70 Places in nursing homes according to ownership

Acute Care Hospital Beds According to Ownership

(a)

Private for-profit hosptial beds

0 1970 1975 1980 1985 1990 1995 2000 2005

Private non-profit nursing homes

60 50 40

Private for-profit nursing homes

30 20 10 Public nursing homes 0 1970 1975 1980 1985 1990 1995 2000 2005

Figure 6.9 The inpatient care sector by ownership category Source 6.9a: Bundesministerium für Gesundheit (1991). Acute-care beds, beds planned until 1985, and the years 1979 and 1981 filled through linear interpolation. Beds in general hospitals since 1991 reported by Statistisches Bundesamt (2008a) and earlier issues. Source 6.9b: 1969–94: Schölkopf (2000); 1969: residents; 1999–2005: GBE (2009b); missing values interpolated.

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places, for-profit providers have been strong compared to their representation in the acute-care hospital sector, even as early as the 1960s. Over the last decades non-profit providers have by and large maintained their share, while public providers and for-profit providers have changed positions. In 2007 about a third of places in nursing homes were owned by for-profit institutions, while the public share has declined to 6.8 per cent by 2007. In the 1990s the process of privatization in the hospital sector mainly took place in East Germany in the form of takeovers by private hospital chains of (local) public hospitals that were running into financial difficulties. Since 2000, however, in a second wave, West Germany has also become the target of privatization, and in 2005 the university hospitals of Marburg and Gießen were first merged and in 2006 sold to Rhön Klinikum, a private hospital chain. Thus, for the first time teaching and research facilities were privatized, indicating that material privatization is no longer a matter for small hospitals only. The new hospital financing scheme, the G-DRG (German Diagnosis Related Groups) system, will have the effect that hospitals with costs above the regional average will accumulate losses and may in the long run either close down or become privatized (Rosenbrock and Gerlinger 2006). Private hospital chains are particularly strong in East Germany, with a market share (hospital beds) of up to 53 per cent (MecklenburgVorpommern). However, even in the (West German) city of Hamburg, more than half of all hospital beds are in private for-profit ownership now (Statistisches Bundesamt 2009b). These data reflect fundamental changes in the German hospital system, and the steep increase in share of private for-profit hospital beds in the last years can be seen as the beginning of an ongoing trend (SVR 2007). Thus, in inpatient care we find a clear tendency towards (material) privatization, though starting from a very moderate level. Additionally, there has been considerable formal privatization, especially in the last decade. From 2003 to 2007 the share of public hospitals under private law has almost doubled from 31 to 56 per cent, while the share of hospitals directly run by local authorities has more than halved from 54 per cent in 2003 to 24 per cent in 2007 (Statistisches Bundesamt 2005: table 2.1; Statistisches Bundesamt 2008a: table 2.1). Moreover, as in many other countries, functional privatization can be seen to occur, since operational activities in hospitals such as cleaning and laundry and hospital management have been outsourced to private for-profit providers (Busse and Wörz 2004: 85f.). The public service provision index Combining the information on the weight of sectors and the public/private-mix within healthcare sectors, we can construct the public service provision index (PPI) introduced in Chapter 4, which helps us measure the

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Table 6.3

Trichotomous Index of Service Provision (TIP) 1970 1975 1980 1985 1989 1992 1995 2000 2005 2007 Trend

Public Service Provision Index (PPI)

19.2

20.8

20.3

20.5

20.6

21.8

21.4

19.3

17.7

16.6

Minus

Private Non-Profit Provision

17.0

17.9

17.2

18.1

18.3

18.4

20.7

21.4

19.9

19.4

Plus

Private For-Profit Provision

63.8

61.3

62.5

61.5

61.0

59.8

57.8

59.3

62.4

64.0 Plus

Source: See Figures 6.8 and 6.9.

changing role of the state in service provision. The development of the indicator is displayed in Table 6.3. Moreover, this indicator also allows us to distinguish between private for-profit and private non-profit provision, which is why it is referred to here as the ‘Trichotomous Index of Service Provision’. The trichotomous classification shows that private for-profit providers, mostly located in the outpatient, dental, and pharmaceutical sectors dominate healthcare delivery. In 2007, for-profit provision accounted for about 64 per cent, while private non-profit services represented 19.4 per cent and public provision 16.6 per cent of all services. In the early 1970s public provision increased its share, since more resources were devoted to inpatient care. From 1975 to 1990 the Public Provision Index (PPI) is fairly constant at about 20 per cent, which means that, weighted by their financing share, about one fifth of all health services were provided by public institutions. The integration of the new Länder raised the index to almost 21.4 per cent, as both the share of resources devoted to inpatient care and the share of public hospital beds increased. Since then the observed privatization trends have caused PPI to decline to 16.6 per cent in 2007. There are two reasons for this drop of the index by more than 20 per cent of its already small value over the last decade: apart from the privatization of public hospitals and nursing homes (explicit privatization), public provision also decreases implicitly as medical goods and the long-term care sectors, which are dominated by private providers, attract a higher share of resources (implicit privatization). The territorial axis Nearly all service providers and institutions in Germany can be defined as sub-national. Public hospitals are in general owned by the Länder or municipalities, and private non-profit hospitals are organized at the sub-national

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level too. Within the past few years, however, an increasing number of hospital mergers have taken place, not only in the private for-profit sector but also in public and private non-profit hospitals (SVR 2007; Wambach 2006). The latter still operate at a regional or local level. In the case of private forprofit hospitals, however, a centralization process is currently taking place. Private for-profit hospitals are increasingly owned by hospital corporations which operate on a national level (Rosenbrock and Gerlinger 2006: 138). The four largest private for-profit hospital chains (Asklepsios-Kliniken GmbH, Rhön-Klinikum AG, Sana Kliniken AG, Helios AG) provide more than 70 per cent of all for-profit beds in hospital chains and nearly 50 per cent of all private for-profit beds (Table 6.4). Some of these corporations even have the potential to operate on an international level or already do so, such as the Swiss Ameos Group and the Swedish Capio Group (that has taken over Deutsche Klinik). At present, however, most health services are still delivered by sub-national service providers and institutions. Apart from a potentially higher involvement of international hospital corporations, the distribution of pharmaceuticals by international pharmacies may also be a future trend. But international corporations such as the internet company ‘Doc Morris’, which is now operating a franchise model, are still allowed to sell only non-prescription drugs, and the distribution of prescription drugs is still limited to pharmacies at the sub-national level. Until 2003, pharmacists were not allowed to own more than one pharmacy and even now, may own no more than four. Therefore, even after the ‘liberalization’ of the pharmaceutical market through the GMG 2004, which allowed e-commerce in pharmaceuticals under strictly regulated conditions (Busse and Riesberg 2004), the creation of larger pharmacies operating at a national level is still not possible. Between January and July 2004, however, 600 pharmacies obtained licenses to trade pharmaceuticals via the internet and about 5,000 pharmacies are now members of Aponet, established by the Federal Association of Pharmacists’ Organizations, the largest network of internet-based pharmacies in Germany (Busse and Riesberg 2004). Thus, while their effects are still limited, trends towards (inter)nationalization are taking place and are expected to continue. The changing role of the state in service provision According to the public service provision index (PPI), health service in Germanys are overwhelmingly provided by private actors and/or institutions. Within the past four decades the dominance of private providers, already high, has even increased (the PPI declined from 19.2 per cent in 1970 to 16.6 per cent in 2007). This indicates a weak and even a declining role of the state in the direct provision of healthcare. The strong role of private healthcare providers is strongly related to the fact that not only general practitioners but also specialists provide medical care in private settlements and that, until the early 1990s, panel doctors’ associations held

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Number of hospitals and hospital beds in private for-profit hospital chains

37 37 29 23 16 10 8 8 6 5 4 4 4 191 424 615

19.4 19.4 15.2 12.0 8.4 5.2 4.2 4.2 3.1 2.6 2.1 2.1 2.1 100.0 – –

6.0 6.0 4.7 3.7 2.6 1.6 1.3 1.3 1.0 0.8 0.7 0.7 0.7 31.1 68.9 100.0

Source: Own calculations based on data from Bruckenberger et al. (2006: 61).

Asklepios Rhön Sana Helios Paracelsus Medclin Ameos Fresenius SRH Humaine Damp Medigreif Deutsche Klinik Total Other private Total

11,027 10,717 5,600 8,981 2,386 1,382 1,812 1,287 2,487 1,470 1,277 616 418 48,137 27,049 75,186

22.3 21.7 11.3 18.2 4.8 2.8 3.7 2.6 5.0 3.0 2.6 1.2 0.8 100.0 – –

14.7 14.3 7.4 11.9 3.2 1.8 2.4 1.7 3.3 0.2 1.7 0.8 0.6 64.0 36.0 100.0

298 290 193 390 149 138 227 161 415 294 319 154 105 – – –

Selected private Number of As percentage of As percentage Number As percentage As percentage Average hospital chains hospitals selected hospital of all private of hospital of selected of all private number of beds in 2005 chains hospitals beds hospital chains hospital beds per hospital

Table 6.4

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the monopoly in outpatient health services. The inpatient sector, which for many years was characterized by a minor role of private for-profit hospitals, has experienced a considerable increase of such providers since the mid-1990s, while at the same time the share of all resources going to the inpatient rehabilitative and curative care sector has been declining. On the public/private axis we therefore see an increase in the already high share of private (for-profit) service provision, in particular between 1992 and 2007. This process has been accompanied by formal and functional privatization. Some of these developments also affect the territorial axis, and although most healthcare services are still provided at regional and local levels, the increasing importance of private hospital chains indicate an incipient (inter) nationalization of certain parts of healthcare provision.

Regulation In the German healthcare system, regulation has traditionally been largely delegated to non-governmental actors, according to the principle of corporatist self-government. This principle is applied to sickness funds (Kassenselbstverwaltung), where elected representatives control the professional management of the fund. It is also applied to the physicians (kassenärztliche Selbstverwaltung), where elected representatives run powerful associations of panel doctors and medical associations (Ärztekammern). Finally, it is applied to the interaction of providers and funds, where mutual self-regulation operates in several arenas (gemeinsame Selbstverwaltung). GKV institutions decide, through self-regulation, issues such as reimbursement, conditions for service provision, benefit packages, and so forth. The state, however, defines the scope of self-regulation and has the authority to monitor the regulatory actors and, if necessary, to intervene directly in the otherwise largely state-independent system. In contrast, competition and other market mechanisms had hardly been institutionalized until the 1990s (Döhler and Manow 1995: 140). The outpatient sector is particularly important for understanding the specific characteristics of the German healthcare system, as it also served as a model for regulation in the hospital sector. Forming an important part of the outpatient sector, the associations of panel doctors, for example, are not only negotiating partners of the sickness funds’ associations for regulating the healthcare system, but they are also interest groups looking for income opportunities for physicians and safeguarding their professional autonomy. Since they are legally charged with guaranteeing healthcare provision in the ambulatory sector, they have to ensure that their members provide services that are medically suitable and efficient. A wide range of research has concentrated on this self-regulatory core of the German health insurance system, which has been considered the major reason for the slow pace of structural health reforms (Rosewitz and Webber 1990). In contrast, the

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adaptability of the self-regulatory system has been interpreted as a result of concessions made by panel doctors at the cost of short-term income opportunities in order to prevent structural reforms that would in the long-run reduce their veto power. Since the institutional arrangements of the selfregulating system could always be changed by the legislative process, the ‘threat’ of state intervention has at all times been a motivation for autonomous actors to regulate the healthcare system in line with government policy. Interventions have been more frequent in the aftermath of the switch to austerity policies in the late 1970s, producing a ‘corporate system under stress’ (Behagel 1994). More specifically, from the early 1990s onwards, the intensity of state intervention has increased and the time periods between healthcare reforms have become shorter (Moran 1999). The original idea behind these interventions, however, was not to establish the state as a third partner in the negotiating system of sickness funds’ and panel doctors’ associations but to stabilize and strengthen the existing modes of self-regulation (Döhler and Manow 1995). This only changed when competition was introduced as a new form of co-ordination. The following overview of six areas of regulation (coverage, system of financing, remuneration methods, access of service providers to the healthcare market, access of patients to service providers, and contents of the benefit package) will show that the introduction of market principles should not be considered an isolated episode, but that these principles tend to spread from one area of regulation to others. Together with more direct state influence and, on the territorial axis, a tendency towards decision-making at higher levels, this leads to a new mix of state regulation, corporatist selfadministration, and competition within Germany’s healthcare system. Coverage The history of Germany’s GKV is a history of continuously increasing inclusion (Alber 1992). When founded in 1883, the GKV merely covered blue collar workers. In 1930 and 1931, non-employed spouses and children of sickness fund members were co-insured free in the GKV – a situation which still holds today. Since 1941, pensioners have been covered as well – with only parts of the contribution rate at the start, but a full contribution rate since 1989. In the 1970s, farmers, handicapped persons, students, and artists were incorporated into the GKV (Alber 1992: 59). As a result, in 1981 90 per cent of the population was covered via GKV. As Table 6.5 reveals, today less than half of all GKV insured belong to the group of mandatory insured employees. Far from being a pure workers’ insurance, the current system covers employees, some self-employed who may insure themselves voluntarily, as well as people receiving unemployment benefits and persons who are not members of the labour market at all, such as dependent family members and pensioners. Figure 6.10 shows the development of coverage over our observation period. It reveals a declining share of the number of co-insured family

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members, mainly due to low birth rates and increasing female labour market participation. The continuous growth in the share of privately insured in the 1980s was disrupted by re-unification, as there were few employees in East Germany with an income above the income ceiling that would allow them to opt out of the GKV. From 1991 onwards, however, the share has continued to rise. The share of the uninsured, finally, has always been less than two per cent and is therefore hardly visible in the graph. Since the early 1970s, the share of uninsured has fluctuated around 0.3 per cent. The basic principle of entitlement to treatment on the basis of former contribution payments still holds in general, but has been transformed. Under certain circumstances, contributions paid by spouses or parents also entitle an individual to benefits, as do contributions paid by other social insurance institutions (see Henke 2001). Traditionally, people living on means-tested social assistance were not covered by the GKV, but they could continue in membership if they had already been a GKV member for a certain time before claiming welfare benefits. This applied to 80 per cent of social assistance recipients. For the remaining population, the municipalities paid bills issued by hospitals or doctors directly, as part of social assistance. Since the GMG 2004, however, sickness funds also cover people on welfare, but pass the resulting costs to the municipalities for reimbursement (Rosenbrock and Gerlinger 2006: 99). Though still upholding the insurance principle, the

Table 6.5 Healthcare coverage of German population in 2007

Population Social health insurance (total) Consisting of Mandatory members Voluntary members Pensioners Family members insured free of contributions Other insurance Private substitutive insurance Coverage by government programme (Military, police, prisoners, etc.) Uncovered Coverage not specified (Non-response)

In thousands

As percentage of total population

82,257 72,479

100 88.1

30,378 4,633 17,368 20,099

36.9 5.6 21.1 24.4

114 8,696 392

0.1 10.6 0.5

196 494

0.2 0.6

Source: Statistisches Bundesamt (2008b); Figures for mandatory members, voluntary members and pensioners are own estimates based on KM6 statistics of the German Ministry of Health (GBE 2009g).

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Coverage in percentage of population

100 90 Social health insurance

80 70 60 50 Co-insured family members

Mandatory members

40 30 20

Covered by government program

Private health insurance

Uninsured

10 0 1966

Figure 6.10

1971

1976

1981

1986

1991

1996

2001

2006

Coverage in percentage of total population

Source: Unpublished tables provided by the Federal Statistical Office, based on German Microcensus, missing values interpolated, own depiction.

GKV has been transformed into an almost universal system, covering about 90 per cent of the population. The health expenses of civil servants are partly (between 50 and 70 per cent) directly covered by a publicly financed scheme (Beihilfe); for the remaining costs civil servants usually subscribe to substitutive private insurance.10 The state also provides special schemes for police, military, and other officials, and there are also tax-financed governmental healthcare schemes for prisoners and immigrants seeking asylum. The self-employed are not compulsorily covered by the GKV, but may opt to become voluntary members, which more than half do (Fuchs 2000).11 For many years, only white collar employees with an income above a certain threshold were allowed to opt out of the GKV, but under the Healthcare Reform Act of 1989 (GRG) this option was extended to blue collar employees with an income above the annually adjusted ceiling (Versicherungspflichtgrenze, 48,600 Euro per year in 2009). While in the 1970s the GKV was opened up to include some low-income and/or high-risk groups, in the 1990s certain high-income and low-risk groups were given an exit option – both having negative fiscal implications for GKV. As a percentage of the total population, however, the coverage rate of the GKV has remained relatively constant. From 1980 to 1990, the rate decreased from more than 90 per cent to about 86 per cent. After German unification, coverage through GKV once again accounted for nearly 90 per cent of the population and, until 2007, basically remained at this level (see Figure 6.10).

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Turning to private insurance, we find that in 2007 10.6 per cent of the population held substitutive private insurance. A further 17.5 per cent are estimated to own complementary private insurance (OECD 2009). The proportion of people with substitutive private insurance decreased from 9.5 per cent in 1970 to 7.0 per cent in 1976, followed by an increase to 11 per cent in 1990. In East Germany substitutive private insurance was only introduced after re-unification, leading to a growing share from 0.9 per cent in 1990 to 4.1 per cent in 2000 (Bundesministerium für Gesundheit 2001: 22, 365). For the whole of Germany the share rose from 8.8 per cent in 1991 to 10.6 per cent in 2007 (see Figure 6.10). All in all, the vast majority of the population is still assigned to the GKV, private health insurance, or a government programme. Most of the few who are allowed to choose between schemes in practice have no choice since given their occupational status, family size, income and health status, either the private or the statutory health insurance is clearly superior. Thus, Germany’s healthcare system is universalistic in the sense that almost everyone is covered, but is still a fragmented system with varied arrangements for coverage. Today, the idea that all members of society should have access to the healthcare system, even those who are financially not in a position to pay public contribution rates or private insurance premiums, is strongly rooted in German health policy. Due to changes in the labour market, leading among other things to a growing share of freelancers, the number of uninsured has been growing over the last decade. Among those uninsured both the fairly rich and the poor are overrepresented. The latter gave rise to some concern, so mandatory universal coverage was seriously considered for the first time in recent years (Greß et al. 2005c). Indeed, the 2007 Reform introduced an obligation to insure, coming into effect in January 2009 and implying (de jure) universal coverage (Wille and Koch 2007: 23f.). In a way this reform can be regarded as the last step in an inclusion process lasting more than 100 years. Interestingly, however, universal coverage of the population is reached by making use of both statutory and private health insurance. Both systems now have to offer membership to uninsured people who have been insured with them before. For private health insurance this means that they also have to accept bad risks and insure them under a basic tariff without risk assessment or an additional premium for bad risks. The recent reform is therefore one example among many of public regulation of private health insurance undertaken for social purposes – a phenomenon which blurs the borderline between social and private insurance. With regard to the mode of regulation, we find that coverage is determined by hierarchical state regulation rather than by corporatist self-regulation. Changes in GKV coverage have been brought about by legislation, while sickness funds have no respective competences. The income ceiling defining mandatory GKV membership is adjusted in line with growth of average

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earnings following a formula that is determined politically. Only a small minority of the population is allowed to choose between private substitutive health insurance and GKV, the vast majority being assigned to either the private or the public domain. For those who are entitled to choose, there is in practice little room for choice. Thus, there is hardly any competition between private and statutory insurance (Fuchs 2000). However, in the last decade, following the introduction of a free choice between sickness funds, competition between statutory sickness funds has become fierce. Analyses with data from the German Socio-Economic Panel (G-SOEP) reveal that the proportion of insurants switching from one sickness fund to another increased from four to six per cent per year between 1997 and 2004 (Andersen and Grabka 2006). Since 1997 more than one quarter of all insured have switched their sickness fund (Braun et al. 2006). Contrary to expectations that there would only be an insignificant amount of switching between funds (see, for example, Ullrich et al. 1994) there have been so many switches that the Risk Structure Compensation Scheme Reform Act 2002 made switching between sickness funds more difficult. Insurants may only leave a sickness fund after a minimum insurance period of 18 months, unless the fund raises contribution rates. The reason for this was considerable cream-skimming (Höppner et al. 2006) due to an incomplete risk structure compensation scheme (RCS) (Bundesministerium für Gesundheit et al. 2002). As a result, good risks, in particular, have been switching insurance funds, leading to further disaggregation of risks. As short-term remedies, a high-risk pool and disease management programmes (DMPs) (for details, see Greulich et al. 2002) have been introduced, and chronically ill patients enrolled in a DMP have formed a separate group within the RCS and yield higher transfers for the respective sickness fund. Thus chronically ill patients are no longer seen as bad risks for sickness funds. In the medium and long run, however, the transformation of the RCS into a morbidity-oriented RCS was decided upon and later introduced in 2009.12 Ironically, competition between private insurance companies is less developed. They do compete for new contracts, but once the insured stays with a company for a couple of years, switching insurance companies involves excessive costs. This is due to the fact that private substitutive insurance contains an element of capital-funding. The basic idea is that – compared to their average age-related costs – the insured pay a higher premium at a younger age to build up a capital stock. This stock is used to stabilize the premium in old age (Rothgang et al. 2007). If an insured person switches to another company, however, he/she stands to lose the capital stock, a rule that means that the insured is a captive consumer. The 2007 legislation contained some regulations forcing private insurance companies to release part of the capital if the insured moves to another insurance company. By and large, however, it is still not attractive to switch insurance companies

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once you have been insured for a couple of years. Thus the private insurance market for ‘old’ insurance contracts is not competitive. The 1993 GSG has thus introduced a new mode of coordination for the coverage of the population. While the assignment of people to either private or social insurance is still determined by state regulation, the decision as to which public sickness fund to join is now a matter of choice and is regulated by competition among funds. Moreover, the introduction of competition among funds has triggered reforms which have led to a change in the risk structure compensation scheme and the introduction of disease management programmes. As DMPs relate more to the relationship between the insured and service providers, it becomes clear that competition among funds has also spread to other relations between stakeholders in the system. System of financing The analysis of the financing dimension has shown that four sources of financing are of importance in the German healthcare system: social insurance contributions, tax revenues, private health insurance premiums, and private out-of-pocket payments. These means of financing are regulated to varying degrees at the national level by state actors/institutions, and are also delegated to varying degrees to the self-regulatory system and open to competition. Social insurance contributions are income-related. They are calculated as a percentage of certain parts of income. Income is only taken into account up to an annually adjusted ceiling (Beitragsbemessungsgrenze, 44,100 Euro per year in 2009). Income beyond this ceiling is not liable to contributions. The combination of income-related contributions and a uniform entitlement for all insured leads to ex ante redistribution from rich to poor, from younger to older insured, from singles to families (which is welcomed as financing through solidarity (cf. § 3 Social Code Book V), from men to women and, finally, from some birth cohorts to others (Moog and Raffelhüschen 2006). Generally speaking, contributions are based solely on income from gainful employment, pensions (including occupational pensions) or unemployment benefits, but not on income from other sources such as assets or income from rent and leases. The rules are, however, different for voluntary members and for pensioners who are voluntary members. For the latter, all other income is automatically contributory, while for the former, the respective sickness fund is free to determine its regulation, which must always have regard to the economic potential of the insured. Thus, sickness funds have some discretion about what is considered as contributory income, but only for voluntary members. As a rule, the contributory income is legally fixed. The income ceiling is also legally fixed and automatically adjusted by decree, in line with average wages.

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Cost sharing between employers and employees is also defined by state regulation. Traditionally both have paid an equal contribution (principle of parity). With effect from July 2005, the GMG introduced a special contribution rate of 0.9 percentage points to be paid by employees alone, while the general contribution rate was correspondingly cut (cf. Becker and Busse 2007: 27f.). Thus the cherished principle of parity was broken, though the difference between employers’ and employees’ contribution is still small. With both the contributory income and the income ceiling being legally determined, sickness funds can only influence financing by fixing the contribution rate. The right of the individual sickness fund to do so has therefore been considered as one of the basic principles of Germany’s GKV (Döhler 1994). Over the last decade this privilege has come under siege. On the one hand, direct state intervention has become fiercer: as part of the Health Insurance Contribution Rate Exoneration Act from 1996, all sickness funds were forced to cut their contribution rates by 0.4 percentage points. The same procedure was repeated as part of the GMG of 2004. The most recent GKV-WSG Act introduced a legally fixed universal contribution rate for all sickness funds from 2009 onwards (Henke 2007). In order to cover deficits, individual funds may now collect an additional contribution, which may either be income-related or a lump-sum. Funds that levy additional contributions above 8 Euro must consider the insurant’s earnings, as the add-on is restricted to one per cent of his income liable to contributions. In sum, we see a growing direct involvement of the state in determining contribution rates, in order to stop them from growing. The fixing of the contribution rate has become even more important for sickness funds as the GSG 1993 introduced a free choice of sickness funds for almost the entire population, taking effect in 1997. Since benefits have remained almost identical and all the funds’ peak organizations have made identical collective contracts with providers, the level of contribution rates has been the main incentive for insured persons to change their sickness fund. Free choice of sickness funds was combined with the introduction of a risk structure compensations scheme (RCS), whereby ‘risks’ were calculated with respect to gender, age, income level, the number of co-insured persons, the amount of sick pay insured, and according to whether invalidity pension was received (Dixon et al. 2004).13 As a result there was a strong convergence of contribution rates among different sickness funds and branches of sickness funds. Since morbidity has been adjusted only indirectly – via age and sex – sickness funds still had a strong incentive to compete for ‘good’ risks rather than for the most effective use of resources. In order to reduce creamskimming, in December 2001 the RCS Reform Act was passed stipulating the introduction of a morbidity-oriented RCS by January 2007. Moreover, as a short-term response, the Act introduced a pool that co-financed expenses of insurants who had incurred particularly high costs (over 20,450 Euros per year). The Act also defined higher allotments from the RCS for patients

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enrolled in Disease Management Programmes (DMPs). These DMPs could be set up for any of a set of six major chronic diseases. After a commissioned expert report was submitted (Reschke et al. 2004), the way for the introduction of the morbidity-oriented RCS by 2007 seemed clear, but its introduction was delayed until 2009 because of struggles over the technical implementation and incentives for prevention as well as political differences (for the issues at stake, see Göpffarth and Henke 2007). By and large, the introduction of competition among sickness funds has strengthened their interest in stable contribution rates. As the introduction of competition has led to numerous subsequent changes such as the reform of RCS, the introduction of DMPs, and integrated care, it can be considered as the most influential change of the 1990s: one that had a path-breaking effect. Turning to the second source of financing, we find that taxes have traditionally not been a major source of healthcare financing in the German healthcare system, particularly as there have been virtually no tax-financed grants to the GKV. In 2004, however, a tax subsidy to the GKV was introduced for the first time in order to compensate for expenses in the area of family policy which are regarded as tasks of the society as a whole and not of the GKV (Busse and Riesberg 2004: 73). In order to finance these transfers, tobacco tax was raised. In line with the GMG 2004, the tax-financed subsidy to the GKV was set at 4.2 billion Euros per year for the period from 2006 to 2011. This figure was only reached in 2006, but in a budget by-law (Haushaltsbegleitgesetz 2006) it was cut to 2.5 billion Euros for 2007. As part of the 2007 Reform, it was announced that the amount of tax transfer into the GKV would climb again, from 2.5 billion Euros in 2008 at a rate of 1.5 million a year up to a ceiling of 14 billion Euros, to be reached in 2016.14 This figure was set to mirror the expenses incurred by children insured free of charge. Once again, however, there is no technical link between those expenses and the amount of tax subsidies going into the GKV. Private health insurance, which is a third source of finance, generally follows different principles from social insurance. Premiums are calculated according to risk: age, sex, and medical conditions at the time of contracting. As premiums should remain constant over life, they are calculated in a way to build up old-age provision while the person is young (Altersrückstellungen) and use these provisions later when the premium is no longer sufficient to cover all costs (Rothgang et al. 2007). The calculation of premiums is based on current spending patterns and life expectancy. As both grow over time, premiums also rise continuously. Insurance companies are therefore tempted to raise premiums for older customers in particular, as they are captive consumers, and keep premiums as low as possible for potential new clients. In order to prevent such developments typical of private insurance, the German government has increasingly intervened. In fact, this market is now heavily regulated and the state uses private health insurance as a means of strengthening solidarity.

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More specifically, as part of the GSG 1993, from July 1994 onwards private health insurance companies have been forced to offer a ‘standard tariff’ for the elderly, comprising the standard GKV benefit package combined with a premium no higher than the maximum premium paid under GKV (Busse and Riesberg 2004; Wasem 1995).15 Moreover, following the German Insurance Supervision Act (Versicherungsaufsichtsgesetz) private insurance companies were obliged to use interests exceeding the calculated interest rates (so-called Überzinsen) to subsidize premiums for the elderly and, to this end, to institutionalize a mutual finance equalization scheme with other private insurers. At that time, 80 per cent of the gains from interest exceeding the calculated gains had to be used for this purpose. As part of the GKV-GRG 2000, this share was increased to 90 per cent. A third measure to limit premium payments for the elderly was also introduced in 2000: an additional premium of 10 per cent on all tariffs has been levied on all new contracts to stabilize premiums for the elderly. The long-term care insurance introduced in 1994 consists of two branches: social insurance for GKV members and mandatory(!) private long-term care insurance for all members of private health insurance (Rothgang and Igl 2007; Rothgang 2010). For the latter, private insurance companies had to accept several regulations previously alien to private insurance, such as obligatory underwriting even for those already in need of long-term care, capped premiums, reduced premiums for married couples, premium-free insurance for children and unisex tariffs. State regulation has thus been particularly strong. A final example of the increasing public regulation of private insurance is the reform of the by-law regulating how premiums are calculated (Kalkulationsverordnung). The starting point for this change was the EU Directive 2004/113/EC on equal insurance premiums for men and women, which states that sex-specific tariffs are only allowed if genuine differences in costs can be demonstrated, and that the costs of childbirth and motherhood must be excluded from this calculation (Rothgang et al. 2007). In 2006, the directive was implemented in national law and since 2007 the insurance costs of childbirth and motherhood are borne equally by men and women. This example not only demonstrates the increasing state regulation of private insurance but also hints at the influence of the European Union as one possible source of reform. Private out-of-pocket payments, finally, result from payments for medical goods or services that are not financed by health insurance, and from costsharing arrangements (for example, co-payments and deductibles) for goods or services covered by the benefit package. As both are matters of legislation on the national level, it is clear that the state has an influence on out-ofpocket payments. The introduction of co-payments in the 1970s was meant to deal with fiscal problems and not to counter moral hazard on behalf of the insured. Nevertheless, moral hazard has since been used as an additional

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rationale, particularly in the 1989 Reform. The introduction of co-payments and deductibles has mainly been directed towards pharmaceuticals and dental care. Under the Health Insurance Cost Containment Act of 1977, the former prescription charge was replaced by co-payments for each prescribed pharmaceutical, which were increased by stages in 1981 and 1983. The GRG 1989, which increased co-payments in all sectors of the healthcare system, introduced a system of reference prices for off-patent drugs, implemented by 1992. For drugs with a reference price, patients had to cover the difference between the actual and reference prices. From 1994, co-payments for pharmaceuticals were set according to packaging size. In 2004 the co-payment method was changed again, and patients now have to pay ten per cent of the price of each pharmaceutical, with a minimum charge of five Euros and a maximum of ten Euros. Additionally, over-the-counter drugs have with some exceptions been excluded from the GKV benefit catalogue. Moreover, the reference price scheme was extended to patented drugs. In 2006, copayments were abolished for all drugs whose price is at least 30 per cent below the reference price. With respect to dental healthcare, co-payments were raised even further. The GRG 1989 introduced co-payments of 50 per cent for dentures.16 If patients are able to give proof of regular dental care or regular dental examinations the social insurance allowance is generally raised by between 10 and 15 per cent respectively. In 1983 co-payments were also introduced for inpatient care with an amount of about 2.5 Euros per hospital day and a maximum of 35 Euros per year. The small size of the payment is a good indication of the purpose of this co-payment, which was not to steer utilization but rather to increase revenue. In 1989 these co-payments were raised to about five Euros per day, with a maximum of about 70 Euros per year. After several rounds of modification, the co-payment now stands at 10 Euros per day with a maximum of 280 Euros per year. The GMG 2004 even introduced co-payments for outpatient services. Since then, 10 Euros per quarter must be paid for a first contact at a physician’s or dentist’s office. As a result, out-of-pocket payments increased in 2004 (see Figure 6.5b). There is a long-standing tradition of exemptions from co-payments for the poor or for people with chronic illness which do not, however, apply to benefits outside the GKV benefit catalogue or to price differentials for reference-priced drugs (for details, see Busse and Riesberg 2004: 75ff.). Nevertheless, state federal regulation has continuously raised the amount of co-payments over the last decades and has thus influenced the share of private out-of-pocket financing. If all these elements are taken together, we can see that hierarchical state influence is quite strong in the system of financing. Within GKV, income ceilings are stipulated for funds, as are the types of contributory income. Traditionally the contribution rate was fixed by the funds, but with the

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introduction of competition their room for manoeuvre has diminished and even their formal right to fix rates was taken away in the 2007 Reform. Remuneration of service providers Systems for remunerating service providers differ according to healthcare sector. Therefore, in what follows the three biggest sectors are discussed: outpatient, inpatient, and the pharmaceutical sector. The outpatient sector is often seen as the paradigmatic sector for Germany’s GKV. In this sector the responsibility for securing adequate service provision rests with the regional panel doctors’ associations. Consequently, the remuneration of doctors is determined on two levels and consists of two steps: first, sickness funds and the regional panel doctors’ association negotiate a total reimbursement (Gesamtvergütung); second, the respective panel doctors’ association distributes the money to the doctors according to a fee distribution scale (Honorarverteilungsmaßstab, since 2007 Honorarverteilungsvertrag), which must take into account the amount of services provided. Over time, methods for remuneration have changed on both levels.17 In the 1960s, the distribution scale followed the fee-for-services scheme and the total reimbursement was open-ended. Thus, every additional service provided caused the overall cost to increase. Not surprisingly, this system was heavily criticized for causing supply-induced demand. The outpatient sector was therefore included in attempts to produce a revenue-oriented spending policy (einnahmeorientierte Ausgabenpolitik), as it was referred to from 1977 onwards. With the institutionalization of the Concerted Action in Healthcare, which consisted of all major (and numerous minor) actors in healthcare, an attempt was made to achieve cost containment by means of corporatist self-regulation via the regulation of remuneration.18 In order to stabilize contribution rates, the 1977 Act strengthened the bargaining power of sickness funds vis-à-vis the panel doctors’ associations. First, it established that remuneration was no longer negotiable between the individual health insurance funds and the panel doctors’ associations, but by associations of insurance funds, organized at the Länder level. Second, differences between distinct types of health insurance funds (that is, between those for white and for blue collar employees) were reduced, making sickness fund associations more homogeneous and more powerful than before. By balancing the power of sickness funds’ and doctors’ associations more evenly, state intervention has thus improved the process of equal and autonomous decisionmaking within the system of mutual self-government. The combination of budgeted total reimbursements on the first level and fee-for-services remuneration on the second level led to a vicious circle in which doctors were incentivized to inflate the services provided, which had the effect of reducing the fees that were received for such services. This again triggered another round of service inflation. This became particularly salient when sectoral budgets for all healthcare sectors were introduced in

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1993. In order to stabilize contribution rates, the growth of total reimbursement was linked to the growth of the sum of contributory income. The introduction of sectoral budgets by the state can be considered by far the strongest regulatory instrument for achieving that goal (Bandelow 2004; Busse and Howorth 1999). Although this form of direct state intervention had been temporarily suspended when the Red-Green coalition came into office in 1998, it was soon re-introduced. In order to remove incentives for doctors to inflate services, the fee-forservice remuneration was amended by various measurements to control the quantity of services provided. Generally speaking, the fee distribution scale is based on a so-called uniform valuation standard (Einheitlicher Bewertungsmaßstab, EBM), which assigns ‘points’ to services, thus determining relative prices for about 1,500 distinct services. This system of relative prices is adjusted by a Valuation Committee (Bewertungsausschuss), consisting of representatives from the federal panel association (KBV) and federal associations of sickness funds, which were established in 1977. In the wake of the GSG 1993, a sequence of regulations was enacted introducing lumpsum payments for typical standards, differentiated for general practitioners and (groups of) specialists, as well as a means to control the number of cases. In 1996, fees for certain services were therefore combined to form a general consultation fee (Ordinationsgebühr). This fee can only be charged once every three months for each patient. By 1999, one fifth of a doctor’s reimbursement was already based on the general consultation fee (Rosenbrock and Gerlinger 2006: 136). In 1997, a practice budget (Praxisbudget) was assigned to each doctor’s practice. This budget defines an upper limit for the total amount of chargeable health services for a single practice. Basically, a lumpsum for each case was set (distinguishing between pensioners and other insured). The individual budget was then defined as the product of the number of cases treated and the lump-sum per case. For services exceeding the standard volume, reduced fees could be charged. Following a ruling of the Federal Social Court, practice budgets had to be abolished in 2003 (Busse and Riesberg 2004: 178). In April 2005, as part of the GMG, a new fee schedule was established, the EBM 2000plus, which among other things reinforces the trend towards substituting single services by service complexes and lump-sums (cf. Becker and Busse 2007: 58ff.). Moreover, the fee distribution scale became subject to negotiations between sickness funds and the association of panel doctors, over which the latter had previously had exclusive competence. On the level of total reimbursement, by January 2007 a risk-adjusted regular service volume (morbiditätsorientierte Regelleistungsvolumina) was planned, aiming at a new form of risk-sharing between sickness funds and doctors (Simon 2005: 155). However, the implementation failed, leading to new regulation as part of the 2007 Reform (cf. Wille and Koch 2007: 202ff.). At the centre of the new system is a Euro fee schedule (Euro-Gebührenordnung), which assigns

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prices in Euro to services. For doctors, this means the end to a ‘floating value of points’ and more security for their income. Fixed prices, however, call for stricter control of quantities if supply-induced moral hazard is to be avoided. On the level of the individual doctor as well as on the level of total reimbursement, morbidity-oriented regular service volumes will serve this purpose. Moreover, the role of lump-sum payments has been increased. For general practitioners, only special services are remunerated according to a fee-for-services scheme; the bulk of remuneration rests on lumpsum payments, which may differ according to the age and sex of patients seen. For specialists, a basic lump-sum payment, an additional, lump-sum payment, and diagnosis-related lump-sum payments build the basis of remuneration.19 In addition, in 2006 a new scientific institute (Institut des Bewertungsauschusses) was founded to support the implementation of the new scheme. Finally, the direct influence of the Ministry of Health has grown. The Ministry may now participate in all meetings of the Valuation Committee and the Institute. All decisions of the Committee are subject to scrutiny by the Ministry, which may reject or modify them. Apart from reforms of the fee schedule within the system of corporate mutual self-regulation, options for a second more competitive pillar of service provision have been created. The Second GKV Restructuring Act of 1997 and the GMG 2004 improved the potential for pilot projects (§§ 63 ff. SGB V) and structural contracts (§ 73a SGB V), whereby the individual insurance funds (and not the federal or state insurance funds associations) are in part responsible for negotiating with doctors or groups of doctors. The introduction of options to conclude contracts for integrated care (§§ 140a ff. SGB V), however, marks a breakthrough. As part of these contracts, new remuneration schemes are possible, including new risk-sharing arrangements between providers and funds. Since 1965, physicians’ services for the privately insured have been remunerated according to a public fee schedule (Gebührenordnung für Ärzte, GOÄ) decreed by law. The value for each service is assigned in Euro. Physicians may multiply this value with a certain factor if treatment is particularly burdensome. In practice, private insurance companies accept that factor, which has thus become standard for all treatments. With respect to regulation, the remuneration of outpatient physicians has always been one of the prime examples of corporatist self-government. However, fee-for-service remuneration caused rising costs, which from 1977 onwards were regarded as unbearable, leading to the introduction of fixed total reimbursements which – together with fee-for-services remuneration on the second level – led to the deteriorating value of single services. As mutual self-government seemed to be unable to control remuneration properly, the state intervened directly in order to stabilize the system. Although the sectoral budgets must be regarded as an extreme form of state-hierarchical influence and though the Ministry was the initiator of most of the reforms

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of recent decades, mutual self-government is still the dominant feature of regulation. In the last decade, however, options for a second pillar of remuneration outside the established corporatist system have been introduced. So far, the opportunities offered by integrated care, in particular, have not been taken up excessively. The remuneration of inpatient healthcare is basically regulated in a separate law book, the Hospital Financing Act of 1972 (KHG). In the 1960s hospitals received insufficient remuneration from sickness funds. Consequently, the owners of hospitals made losses and there was insufficient investment (Simon 2000). The KHG aimed at changing this situation. It was one of the last acts in the area of expansion before the period of austerity started in 1977. The KHG introduced the cost-covering principle (Kostendeckungsprinzip) of full reimbursement, meaning that – for the first time – hospitals had the right to full reimbursement of all necessary costs. This was to be achieved by a dual financing system: investment should be covered by the state (originally Länder and the federal level together, since 1985 the Länder alone), and running costs by sickness funds on the basis of per-diem rates. Hospitals thus received a fixed amount per patient per day, irrespective of the costs for the different health of patients, patient groups, and care services delivered. Negotiations over the daily rates and (later) the number of hospital days and hospital budgets, however, take place between the individual hospitals and the sickness fund associations. As only ‘necessary’ costs are refunded, over time the negotiation system has developed ever tighter regulation to define ‘necessity’. The 1984 Reform Act modified the cost-covering principle insofar as a prospective hospital budget was agreed upon, derived from the agreed number of hospital days multiplied by the negotiated daily rates. Additional hospital days, as well as shortfalls with respect to hospital days, were only remunerated at a reduced rate. From then on, hospitals could legally make profits (and losses) (Simon 2000: 113). In practice, however, open profits have caused cuts in the next negotiation round, so there was no real incentive for increasing efficiency. Starting with the GSG 1993, a radical transformation of the hospital payment system has taken place. By 1996, a mixed payment system was introduced, which combined hospital per-diem allowances with casebased lump-sum payments and special payments (Greiner and von der Schulenburg 1997; Kamke 1998). However, only about 25 per cent of the total inpatient budget was remunerated on the basis of the new system, 75 per cent still being paid on the basis of hospital per-diem allowances (Wendt 2009). Moreover, sectoral budgets in the 1990s cut the room for manoeuvre to almost nothing. The GKV-GRG of 2000 introduced a ‘universal, efficiency-based, lump-sum remuneration system’. The task of implementing the new DRG-based system was assigned to mutual self-regulation, that is the German Hospital Association, the peak associations of the sickness

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funds, and the private insurers. Due to a roadmap that was already tight in June 2000, they agreed to building a German diagnosis-related system based on the Australian Refined DRGs (Schmid and Götze 2009). Interestingly, the development of the specific design of the DRG system was assigned to the negotiations between the above mentioned actors of mutual self-regulation. The state seemed thus willing to strengthen self-regulation in the inpatient sector. The self-governing bodies were to agree upon the DRG catalogue and the relative prices of those DRGs. In order to do so, they founded INEK (Institut für das Entgeltsystem im Krankenhaus) as the German DRG Institute in May 2001. However, since the contracting partners were not able to agree on the valuation and accounting of DRGs, for 2003 and 2004 the Ministry of Health regulated the introduction of the DRG system by decree. Subsequently, in 2005, the German Hospital Association, the peak organizations of the sickness funds, and the Association of Private Health Insurers came to an agreement. The Case Fee Act (Fallpauschalengesetz) of 2003 set out the path to the new DRG system: in 2003 and 2004 DRGs were already calculated, but the hospital budget was still determined traditionally. From 2005 to 2009 a convergence phase followed in which the share of the budget that is determined by the DRG system was gradually increased (Bruckenberger et al. 2006: 163ff.). Because of a financial incentive, 64 per cent of all hospitals had already introduced the DRG system in 2003, and from 2004 onwards, the German Diagnosis Related Groups (G-DRG) system has become compulsory for all German hospitals. However, because of the convergence phase, which has been prolonged up to 2010, the introduced unitary regional basic case fee (Landesbasisfallwert) has not yet become fully effective (SVR 2007: paragraph 415). The system of remuneration does not make distinctions according to ownership of hospitals. It is thus also valid for private for-profit hospitals. The privately insured pay the same rates as patients covered by the GKV. There are, however, extra services, mainly the choice of a single or a two-bed room, rather than a standard room which normally contains about three or four beds, and the choice of doctor. These extra services can be chosen by all patients, but the fees are mostly included in private health insurance and are not part of the GKV package. The shift towards a DRG-based remuneration system is certainly the biggest change the hospital sector has experienced since the introduction of the KHG 1972 (Becker and Busse 2007: 53). With respect to regulation it has, first, strengthened the system of mutual self-regulation as the various actors are responsible for the fixing of the unitary regional basis fee (Simon 2005). In particular, when compared with the system of sectoral budgets in the 1990s, the DRG system can be considered as a revival of mutual selfregulation. Second, the shift to the DRG system shows the necessity for state interventions, since the system of mutual self-regulation would otherwise not be able to overcome the conflicting interests of providers and funds.

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Third, the DRG system will create opportunities for comparisons and more transparency of hospital services. As transparency is a prerequisite for meaningful competition, this reform creates opportunities for more competition among hospitals, which is likely to take place if new forms of selective contracting under integrated care become more important. Reforms of remuneration in both the inpatient and outpatient sector have thus strengthened competition, or – to put it more modestly – have created opportunities for competition. They have also shown that direct state influence can be used to strengthen mutual self-government. With respect to pharmaceuticals, price regulation can take place on the level of producers (the pharmaceutical industry), the level of distributors (pharmacies), the level of prescription (in relation to doctors), and the level of consumption (in relation to patients) (Mossialos et al. 2006; Mrazek and Mossialos 2004). In Germany, there has traditionally been easy access to the market and no direct price control or control of profits on the level of producers, but a complex mix of regulation on all levels (Rosenbrock and Gerlinger 2006: 195ff.; Thanner 2007: 181ff.). The major instrument of indirect price control on the level of producers is the system of reference prices, which was introduced as part of the GRG 1989. The basic idea of this system is to identify identical or similar groups of drugs (drugs with identical substances, drugs with pharmacologically similar substances, and drugs with similar effects are distinguished) and set one reference price for those drugs. The reference price is set so that one third of the drugs in the respective group are cheaper and two thirds are more expensive. The GKV only finances the reference price. Higher prices thus result in co-payments and put the respective drug at a competitive disadvantage (indirect price control). The range of application of reference prices has continuously been extended, particularly by the GMG 2004, when drugs with patent protection but no additional benefit were included, and by the GKV-WSG of 2007, when innovative drugs with patent protection were also included in the reference price system.20 From 2000 to 2008, the share of all drugs subject to the reference price system increased from 64.6 to 74.9 per cent. The respective share of turnover, however, decreased from 46.5 to 43.8 per cent at the same time (VfA 2009: 52), indicating the effectiveness of the reference price system in controlling prices but also evasion strategies on the part of the pharmaceutical industry. Within the reference price system, decisions about the grouping of drugs are taken by the peak organization of mutual self-regulation; until 2004 this was the National Committee of Panel Doctors and Sickness Funds, and since 2004, the Federal Joint Committee. The reference price is set by the peak organization(s) of sickness funds. Another instrument of indirect price control was introduced in 2002 for drugs outside the reference price system: the so-called aut idem rule, which makes it possible for doctors to state on their prescriptions that the pharmacist could choose a similar drug if a cheaper one is available.

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In 2007 this rule was then reversed: unless the doctor explicitly rules out the aut idem clause, the pharmacist has to choose the cheapest drug, now defined as the drug with a special discount contract between producer and sickness fund. Though direct price controls are not typical for Germany, there have been legally set price stops from 1993–5 (as part of the GSG 1993) and from 2006 to 2008 (as part of the Arzneimittelversorgungs-Wirtschaftlichkeitsgesetz, AVWG). Moreover, the 2007 Reform decreed a 10 per cent discount for all producers of generic drugs. Though the reference price system in particular is left to self-regulation, direct state intervention does happen as well. On the level of distribution, regulation mainly refers to (re)imports of drugs. In 2000, pharmacies were forced to sell imported drugs when cheaper, and a minimum quota of import drugs was set. In 2004, this was restricted to imported drugs that are at least 15 per cent or 15 Euro cheaper. Once again, we observe direct state intervention. With respect to prescription writing, there are no drug utilization reviews, but guidelines and budgets. In 1993 a budget for prescriptions of office-based physicians was introduced alongside the budgets for inpatient and outpatient care. The physicians had overall responsibility for keeping within the budget. Claims against physicians for exceeding the budget, however, have never been made (Rosenbrock and Gerlinger 2006: 200). In 2000, these budgets were replaced by regionally set spending volumes without sanctions, and in 2006 a bonus-malus system was introduced and addressed to targets set for active ingredient groups. As these targets are set by self-regulation authorities, we observe the re-emergence of corporatist self-regulation after a period of hierarchically set budgets in the 1990s. On the level of consumption, the introduction of co-payments can be regarded as the most important means of regulation. Indirectly, the introduction of an office fee in 2004 has also influenced the utilization of doctors and drug consumption alike, with possible effects on prices. Taking all these factors together, we observe a strengthening of regulation with respect to pharmaceuticals, particularly by means of reference prices, although starting from a very low level of regulation. As these reference prices are set by self-regulation this can even be regarded as a strengthening of corporatist structures, albeit under state control. Corporatist structures are, however, far less developed than in other sectors of the healthcare system, as collective agreements between providers and sickness funds are rare. By and large, self-regulation has always been strong with respect to remuneration. Over the past decades corporatism has come under pressure but less so than in other relations. However, the crucial parameters are still determined through negotiation within mutual self-government. This holds particularly for the outpatient sector and is also true for the pharmaceutical sector.

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Access of service providers to the healthcare market As with remuneration, the access of providers of medical services and goods to the healthcare market differs between healthcare sectors. In the outpatient sector two aspects of access have to be distinguished: access to medical schools for students and access to the GKV market for doctors. The former became particularly relevant when regulation of the latter was abolished in 1960. Since 1973, the number of medical students has been controlled by the Centre for Allocation of University Places (ZVS), an independent agency set up by the Länder via a special treaty. Nowadays, however, this instrument of control is of lesser importance. First, the share of medical students who do not ultimately work as medical doctors has increased dramatically. Second, due to Europeanization, the migration of doctors has become a relevant issue. Thus, it is impossible to restrict or to increase the number of doctors in a reliable way by regulating the number of medical students. In the past, the competence to regulate the access of doctors to the outpatient healthcare market was highly contested. After the introduction of the GKV in 1883, the funds regulated the number of panel doctors. After some conflicts between funds and doctors, an agreement was reached in 1913 giving this competence to a joint committee of doctors and funds. Access was granted according to a fixed quota of doctors per inhabitants. In 1931, the responsibility of guaranteeing provision of outpatient services was given to the association of panel doctors, which regulated the access of doctors to the GKV market, and in 1955 this situation was re-established (Nagel 2007: 121ff.). We thus see a shift in the balance of power from the funds to the panel associations. In 1960, however, the German Constitutional Court overruled the restriction of access for medical doctors to the German healthcare market, leading to easier access to the market and a growing number of doctors. An indirect measure for controlling the number of doctors was introduced by the Panel Doctors’ Requirements Planning Act in 1987 (Gesetz zur Verbesserung der kassenärztlichen Bedarfsplanung) (Deppe 1987). According to this, restriction on entry was possible if the number of doctors in a district exceeded a certain level by more than 50 per cent. This rule, however, had little effect on the overall number of doctors as the 50 per cent quota was fairly high and at least half of the districts had to remain open (Rosenbrock and Gerlinger 2006: 130). Since 1960, therefore, access to Germany’s market for outpatient physicians has been relatively easy. The GSG 1993, however, tightened the conditions for physicians to enter the healthcare market.21 The Federal Committee of Physicians and Sickness Funds was assigned the task of developing guidelines for drawing up need plans and to define so-called ‘open’ and ‘closed’ planning areas (Kamke 1998). If such schedules are exceeded by more than 10 per cent, admission commissions have the power to refuse new doctors permission to open a

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medical practice in districts judged to be oversupplied with self-employed doctors. This task was assigned to the Federal Committee of Physicians and Sickness Funds, and since 2004 to the Federal Joint Committee, as its legal successor (Busse and Riesberg 2004; Simon 2005). Since 2003, the admission of physicians for the outpatient sector has been regulated by legally defined ratios for different groups of doctors; and for the first time, the percentage of general practitioners and specialists has been defined at a ratio of 60 to 40 (Rosenbrock and Gerlinger 2006). In early 2007, out of a total of 395 planning areas, one was open to new surgical practices, one to specialist internists, 25 to dermatologists, and 26 to paediatricians. However, 220 areas were open to family doctors (KBV 2007: 29). While there was little regulation in the ‘golden age’ of the welfare state, the access of doctors to the GKV market has been tightened in the past decade via regulation that is drafted and executed within the system of mutual self-regulation. In the hospital sector, the Länder have always been in control of capacity planning. Under the KHG 1972, they have become responsible for developing hospital needs plans (Krankenhausbedarfspläne), which in 1984 were renamed as hospital plans (Krankenhauspläne), indicating that the question of possible undersupply was no longer on the political agenda. As part of these plans, the number of hospitals and hospital beds are defined according to specialties and levels of provision (Simon 2000; 2005). In a gradual process, sickness funds have been included in the process of drawing up hospital plans, but even today the Länder are still in the driver’s seat, and all attempts to strip the Länder of this power have failed.22 The introduction of DRG-based remuneration, however, will presumably influence the access of hospitals to the healthcare market and the role of the planning system. Once in force, identical prices for the same DRG will make it difficult for some hospitals to survive. Thus, it is to be expected that market forces will increasingly drive the development of hospital capacities and the role of competition as a form of governance will increase at the expense of hospital planning. Moreover, the Federal Joint Committee sets minimum standards for the quality and quantity of inpatient health services. Hospitals that are not able to fulfil these standards (for example, a certain number of operations per doctor and/or hospital) lose their right to provide these services. Thus hospital planning comes under pressure from this side as well. Traditionally there has been little control over access to the market for pharmaceuticals in Germany. 23 Until 1976 new drugs only had to be registered (Westphal 1982). The 1976 Pharmaceutical Act (Arzneimittelgesetz, AMG), which took force in 1978, introduced an approval procedure carried out by a state agency, the Bundesgesundheitsamt (until 1994) followed by the Bundesinstitut für Arzneimittel und Medizinprodukte (BfArM) (since 1994). In order to get access to the market, new drugs now have to clear three hurdles: they have to demonstrate effectiveness, quality, and harmlessness.

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Effectiveness has only to be demonstrated compared to the course of disease without treatment and not in reference to the state-of-the-art treatment. Moreover, it is sufficient for the producer to carry out a study with a very small number of cases. All ‘old’ drugs have received approval as it is ‘assumed’ that they meet the prerequisites (Rosenbrock and Gerlinger 2006: 186). 24 Accordingly, there have only been very low hurdles for access to the market. As a result, in 2001 there were 50,000 distinct drugs on the German healthcare market, the second highest figure in the world (Nink and Schröder 2003: 882). However, with respect to the access of drugs to the healthcare market, new regulations are now being introduced into a field traditionally subject only to weak regulation. The various decisions are taken by state agencies, highlighting the direct influence of the state in this area. A new and higher hurdle has been established with the Institute for Quality and Efficiency in Health Care (IQWiG) which, since the 2007 Reform, analyzes the cost-effectiveness of innovative drugs with patent protection. With respect to pharmacies, the GMG 2004 brought about considerable liberalization of the access rules, as the ban on mail order selling was relaxed and pharmacists were given the right to own more than one pharmacy. On this level, therefore, also competition has been strengthened. Generally speaking, regulation is rather weak regarding access of service providers to the market. Under the existing regulation, mutual selfregulation is central in the outpatient sector, while for hospitals, state planning prevails, and for pharmaceuticals, state agencies play the most important role. In all sectors, however, the existing arrangements will soon be challenged by growing competition. Traditionally, all contracts between funds and service providers, including those regulating access to the GKV market, have been identical for all funds. As a result, when introduced, competition between funds lacked systematic parameters on which funds could compete. The benefit catalogue was defined and identical for all funds; and all contracts with providers with respect to access as well as prices were collectively agreed upon. Thus, meaningful competition was not possible. Over the last decade, we have therefore witnessed the creation of opportunities for selective contracting on behalf of the funds (Götze et al. 2009). Various instruments are especially found in ‘pilot projects’ (Modellvorhaben) and structural contracts (Strukturverträge), which were introduced in 1997, and – in particular – contracts for integrated care (cf. Mühlbacher 2002), an option introduced in 2000, with additional regulations aiming at the extension of integrated care in 2004 and 2007. Under these headings funds have the right to selective contracting, which also means that funds could close the access of providers to this part of the market. Funds may also conclude selective contracts with certain pharmaceutical firms, which offer them discounts. Up to now, the scope of such selective contracting is still small, but the legal system now

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offers some potential which might challenge traditional arrangements considerably. Access of patients to health services The access of patients to health services can be divided into outpatient and inpatient services.25 In the outpatient sector for most of the 20th century, as part of their struggle for power with the sickness funds, doctors have defended their right to be self-employed providers and have promoted the right of patients to choose their own doctor.26 Generally speaking, patients have free and direct access to general practitioners and specialists. In 1995, the existing health insurance forms were replaced by health insurance cards that even allow ‘parallel’ consultations with different specialists about the same ailment or condition.27 Since previous examinations are not recorded on the health insurance card, the potential for ‘doctor hopping’ increased during this period. In the second half of the 1990s, however, sickness funds attempted to implement gate-keeping mechanisms, and the GMG 2004 encouraged insurance funds to do so (Busse and Riesberg 2004). Indeed, as a result of the 2007 reform they are now obliged to offer a gate-keeping plan to all of their insurants. Thus sickness funds and the federal government have made attempts to impose more control on the access of patients to health services. Since 2004 patients have to pay an office fee of 10 Euros when visiting the doctor, but they are charged only once per quarter, further contacts being free with a referral from the first contact doctor (normally the family doctor). Thus a financial incentive has been introduced for patients not to visit various general practitioners and specialists directly, but to decide on one first contact doctor, thus opting for a kind of gate-keeping model. If patients register with a particular family doctor (hausarztzentrierte Versorgung), some sickness funds even exempt them from the office fee. The de facto access of patients to a certain doctor has also been influenced by developments in the market for doctors. While traditionally working in solo practices, doctors increasingly work in group practices.28 Patient may thus choose a certain group practice but not necessarily a certain doctor within this group practice. This effect is even more pronounced with medical care units (medizinische Versorgungszentren), which were introduced in 2004. In a medical care unit, doctors of different specialties and sometimes non-medical health professionals work together under the supervision of a doctor. The number of medical care units is still small, but is growing. By the end of July 2008 there were 984 medical care units with 4,006 doctors in total. Since the introduction of medical care units in 2004, on average, the number of medical care units has been growing by 300 per year, and the number of doctors working in such units has been growing by 100 per month. Also the average size of such units is growing. In 2004, on average

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each medical care unit had 3.6 doctors. In 2007 this ratio already stood at 4.1 (own calculations based on KBV 2007: I. 26). The free choice of providers can be expected to come under further pressure if integrated care plays a bigger role in the future. Integrated care, first, aims at bridging the gap between distinct sectors of service provision, particularly the gap between office-based doctors and hospitals. Second, it gives sickness funds the opportunity of selective contracts with providers and thus a tool for competition between funds. Like all managed care instruments, however, selective contracts with certain providers may limit the choice of providers for patients. In general, a prescription or a referral by a self-employed doctor is necessary for the patient to use hospitals and non-medical service providers in the outpatient sector.29 When choosing a hospital, patients consider the recommendations of their social network, as well as their family doctor (Bertelsmann Stiftung 2006: 26f.; Salfeld et al. 2008). Family doctors are the key providers of professional advice and are therefore of enormous importance for hospitals. With intensified competition among hospitals, their increased marketing and the search for closer links to office-based physicians are to be expected (SVR 2007: paragraph 436). To sum up, there has traditionally been little regulation of access to doctors through state regulation or within the system of corporatist self-regulation. Due to the introduction and diffusion of competition we observe the introduction of managed care instruments such as gate-keeping, DMPs and integrated care, ultimately leading to reductions in free access. In particular, the advancement of competition as a new form of governance in its own right has modified patients’ access to providers. Content of the benefit package For those with private substitutive health insurance, the content of the benefit package is a matter of individual contract. Privately insured employees, however, can get an allowance from their employer that covers up to 50 per cent of their premium – but not more than the equivalent of employer’s contribution to the GKV – if certain prerequisites are met. Among other requirements, the insurer must offer a standard tariff for the elderly with benefits comparable to the GKV benefit package. As employees naturally demand this, the benefit package in private health insurance is indirectly linked to GKV standards. The content of the benefits package in the GKV is determined in a twostep-process. First, on a macro-level the overall content of the package is described in very general terms in the Social Code Book V. Second, on the micro level for each sector of care provision it is determined which diagnosis tools and treatments are to be included. On the macro-level, sickness funds are required to cover outpatient medical care provided by family doctors and specialists, hospital care, drugs, medical devices, dental care, and sick

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pay. Moreover, patients are entitled to a kind of case and care management. In order to be financed by funds, all services and goods must be ‘medically necessary, effective, and cost-effective’. With minor exceptions, the contents of the benefits package at the macro-level have remained unchanged over the past three decades, although there continues to be a heated discussion about reducing the scope of services (for example, excluding dental services or sick pay). Moreover, the 2007 reform restricts coverage of treatments resulting from piercing, tattooing, and other non-necessary invasive treatments. As the Social Code Book only defines the benefit package in broad terms, actual entitlements have to be specified in a second step, by mutual self-regulation and by services providers. As considerations of effectiveness have become more prominent, institutional arrangements for benefit decisions on the micro level were formalized under the GKV Restructuring Acts of 1997, according to sectors (for details, see Greß et al. 2005a). In the outpatient sector, in 1989 the Federal Committee of Physicians and Sickness Funds (Bundesausschuss Ärzte und Krankenkassen), Germany’s peak organization for mutual self-regulation,30 was given the power to assess existing methods of diagnosis and treatment. In 1997, this competence was extended. The Committee is now required to assess new as well as preexisting methods, and decide whether they should be part of the publicly financed benefit package. Its directives are legally binding for office-based physicians and sickness funds. Only if a new technique gets the approval of the Committee can it be financed by GKV sickness funds. Though the Committee can now assess all methods, in practice it has concentrated on new fringe techniques. Consequently, between 1990 and 2003, the Federal Committee assessed 49 methods – 48 new and one existing method (Greß et al. 2005b: 83). The assessment procedure itself has also changed: in 1998, the Central Sub-committee on medical outpatient care began to follow the methods of evidence-based medicine and health technology assessment (for details, see Niebuhr et al. 2004). The Federal Committee of Physicians and Sickness Funds has also been responsible for the inclusion of pharmaceuticals in the benefit package. Access to the market is a necessary, but not a sufficient, condition to be part of the GKV benefit package (Greß et al. 2005b). In its directives on pharmaceuticals, the Federal Committee has specified the circumstances when pharmaceuticals may be prescribed (Niebuhr et al. 2004: 57ff.). For example, the Committee could limit the prescription of pharmaceuticals to specified indications or patient subgroups, or both. Since there is no explicit provision in the Social Code allowing the Committee to exclude coverage for drugs, the Federal Social Court has overruled the Committee’s decision to exclude specific drugs completely from the benefits package and thereby refined the competence of the Committee (Niebuhr et al. 2004: 59ff.).

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At the beginning of this century, a debate began on the necessity of a ‘fourth hurdle’, referring to proof of cost-effectiveness. The GMG did not come up with a fourth hurdle, but instead, the IQWiG was founded. The Institute carries out assessments commissioned by the peak organization of mutual self-regulation, but may also initiate assessments of its own. It acts according to the international standards of evidence-based medicine, demanding high-level studies to prove effectiveness. In this respect, the foundation of the IQWiG marks the final breakthrough of evidence-based medicine as the decisive yardstick for effectiveness. Cost-effectiveness, however, has not been of major interest to the IQWiG. The 2007 Reform now requires that the IQWiG also analyze the cost-effectiveness of innovative drugs with patent protection and use the results to recommend maximum prices. If market prices are above these maximum prices, patients have to pay the difference out of pocket, which could end up in the de facto exclusion of a drug from the GKV benefit package. Moreover, since 2004, new drugs may be excluded from the GKV benefit package (Greß et al. 2005b: 80) – not due to low cost-effectiveness, but only if their effectiveness is not proven according to the standards of evidence-based medicine. As a direct means of denying GKV financing, in 1989 a negative list of drugs was introduced. Drugs on this list are not financed by sickness funds because they are regarded as ineffective, whether because they contain additional substances not required for the treatment in question, or because they contain too many competing substances to accurately prove effectiveness, or because their effectiveness has not been proven. This list is drafted by the Ministry of Health and is updated at irregular intervals. As most of the drugs from the list have disappeared from the German market, it is of lesser importance (Rosenbrock and Gerlinger 2006: 194). Attempts in 1993 (GSG) and 2000 (GKV-GRG) to install a positive list – a list containing all drugs that are financed by sickness funds – finally failed. Since 2004, we therefore observe the introduction of new regulations requiring high quality proof of effectiveness of drugs in a field that traditionally had rather weak regulation. Decisions are taken by mutual self-regulation, based on assessments carried out by an independent scientific institute (IQWiG) initiated by the Federal Joint Committee. Decisions of the Joint Committee did not apply to the hospital sector. This competence was assigned instead to the Hospital Committee (Ausschuss Krankenhaus), which was founded in 2001. It was responsible for making coverage decisions for hospital care.31 There was a major difference between outpatient care by office-based physicians on the one hand and hospital care on the other: in hospital care, all services were covered unless the Hospital Committee excluded the service. In ambulatory care, no service was covered unless the Federal Committee of Physicians and Sickness Funds included it. This could lead to a situation in which approval was withheld from a

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particular technique by the Federal Committee of Physicians and Sickness Funds on the grounds of ineffectiveness, but was still used in hospital care. The Co-ordinating Committee (Koordinierungsausschuss) was founded in autumn 2001 to co-ordinate the above-mentioned three committees. It existed only until 2003, when the committee system was reorganized. As part of the GMG, the Federal Committee of Physicians and Sickness Funds, the Hospital Committee, the Federal Committee of Dentists and Sickness Funds, and the Co-ordinating Committee were merged into the newly founded Federal Joint Committee.32 This consists of representatives of doctors and hospitals on the one hand and sickness funds on the other. As an institutional innovation, representatives of patients are for the first time members of the Committee, though without veto power. Interestingly, the pharmaceutical industry is not represented on the Federal Joint Committee. We thus see an extension of the influence of mutual self-regulation, but without incorporating the pharmaceutical industry into the corporatist structures and without the use of collective contracts. To sum up, in the past decade we have seen a strengthening of mutual self-regulation. The Federal Committee of Physicians and Sickness Funds has gained new competences, which have been further consolidated with the founding of the Federal Joint Committee and the IQWiG. Thus an area which had been fairly unregulated has now come under closer regulation by mutual self-government. Decisions of the Federal Joint Committee are binding for all funds. This underlines the fact that funds differ very little with respect to the benefit catalogue. Thus as the common benefit catalogue does not allow for much distinction among funds, meaningful competition among sickness funds requires selective contracting for the structures of service provision. The territorial axis By and large, on the territorial axis we observe a shift towards higher (territorial) levels of decision-making, with decisions of national committees increasingly binding regional and local negotiators (Wessen 1999). In the 1980s, competences were shifted from individual sickness funds to the associations of sickness funds on the Länder level, particularly with respect to remuneration. In the 1990s and in this century, competences moved up further, even to the federal level. The assignment of new roles to the Federal Committee of Physicians and Sickness Funds with respect to access to the healthcare market (for example, needs plans for outpatient services) and the definition of the benefit package serve as good illustrations. While this trend of moving competences up to a higher territorial level seems to be unambiguous within the system of corporate self-regulation, the introduction of managed care instruments in the last decade could mark a countertrend, as competences have been moved (back) to single funds. In the meantime, however, the landscape of sickness funds has changed, and the

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number of funds has decreased dramatically: in 1951 this number stood at about 2,000 (Nagel 2007: 74), while in 1990, 1,147 funds existed. The introduction of competition between funds as part of the GSG 1993 triggered a still-ongoing concentration process. As a result, fewer than 200 sickness funds remain today (see Table 6.2). Assigning competences to single funds, therefore, does not automatically mean a downward shift on the territorial axis, as today’s funds are no longer predominantly local actors. Moreover, another concentration process can be observed on the federal level. Traditionally, sickness funds are organized into seven distinct types: Regional funds (AOK), health insurance funds originally for white collar workers (Ersatzkassen), company-based funds (Betriebskrankenkassen), guild funds (Innungskrankenkassen), and (small) funds for miners, sailors, and farmers. For each of these types of funds, a peak association (Spitzenverband) exists. By July 2008, most of the contracting powers of these peak associations were moved to the newly founded Spitzenverband Bund der Krankenkassen, which represents all funds, irrespective of the type of fund. As a result of the 2007 Reform, therefore, competences have been concentrated in this organization (cf. Wille and Koch 2007: 314ff.). Turning to the issue of Europeanization, we can distinguish direct and indirect ways in which influence can be executed. Indirect effects mainly refer to cost-containment measures which are deemed necessary for keeping to the stability and growth pact of 1997. As tax-financing is of minor importance, this has never been a major influence on the German healthcare system. With respect to direct effects, positive and negative integration can be distinguished (Leibfried 2005). The former refers to attempts to harmonize systems top-down, while negative integration just refers to the boundaries to national policy-making that come from existing European commitments. As the organization of healthcare systems is a national matter (Art. 152 Treaty Establishing the European Community), harmonization is ruled out. The Open Method of Co-ordination (OMC), however, can be regarded as a soft instrument of positive integration. By defining common goals, strategies and indicators, as well as by providing benchmarks based on these indicators, the European level may influence national policy (Gerlinger and Urban 2004; Lamping 2008). Until now, negative integration has been of greater importance (Leibfried 2005). The European Court of Justice (ECJ), in particular, has had a profound impact. Using the basic freedoms as a starting point, the Court has, in a number of subsequent decisions, established certain rights of EU citizens to access treatment in other member-states (Mossialos and Palm 2003; Obermaier 2008; Sieveking 2007). These judgements have – among other things – limited the capacity of nation states to prioritize and ration medical goods or to limit access to specialists via a gate-keeping system. Moreover, it is becoming more difficult to operate capacity planning or certain systems

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of remuneration based on global budgets (Rothgang and Götze 2009). In the Commission’s proposal for a directive on cross-border healthcare (Com(2008) 414 final), these judgements are actively transformed into a positive right, indicating a transformation from negative to positive integration (Rothgang and Götze 2009). Health policy can thus be regarded as an example of ‘uninvited Europeanization’ (Greer 2006), leading to an upward shift of competences on the territorial axis. The European level has also become increasingly relevant for private insurance. The Third Non-Life European Insurance Directive of 1992 opened up the German market for substitute (and supplementary) health insurance for companies from all member states. The single license principle simplified access to the market in other member-states considerably, as a license in one country suffices now for the entire EU. The directive also severely limited the possibilities for national regulation. Substitutive health insurance, however, was exempted and is still subject to national regulation (Rothgang et al. 2007: 14f.). The EU anti-discrimination directive 2004/113/EC of December 2004 demands equal insurance premiums for men and women unless there is mathematical and statistical proof of different risks and costs. As a consequence, insurance companies must now prove that different premiums for men and women can be justified. Moreover, all costs related to pregnancy and motherhood must be excluded from the relevant calculations (for details, see Rothgang et al. 2007). This directive, which had been transformed into national law in 2006 as part of the Antidiscrimination Act (Allgemeines Gleichstellungsgesetz), led to new tariffs for substitutive private health insurance. Accordingly, the directive directly interfered with a core element of private insurance: the calculation of premiums. Though the European level influences the healthcare system, all in all, the crucial competences for the regulation of the German healthcare system still rest with the nation state. As in the past, however, the future also promises increasing influence from the European level, not least due to the OMC, which until now has not been that influential. The changing role of the state in regulation Traditionally, regulation in Germany’s healthcare system has rested on mutual self-regulation by corporatist actors conducting collective contracts. Today, this is still the dominant mechanism of regulation and the German system can still be regarded as a prototype of the social insurance system. This type of regulation, however, has increasingly been amended by direct state intervention on the one hand, and market competition on the other. Since the 1990s, we observe regular major healthcare reform at ever shorter intervals. The GSG 1993, in particular, introduced competition as a new mode of governance, leading to a wave of subsequent reform steps meant to strengthen this mechanism. Table 6.6 summarizes the major changes in the mode of regulation as described in the sections above.

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Table 6.6 Changes in the regulation structure in Germany’s healthcare system Effect on regulatory actors and modes

Area of regulation

Dominant regulation mechanism in 1970 Contents of reforms

Coverage

Legal assignment to either GKV or private health insurance; within GKV: the insured are assigned to sickness funds.

Inclusion of total population in GKV and PHI; choice of GKV funds and competition among funds.

Still dominated by hierarchical state regulation; strengthening of competition.

Financing system

Most parameters set by hierarchical state regulation, but funds decide contribution rate.

Even contribution rate set by the state.

Strengthening of state hierarchy.

Remuneration of service providers

Dominated by corporatist selfregulation.

Introduction of DRGs; selective contracts as part of competition; reference prices.

Still dominated by self-government, amended by direct state intervention and competition.

Access of service providers to healthcare markets

Weak self-regulation (outpatient sector) and state regulation (hospitals, drugs).

Needs planning in outpatient sector; managed care instruments (gatekeeping, selective contracts).

Strengthening of self-regulation and strengthening of competition.

Managed care instruments.

Strengthening of competition.

Assessment of (cost-) effectiveness

Strengthening of self-regulation.

Access of Weak regulation. patients to healthcare providers Benefit package Weak self-regulation.

Interestingly, the introduction of competition between funds triggered major changes. First, a risk structure compensation scheme (RCS) was introduced from the start. As it did not encompass most of the morbidity, creamskimming became a favourite strategy among sickness funds, particularly as collective contracts with providers closed all opportunities for the funds to compete on the basis of distinct provision structures. As a consequence, on the one hand measures were taken to diminish incentives for creamskimming with the introduction of DMPs, a pool for high risks and eventually the introduction of a morbidity-oriented RCS among them. On the other hand, opportunities for selective contracts were introduced (integrated care,

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gate-keeping schemes), to open up the playing field for meaningful competition. Since its introduction, competition has extended from the relation between funds and the insured, to the relation between funds and providers. The activity of the state has thus eventually led to market making and market correcting; and the introduction and later strengthening of competition was accompanied by increased state activity to create a framework for meaningful competition. Even measures such as the introduction of DRGs, which were meant to increase efficiency in hospital care, ultimately foster competition, as a functioning price system is a prerequisite for selective contracts. Of course numerous issues are still decided collectively for all funds. For such issues scientific institutes have increasingly been founded, such as the Institute for Quality and Efficiency (IQWiG), the Institute for the Hospital Remuneration System (INEK), and the Institut des Bewertungsausschusses (InBA).33 We thus see a tendency to outsource such tasks, as funds that compete with each other might have difficulties arriving at agreements through mutual negotiations. All in all, health politics in Germany over the past two decades demonstrate that there is no inherent reform blockade, as some social scientists had assumed by the end of the 1980s (Rosewitz and Webber 1990), though the system does provide for many veto points. With respect to policy change, mutual self-regulation is still the dominant pattern of regulation, but it has been met by more direct state intervention and the development of competition as a co-ordination mechanism in its own right.

Conclusion With respect to healthcare financing, a reduced role for the state can be detected in the German social insurance system over the past four decades. The reduction in tax financing is especially striking in the inpatient healthcare sector, where the state has traditionally had the strongest role. In contrast, social insurance financing has increased during the period of observation. On the financing dimension, the social insurance principle is therefore even stronger than it was in 1970. For specific health services, however, private financing has become increasingly important. Private out-of-pocket payments for dentures, in particular, are increasing at a high rate and are today even more significant than private insurance payments. Pharmaceuticals, too, are increasingly being financed privately by out-ofpocket payments. Our analysis of the service provision dimension shows that public services provision is most important in hospital and nursing-home care. In both sectors we see considerable material privatization, which is accompanied by formal privatization. In contrast, however, the share of resources spent on inpatient service provision has been increased, thus increasing public

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provision. Over time, the public services provision index has decreased from 1970 to present, while private-for-profit provision has increased. The effects are small, but a comparison of 1970 with today underestimates the effect, as German re-unification increased public provision. If the calculation is done for West Germany alone, the effect is stronger. The most important changes, however, have taken place with respect to regulation. The frequency of state interventions in the self-regulatory German healthcare system increased from the early 1990s onwards. The rise in direct state intervention becomes especially evident in the implementation of sectoral budgets. Subsequent state interventions were aimed at strengthening the bargaining power of sickness funds associations in order to contain contribution rates. Since the state has always been an important actor, these and further state interventions did not result in a major structural change of the German healthcare system. The introduction of market principles in the 1990s, however, can be considered a structural change, with the pathbreaking effect of narrowing down the scope for negotiations within the self-regulatory system. Market principles such as competition between sickness funds, for instance, tend to spread to other areas of regulation. The GKV Modernization Act of 2004 allowed (to a limited extent) individual insurance funds to negotiate directly with doctors or groups of doctors, which may open the door for new models of remuneration. Moreover, in the hospital sector, a DRG system was introduced, which can also be regarded as a prerequisite for selective contracting in this sector. These changes have been primarily driven by state actors on the national level. The DRG system will undoubtedly influence the access of hospitals to the healthcare market and will intensify competition among hospitals. Since it is still considered to be the responsibility of the state to guarantee access to the healthcare system for all sections of the population, state control and therefore the ‘shadow of state hierarchy’ has to be extended, to ensure that the results of these competitive elements are still in line with health policy goals. Accordingly, while mutual self-regulation still prevails in Germany, it is now amended by increased state-hierarchy and growing competition.

Notes 1. ‘Polyclinics’ were medical centres with employed doctors of different specialties, which built the backbone of outpatient services in Eastern Germany, while in Western Germany at the same time outpatient care was mainly provided by self-employed office-based doctors, working in premises with just one single doctor. 2. By the Statutory Health Insurance Modernisation Act of 2004 the Advisory Council for Concerted Action in the Healthcare System was renamed into Advisory Council on the Assessment of Developments in the Healthcare System (Sachverständigenrat zur Begutachtung der Entwicklung im Gesundheitswesen). The Concerted Action in the Healthcare System was abolished by the same Act.

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3. A federal programme to support the development of healthcare infrastructure in East German Länder raised investment expenditure in the early 1990s. Moreover, total healthcare spending, measured as a share of GDP, has been driven up statistically by the comparatively low GDP per capita contributed by East Germany. The overall lower pay levels in the new Länder limit the possibility for opting out into private insurance, resulting in a comparatively lower share of privately insured households (Busse and Riesberg 2004: 26). 4. Estimations of healthcare expenditure based on national accounts which are designed to measure macro-level output of the national economy are less suitable as a basis for detailed estimates of expenditure on health (Orosz and Morgan 2004). The SHA is more detailed and comprehensive and distinguishes systematically between financing agents, functions and providers of healthcare. Therefore, many subcategories of healthcare spending, in particular, are hard to compare over the time series break. The changes in measurement affect national and international statistics, since reclassifications of the national statistical office have been developed in conjunction with the OECD (Statistisches Bundesamt 2009a). 5. Social insurance funding of healthcare services includes health-related expenditure of Statutory Health Insurance, Old Age Insurance, Accident Insurance and Long-Term Care Insurance as defined by the SHA (Statistisches Bundesamt 2009a). 6. The contribution rates represent the average contribution rate of all statutory health funds as announced annually by the Minister of Health. The rates given here include the extra contribution of 0.9 percentage points for employees according to § 241a SGB V introduced in 2004. 7. Adema and Ladaique (2005) generously estimated that tax exemptions on private health and accident insurance added up to 0.4 per cent of GDP in 2001. 8. Figure 6.7 presents resources devoted to healthcare sectors as a percentage of total expenditure on personal healthcare (OECD 2009). Personal healthcare does not include investment costs or collective healthcare, which includes, for example, preventive measures and administrative costs. 9. Besides ÖGD-employed physicians about 2,000 physicians work for the Medical Review Board of Statutory Health Funds (MDK). Since these physicians are not practising, but performing administrative tasks, we do not consider them in our calculation. 10. Until 1989 civil servants could relinquish their right to direct coverage of some part of their healthcare costs through their employer, and choose instead to receive the employer’s contribution to GKV. Since then, all civil servants have to meet the complete GKV contribution (employer’s and employee’s rate) if they choose to become a member of a social sickness fund. As there are no GKV tariffs that insure only the uncovered parts, this is much more expensive than buying private insurance. As a consequence, today more than 90 per cent of all civil servants have private substitutive health insurance (Fuchs 2000). 11. According to recent results from the Microcensus, about 58 per cent of the selfemployed (including family co-workers) are covered by the GKV (own calculations based on Statistisches Bundesamt 2008b: table 1.4). 12. While the old RCS only indirectly accounted for morbidity, the new RCS tries to measure morbidity directly. Based on the expenses of the previous year, additional lump-sums are calculated to cover treatment costs for 80 diseases. The funds then receive additional resources for patients with such a diagnosis (for

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13.

14. 15.

16.

17.

18.

19.

20.

21.

22.

Heinz Rothgang, Achim Schmid and Claus Wendt details, see Göpffarth et al. 2008; Göpffarth and Henke 2007). Membership of DMPs is no longer relevant for the RCS but only yields a small allotment for respective administrative costs. From 1977 to the end of 1994 there was a special equalization scheme for pensioners, whereby all expenses incurred by pensioners who were mandatory members were carried by all funds together. In effect, expenses by pensioners became an externality for each fund. The scheme was therefore heavily criticized for encouraging inefficiency (Leber 1991; Schneider 1994). As a reaction to the recent financial and economic crises, this process was accelerated and a higher tax-transfer was set. In January 2009 the standard tariff was transformed into a newly created ‘basic tariff’; this is more attractive as the insured may choose co-payments and deductibles and may take with them parts of their savings if they switch insurance companies. A compensation scheme covers deficits incurred by standard policies across all private insurers, and the Federal Insurance Supervisory Office is responsible for controlling the comparability of the standard benefit package and the pooling mechanism (Wasem et al. 2004). Originally the allowance (50 per cent of costs) was only granted for standard treatment (for example, amalgam inlays). If premium treatment (for example, gold inlays) was chosen, no allowance was granted. Since January 2005 the allowance is always granted (befundbezogene Festzuschüsse) and only the co-payments differ, according to the type of treatment. Physicians’ services for privately insured patients are remunerated according to a public fee schedule (Gebührenordnung für Ärzte, GOÄ) decreed by law. For each service its value is assigned in Euro. Physicians may multiply this value with a certain factor if treatment is particularly burdensome. It soon became obvious that the Concerted Action was far too big to organize any log-rolling or strike intelligent bargains between the actors involved. Moreover it had limited competences and thus did not serve its purpose well. It lost its function completely in the 1993 reform, but was only formally dissolved in 2004 (Noweski 2004). Technically the reform takes force in four steps: the introduction of a new EBM in January 2008, introduction of the Euro fee scale in January 2009, the introduction of a new patient classification system to establish total remuneration by January 2010 and the introduction of lump-sum fees as means of remuneration for specialists by January 2011 (Repschläger 2009: 231). Reference prices can be used for innovative drugs with patent protection if there are at least three of them which can build a group of their own. Otherwise, the Spitzenverband Bund sets maximum prices based on an assessment by IQWiG comparing additional costs and additional benefits using methods of economic evaluation. The announcement of new regulations and the fear among doctors that this would cause a closure of the market led to a 10 per cent rise in the number of office-based physicians in 1993, the last year before the new regulation was enacted. After the switch to austerity policies in the late 1970s it was a common belief that there was an oversupply of hospital beds. In the 1980s, however, the Länder effectively vetoed any significant cut in capacities. So in 1989 (the last year before reunification) there were 670,000 hospital beds in West Germany – only 38,000 (= 5 per cent) fewer than in 1980 (Nagel 2007: 138). In the 1990s, due to increasing

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23.

24.

25. 26.

27.

28.

29. 30.

31.

32.

33.

fiscal strains, the Länder allowed some cuts, leading to a decrease of 24 per cent from 1991 to 2007 (own calculation based on Statistisches Bundesamt 2008a: table 1.). For pharmaceuticals we have to distinguish between access to the healthcare market (Arzneimittelzulassung) and access to GKV financing (Arzneimittelerstattung) in particular. This section only deals with the former, while the latter is dealt with under the heading of the ‘contents of the benefit catalogue’. Originally it was planned that all drugs should undergo an ex post approval procedure by 1990. In 2001, however, only about half of all drugs had approval according to the 1978 standards (Rosenbrock and Gerlinger 2006: 188). Due to pressure from the EU the process was speeded up and finished by 2007. For pharmaceuticals the access to the market is decisive, and for pharmacies there is no particular barrier to access. There have been severe restrictions on doctors employing other doctors in their practice, which have only recently been somewhat relaxed. The number of employed doctors in outpatient care, therefore, is still very small. By the end of 2007 it stood at 2,963 compared to 118,858 office-based physicians (KBV 2007: I. 5). Until then the insured had only one form per quarter year for doctor consultation. Once they had used this for seeing one doctor they needed a referral for seeing another one. By the end of 2007, 46,381 out of 118,858 panel doctors (= 39 per cent) worked from a group practice. The share of panel doctors working in group practice has increased by about 50 per cent over the last 10 years (KBV 2007: I. 10, I. 23). In case of an emergency, patients may go straight to the hospital. Also hospitals offer some outpatient services. This committee was (re)founded in 1956. It is, however, the legal successor to the Reichsausschuss Ärzte und Krankenkassen, which was founded in 1923. The Reichsausschuss itself succeeded the Zentralausschuss founded in 1913 (see Döhler and Manow-Borgwardt 1992: for details). It is thus a very old institution which has been given new tasks. Another separate committee has been responsible for dental care (Bundesausschuss Zahnärzte und Krankenkassen). As it only mirrors the Federal Committee of Physicians and Sickness Funds it is not dealt with here. The Federal Joint Committee covers all healthcare sectors. However, its subcommittees, which prepare all decisions, meet separately to make sure that the relevant providers are represented if questions for example of hospital care or outpatient care are discussed. Moreover, it is still true that in outpatient care methods still need explicit approval in order to be covered by the GKV, while in hospitals all health services are covered unless explicitly excluded. According to the 2007 reform the peak organization of sickness funds has to commission a scientific institute to develop instruments for the measurement and description of quality of healthcare and supervise the implementation of the relevant instruments. Accordingly, in August 2009 a contract between the peak organization of sickness funds and the AQUA Institute for quality research in healthcare was signed.

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7 The US Healthcare System: Hierarchization With and Without the State Mirella Cacace

Introduction Historically, market competition has been the dominant co-ordinating mechanism in the healthcare system of the United States, which also emphasizes the relevance of private actors in financing, service provision, and the regulation of healthcare. Since the introduction of the public Medicare and Medicaid programmes in 1965, major changes have occurred and the state has become an important actor – but in an increasingly fragmented environment (for example Hacker 2002; Oberlander 2002). The growing role of the state primarily manifests itself in the financing of these public programmes but, in assuming responsibility for the appropriation of public monies, also in the hierarchical regulation of those programmes. This is most surprising as the conventional wisdom about the de-regulatory American state in general, and the ‘private nature’ (Docteur et al. 2003: 5) of the healthcare system in particular, teaches us the contrary. It is true that public expenditure as a percentage of total spending was only about 45 per cent in 2006 and therefore relatively low compared to the OECD average (OECD 2009, cf. also Chapter 3). When measured as a percentage of GDP, however, the level of public spending in the US, at 7.1 per cent, is close to the OECD average. These figures do not even include the considerable level of tax exemptions through which the federal government subsidizes private employment-based health insurance. These included, more than half of total healthcare spending in the US today comes from public sources. The most recent health care reform continues the trend of increasing hierarchical state regulation. A second major trajectory of change was initiated by the emergence of a phenomenon which is often viewed as particularly American, namely ‘managed care’ (Glied 2000: 709). Managed care encompasses a highly diverse array of institutional arrangement such as Health Maintenance 180

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Organizations (HMOs), Point of Service (POS) plans, or Preferred Provider Organizations (PPOs). Although any generalization would be misleading, we can at least accept for now that in managed care there is ‘some interference’ in the fundamental relationship between insurers, service providers, and patients (cf. Glied 2000: 709; Hacker and Marmor 1999: 677). Private managed care arrangements have brought about their own specific instruments to control provider and patient behaviour and therefore regulate the provision as well as the consumption of services. Interestingly, although the US government supported the spread of HMOs in the 1970s and contracts with private managed care organizations today, it is not the state but private market participants that established this hierarchical mode of co-ordination (Cacace 2010). In order to explore the changes in the US healthcare system in depth, this contribution continues with an introductory overview and a short legislative history, including the most recent healthcare legislation. What follows is a detailed assessment of the changing role of the state in financing, service provision and regulation of the US healthcare system. In line with our analytical framework as described in Chapter 2, the public/private-mix and the territorial aspects will be examined. The concluding section brings together the evidence about these developments. Main characteristics of the US healthcare system The American healthcare system is a complex mix of public and private elements, which partly overlap while at the same time leaving some major gaps in coverage. In 2008, about 67 per cent of the US population had private insurance; either employment based (59 per cent) or as directly purchased individual plans (nine per cent). The most vulnerable low-income groups, as well as those aged over 65 and the disabled, are covered by the main public insurance programmes, Medicare and Medicaid. Each of these programmes provides health insurance for about 14 per cent of the population with some individuals being doubly eligible, that is, for both Medicare and Medicaid (US Census Bureau 2009: 23). Although it has been on the political agenda repeatedly, the US is the only country in our OECD sample where no mandatory universal health insurance scheme has been legislated yet. Thus in 2008, 15 per cent of the US population was uninsured.1 Furthermore, due to inadequate benefit packages and/or high out-of-pocket payments, millions more must be considered underinsured (Schoen et al. 2008; Stone 2000: 955). Uninsured individuals and those who are unable to pay for services receive emergency treatment in hospitals without charge. The calculation of premiums for private insurance is based on the expected health risk. Depending on the specific health plan, cost-sharing is required from the insured person. Unless restricted by the most recent healthcare reform of 2010, insurers can refuse to cover pre-existing conditions, require waiting times or completely deny coverage for an applicant. As already mentioned, most of the privately insured (almost 90 per cent)

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receive coverage through group health plans provided by the employer on a voluntary basis (US Census Bureau 2009: 23). As employers pay the bulk of the premiums, that is between 72 per cent of the cost for family insurance and 83 per cent for individual coverage on average (Kaiser Foundation/HRET 2009: 77), insurance coverage is closely linked to the specific workplace. The government promotes employment-based health insurance by exempting employers’ contributions from income and payroll taxes. Employers preselect health insurance and therefore play a major role in the competition between plans (Glied and Borzi 2004: 406; Keen et al. 2001). For premium calculation, the number and the risk structure of employees within the firm is relevant. Small employers with a few severely ill employees therefore may face prohibitively high premium costs (Reinhardt 1993). Thus, while most large employers offer health insurance, many fewer small businesses do so. For the same reasons, private health insurance can be unaffordable for single individuals who are not covered by group insurance. Private insurers can be non-profit organizations, but most of them are large, profit-oriented enterprises. Today, most of them are represented by America’s Health Insurance Plans (AHIP), the private insurers’ association. Medicare is a national, federally regulated social insurance programme that is divided into several parts (Finegold 2005; Marmor 2000; Oberlander 2003). Medicare hospital insurance (Part A) is a mandatory programme, funded by payroll contributions, that covers hospital care. Supplementary medical insurance (Part B) is voluntary and reimburses for outpatient doctor visits. Part B is funded by a mix of premiums and co-payments raised from the enrolees, and from general taxation. Medicare beneficiaries can decide to receive Part A and Part B benefits through a managed care plan, which then is called Part C or Medicare Advantage (formerly Medicare+Choice). In 2003, a drug coverage programme (Part D) was added for voluntary subscription. As Medicare does not cover all services, such as long-term care, and also requires cost-sharing, many beneficiaries also hold supplementary private Medigap insurance. Medicaid is a means-tested programme of medical assistance for the poor, financed jointly through federal and state tax revenues (Finegold 2005; Kaiser Commission 2002). The federal government sets the broad guidelines under which the states administer the single programmes. Medicaid offers benefits on an entitlement basis for special groups of the population, such as pregnant women, children, and parents who are living in poverty. Children in families with incomes above the Medicaid eligibility criteria are covered through CHIP, the Children’s Health Insurance Program (formerly also known as the State Children’s Health Insurance Program, SCHIP, see, for example, Patel and Rushefsky 1999: 86ff.). The delivery of services, with the medical profession and hospitals as the chief actors, is largely the domain of the private sector. Hospitals, represented by the American Hospital Association (AHA), are mainly private non-profit

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providers. Although about 38 per cent of physicians are directly employed in hospitals or in HMOs, the majority are self-employed private professionals either working independently or as part of a medical group (AMA 2006; Jacobson 2001). The medical groups incorporate a number of physicians, sometimes in a single specialized area but often across a number of specializations (multi-specialty groups) and also include primary care physicians. In general, outpatient physicians refer their patients to hospitals they are affiliated with. The majority of specialists, however, conduct their practices within a hospital setting. The medical profession – amongst other, more specialized associations targeted at single groups of physicians – is represented by the American Medical Association (AMA). It is worth noting that with the exception of the services offered by the Veteran’s Administration – a special scheme for members of the military and their dependents – hospitals and physicians generally deliver services to all individuals, irrespective of the kind of coverage. Commonly, however, service providers set different charges, which vary in line with the bargaining power of the third-party payer. As they have no market leverage, patients with individual insurance or the uninsured receive the highest medical bills. Due to the simultaneous decentralization and fragmentation of the American healthcare system, administrative costs are high and considerable sources of inefficiencies exist. It is estimated that up to 25 per cent of total healthcare spending is absorbed by administrative costs (Keen et al. 2001: 114; Woolhandler and Himmelstein 2002). Thus while the advocates of the system speak in praise of the freedom-of-choice and consumer sovereignty it offers, critical observers condemn its ‘undesirability, unaffordability, and ungovernability’ (Marmor et al. 1992: 175). Indeed, healthcare in the US is the most expensive within the OECD world, consuming 16 per cent of the GDP, while the nation as a whole ranks relatively low on standard health-status indicators, and many Americans remain uncovered or underserved (OECD 2009; Reinhardt 2005: 83; Schoen et al. 2008). However, the American healthcare system has also brought about a number of key innovations, promoting not only technological but also institutional change, the most path-breaking examples being managed care and the DRG-system, which became forerunners for similar arrangements all over the OECD world (Blumenthal 2006: 86; Frisina and Cacace 2009). This tension already indicates that a look at the individual institutions and actors in the American healthcare system is necessary in order to understand its distinctive character. Major healthcare reforms The following overview of major healthcare reforms in the US must be cursory, as is spans almost half a century in a fragmented and overly complex ‘non-system’ of healthcare financing and delivery. To start with a truly path-breaking event, the Johnson administration enacted Medicare and

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Medicaid under Titles XVIII and XIX of the Social Security Act in 1965. Both programmes fall within the authority of the Department of Health and Human Services (DHHS) and are administered by the Centers of Medicare and Medicaid Services (CMS) today. Earlier proposals to establish public insurance had failed due to the opposition of the organized medical profession, especially the AMA, who discredited these efforts as ‘socialized medicine’ (Oberlander 2003: 109; Starr 1982: 69). As a concession to the AMA, the ‘Prohibition against Any Federal Interference’ clause in the statutes of the 1965 Social Security Act prohibited the federal government from interfering in the autonomy of medical service providers. Consequently, the prices of medical and hospital services increased rapidly. Shortly after the state provided access to healthcare through Medicare and Medicaid, therefore, the oil price shocks and ‘tax payer’s revolt’ of the 1970s forced the government to put cost-containment strategies at the top of the agenda (Marmor 2000: 107; Patel and Rushefsky 1999). Once this need was made paramount, the debate about how to cope with soaring health costs centred upon two broad approaches: whether the state or the market has the greater potential to achieve this objective (Brown 1983; Marmor et al. 1992). As a regulatory measure, the federal government and the states began to control the number of hospitals. In addition, peer review organizations were established in the early 1970s to evaluate and monitor care provided in the publicly funded programmes. At about the same time, the federal government promoted managed care by establishing the HMO Act in 1973. Yet although both approaches to containing healthcare costs – the regulatory and the market based – were applied, their success was limited. Continually rising medical costs, combined with a recession marked by a period of stagflation, contributed to the withdrawal of a proposal to establish a national health insurance programme in the mid-1970s (Patel and Rushefsky 1999: 42). Although Medicare and Medicaid were under severe fiscal pressure almost from the moment they began, the inclusion of further segments of the population into the scheme continued (Patel and Rushefsky 1999: 222; Weissert and Weissert 2002). In line with the ‘new federalism’ inherited from the Nixon era, the 1980s under Reagan witnessed the devolution of federal authority to the states. For example, the federal government authorized the states to influence eligibility rules and to obtain waivers2 to force Medicaid beneficiaries into private managed care plans (France 2006: 92). As a further cost-containment measure, DRGs were introduced in Medicare in 1983 to limit provider payments. Thus, in contrast to Reagan’s rhetoric of deregulation, the government in fact regulated the public healthcare programmes more strictly, especially where the medical profession was concerned. In private insurance, general regulatory and tax collecting competences have been assigned to the US member states (Jost 2001: 463; Pollitz et al. 2000). Thus a decentralized approach to regulation is adopted, resulting in

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considerable variation between the individual states (Finegold 2005: 140). Furthermore, in 1974, through the Employee Retirement Income Security Act (ERISA), the federal government exempted all self-insured health plans3 from state taxation, regulation, and control (Gabel et al. 2003; Hacker 2004). The effects of ERISA have been quite substantial, as self-insurance has since grown considerably. Although the growing number of uninsured was increasingly perceived as a problem, only minor reform steps were possible in the following decades. In 1985 the federal government mandated minimal protection of workers in the transition between jobs through the Consolidated Omnibus Budget Reconciliation Act (COBRA). At the same time, it enacted the Emergency Medical Treatment and Active Labor Act (EMTALA) in order to provide free emergency treatment in hospitals to every individual, even if he or she is unable to pay. In 1993 President Clinton proposed the concept of ‘managed competition’ that would provide universal health insurance in a government-regulated, but highly competitive insurance market. However, the reform failed, due to the resistance of some critical actors from the health insurance industry and the employers’ sides, as these two groups were able to mobilize the support of the broader public (Finegold 2005: 172; Giaimo and Manow 1999; Quadagno 2005). After the defeat of the Clinton plan, the federal government took several incremental steps to increase access to existing public and private programmes (Hackey 2001; Pollitz et al. 2000; Walshe 2003). The Health Insurance Portability and Accountability Act (HIPAA), for example, was established in 1996 in order to improve the portability of group health insurance and to preclude insurers from applying pre-existing condition clauses in certain cases. Another step in this direction came with the Balanced Budget Act (BBA) of 1997, when President Clinton signed CHIP into law for the duration of ten years. The BBA also introduced an array of spending cuts and launched Medicare+Choice, which gave Medicare beneficiaries a wider choice of managed care plans (Oberlander 2003: 181). HIPAA and the BBA legislation also laid the fundamentals for Medical Saving Accounts and Health Spending Accounts4 (Fuchs and James 2005). In 2003, the Bush administration developed the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) to overcome a major limitation of Medicare , namely the gaps in the benefit package. With an effective date of the beginning of 2006, the MMA added a Part D prescription drug benefit for voluntary subscription. Part D differs substantially from the established Medicare programme as it must be provided by private insurers, thus emphasizing the growing importance of private sector arrangements. Since his election in 2008, a major focus of President Barack Obama’s domestic policy has been the reform of the US healthcare system. As a first

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Table 7.1 Overview of the major US healthcare reforms from 1965 and today Year

Title

Content

1965

Social Security Act, Titles XVIII and XIX

Introduction of Medicare and Medicaid

1973

Health Maintenance Organizations Act (HMO-Act)

Provision of funds for qualified HMOs Requires large firms to offer a HMO plan

1974

Employee Retirement Income Security Act (ERISA)

Exemption of self-insured health plans from states’ taxation and, regulation

1981

Omnibus Budget Reconciliation Act (OBRA)

Permission to move Medicaid beneficiaries into private managed care plans (section 1915b waiver)

1983

Social Security Amendments (SSA)

Introduction of DRGs in Medicare

1985

Consolidated Omnibus Budget Set-up of the COBRA plans to (temporarily) Reconciliation Act (COBRA) of 1985 continue group insurance when changing workplace

1985

Emergency Medical Treatment and Active Labor Act (EMTALA)

Requirement that hospital access be granted to emergency patients even when these are unable to pay

1993

Health Security Act (Clinton health plan)

Proposal of a mandate for universal health insurance, failed to pass the Congress in 1994

1996

Health Insurance Portability and Accountability Act (HIPAA)

Secures the portability and the continuation of employer-sponsored group insurance Prevents discrimination due to health status in group health plans

1997

Balanced Budget Act (BBA)

Introduction of the State Children’s Health Insurance Program (SCHIP) Introduction of Medical Saving Accounts Creation of Medicare+Choice

2003

Medicare Prescription Drug, Improvement, and Modernization Act (MMA) (effective 2006)

Offers a voluntary drug benefit plan in Medicare to subscribers

2009

Children’s Health Insurance Program Reauthorization Act (CHIPRA)

Continuation and expansion of SCHIP, renamed to CHIP (Children’s Health Insurance Program)

2010

Patient Protection and Affordable Care Act (signed March 23) and Health Care and Education Reconciliation Act (signed March 30)

Mandate for health insurance coverage, regulation of private insurers, measures to improve healthcare system performance Establishing of Health Insurance Exchanges

Source: Own compilation.

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step, in 2009 Congress legislated the expansion and continuation of CHIP to the year 2013. On 23 March 2010, President Obama signed the Patient Protection and Affordable Care Act into law, followed by the Health Care and Education Reconciliation Act on 30 March. The core provisions of the legislation are a mandate generally requiring citizens to buy and employers to offer health insurance coverage, regulation of the private health insurers, and several measures for improving the performance of the healthcare system. It furthermore establishes Health Insurance Exchanges from 2014 on, through which eligible individuals and businesses can buy insurance. The non-partisan Congressional Budget Office (CBO) estimates that about 32 million currently uninsured persons will be included in existing public and private schemes. Cost is estimated at 938 billion US$ over ten years. While some of the provisions are immediately effective, the legislation will not be fully phased in until 2019.

The financing dimension In order to systematically explore the changing role of the state in the US healthcare system, the chapter now turns to this book’s three analytical dimensions: financing, service provision, and regulation. According to our framework, laid out in Chapter 2 of this volume, we look at each dimension for alterations in the public/private-mix as well as territorial shifts. To start with the financing dimension, the chapter continues with a account of the funding levels in healthcare and then turns to the structure of healthcare financing. In addition, a detailed picture of the changing public/privatemix in terms of financing is provided for each healthcare sector. The next part of the chapter examines the territorial aspect, distinguishing the subnational, national, and international levels. The conclusion sums up the findings on the changing public/private-mix and on territorial shifts in healthcare financing. The level and structure of the public/private-mix in financing Total healthcare expenditure in the US increased steeply from 356 US$ per capita in 1970 to 6,933 US$ in 2006 (OECD 2009). When adjusting these data for price inflation (in year 2000 prices), nominal per capita expenditure grew from 1,292 US to 5,592 US$, which is still a considerable increase. As a percentage of GDP, healthcare expenditure over the same period rose from an already high 5.7 per cent to almost 16 per cent in 2006 (see right-hand y-axis in the figure below). Today, the US has the highest healthcare spending rate of all OECD countries, considerably exceeding the average of 9.5 per cent. Figure 7.1 below contrasts healthcare spending as a share of GDP and as real per capita expenditures in year 2000 prices. It shows that volatility in the first indicator is mainly caused by GDP changes, while healthcare spending per capita increased more steadily.

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7000

21.0

6000

18.0

5000

15.0

Health expenditure as % of GDP (right y-axis)

4000

12.0

3000

9.0

2000

Health expenditure per capita (left y-axis)

3.0

1000 0 1965

6.0

Total health expenditure as % of GDP

Real total health expenditure per capita (Prices 2000)

188 Mirella Cacace

0.0 1970

1975

1980

1985

1990

1995

2000

2005

Figure 7.1 Total healthcare financing as a share of GDP and per capita Source: OECD (2009).

Around the mid-1980s and from 1993 to 2000, healthcare expenditure growth as a percentage of GDP slowed down, and even declined temporarily. Especially noteworthy is the period between 1993 and 1997, which is also marked by a rapid expansion of managed care. This observation could support the view that managed care was able to effectively rein in healthcare cost, although this conclusion is debated (cf. White 2007: 405). A somewhat different interpretation, also plausible, is that pending Clinton reform (and the efforts of private industry to avoid it) led to self-restriction and some cost containment discipline (Brown 2010). In addition, comparison with per capita figures shows that particularly this period of successful cost containment coincided with an increase of GDP due to the booming US economy. Thus stagnation and decrease of healthcare expenditure as a share of GDP was also caused by an increase in the denominator. With the economic shocks unfolding in the aftermath of 9/11, the period of cost containment came to an end and both healthcare expenditure as a share of GDP and real per capita spending increased. From 2003 on, per capita expenditure growth slowed down. At the same time, GDP resumed its increase. This trend, as is well known, is only temporary as it has been followed by the credit crisis, not yet reflected in the 2009 OECD data. Figure 7.2 distinguishes public and private healthcare financing as a share of GDP and per capita. The introduction of Medicare and Medicaid and their first expansion phase increased public expenditures from 1.3 per cent of GDP in 1965 to 3.2 per cent in 1975, while private insurance spending declined in the first years. Public spending on healthcare as a share of GDP rose steadily to four per cent until 1983, when DRGs were introduced into the Medicare programme and public expenditure growth stagnated. When

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14.0

3500 Private health expenditure per capita (left y-axis)

3000

12.0 10.0

2500 2000

8.0

Private health expenditure as % of GDP (right y-axis)

6.0

1500 Public health expenditure as % of GDP (right y-axis)

1000

4.0 2.0

500 Public health expenditure per capita (left y-axis) 0 1965

0.0 1970

1975

1980

1985

1990

1995

2000

189

Public and private health expenditure as % of GDP

Real public and private health expenditure per capita (Prices 2000)

The US Healthcare System

2005

Figure 7.2 Public and private healthcare financing as a share of GDP and per capita Please note: Tax exemptions are counted as private spending (a different classification is suggested in this section). Source: OECD (2009).

comparing this observation to the corresponding per capita figure, however, it is obvious that the slow-down is mainly caused by a change in the denominator. Between 1990 and 1995, public expenditure increased steeply from 4.7 to six per cent, thereby consuming an increasing share of the GDP. Private expenditure, on the other hand, has accelerated in the 1980s but increased only slightly in the early 1990s and even shrank between 1993 and 1997, fluctuating around seven to 7.5 per cent of GDP until 2000. A marked decline in private spending, which also manifested in real per capita terms, occurred around the mid-1990s. As already discussed above, this decrease coincided with the spread of managed care, which accelerated in that period. Public expenditure lagged a few years behind its private counterpart, but declined nevertheless in relation to GDP, especially in 1998 and 1999. Some savings have been achieved through the BBA of 1997, which introduced several cost-containment measures (while at the same time launching CHIP, however). In the early years of this century, private spending took another leap, reaching 8.7 per cent of GDP or 3,320 US$ per capita in 2006. Premiums for family insurance coverage, for example, increased by 78 per cent over six years, compared with an inflation and wage growth of under 20 per cent (Kaiser Foundation/HRET 2007: 11f.). Within that time span, public healthcare expenditure also rose by about one percentage point to slightly more than seven per cent of GDP, or 2,680 US$ per capita. The next paragraphs turn to the structure of healthcare financing. According to the definition used in this book, the role of the state in healthcare

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financing is measured by the share of tax funding in total healthcare spending. In the US case, in addition, social insurance contributions will be included in state financing. This is justified, since in contrast to the German case (see Chapter 6) there are no self-governing collective actors to whom this financing source could be attributed. Consequently, both sources, tax financing and social insurance contributions, are associated with the role of the state in the US case (see Figure 7.3a). The private sources of healthcare financing comprise private health insurance funding, out-of-pocket payments, and other private funds, including charities, which are a source of some relevance to hospital funding (Getzen 2004; Nullmeier and Klenk 2009) (see Figure 7.3b). Before Medicare and Medicaid were introduced, only about 23 per cent of total health expenditure came from public funds, mainly from taxes. The overwhelming share of healthcare expenditure derived from private sources, especially out-of-pocket payments (45 per cent of total spending). At that time, only some minor programmes, for example workers’ compensation and temporary disability insurance, were financed by social insurance contributions. From Figure 7.3a/b we can see that with the implementation and expansion of Medicare and Medicaid, the public/ private-mix of healthcare financing in the US underwent a fundamental change. Public tax funding and social insurance financing increased considerably while total private expenditures decreased correspondingly. Outof-pocket payments, in particular, declined over time. Also noteworthy is the development of social insurance financing. Within ten years from the implementation of the public programmes, over an initial expansion phase, social insurance financing increased from two to almost 13 per cent. In sum, by 1975, public funding covered 41 per cent of all healthcare expenditure, after which it levelled off, remaining relatively

(a) Public financing % of total healthcare financing 100 90 80 70 60 50 Total public financing 40 Tax financing 30 20 10 Social insurance financing 0 1965 1970 1975 1980 1985 1990 1995 2000 2005

(b) Private financing % of total healthcare financing 100 90 80 70 Total private financing 60 50 Private insurance 40 Out of pocket 30 20 10 Other private 0 1965 1970 1975 1980 1985 1990 1995 2000 2005

Figure 7.3 Public and private financing in percentages of total healthcare financing Source: OECD (2009) (for tax exemptions, see above).

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stable until it started increasing again in the early 1990s. This new flow of public funds can mainly be attributed to the tax-financed Medicaid programme, and reflects several changes in the programme’s features. The poverty rate, which peaked around 1993, more generous payments made to hospitals treating a disproportionally high share of low-income patients, and the settingup of CHIP in 1997, all contributed to this trend (Kaiser Commission 2002: 92). In 2007 about 33 per cent of total healthcare expenditure was tax-financed and 13 per cent was derived from social insurance contributions. Although this means that in total almost 45 per cent of healthcare expenditure is levied from public sources today, this figure still underestimates the role of the state in healthcare financing (Docteur et al. 2003; Hacker 2002; Stone 2000). As explained in Chapter 3, OECD health expenditure data count several categories of healthcare spending as private expenditure, although de facto they come from public sources. In the US, the most relevant category of exemptions is tax subsidies, with which the federal US government promotes the take-up of private insurance. The federal government provides subsidies for (1) the exclusion from taxation of employer contributions to medical insurance premiums and medical care, (2) medical insurance premiums for the self-employed, (3) the tax exemption of Medical Savings Accounts and Health Spending Accounts, and (4) the deductibility of medical expenses (US OMB 1995–2009). Figure 7.4 quantifies these amounts by drawing on official documents of the US Government Office of

55 50

US OMB (1995–2009)

Woolhandler and Himmelstein (2002)

Sheils/Hogan (1999)

45

Sheils/Haught (2004)

40 Public spending excluding tax exemptions (OECD 2009)

35 30 25 20 1965

1970

1975

1980

1985

1990

1995

2000

2005

Figure 7.4 Public health expenditures including and excluding federal tax exemptions (in per cent of total expenditure) Source: Woolhandler and Himmelstein (2002); Sheils and Haught (2004); Sheils and Hogan (1999); US OMB (1995–2009, own calculations).

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Management and Budget (US OMB 1995–2009: solid line) and on estimates from the literature, especially from Woolhandler and Himmelstein 2002 (squares) for earlier years. It also uses the estimations of Sheils and Hogan (1999) for the year 1998, and Sheils and Haught (2004) for the year 2004 (triangles). These are compared to OECD health data estimates of public spending, excluding tax exemptions (OECD 2009, dotted line). As Figure 7.4 shows, the differences between the estimates including and excluding federal tax exemptions are quite substantial and – according to Woolhandler and Himmelstein’s historic data – tend to increase over time. In 1965, for example, classifying tax exemptions as public spending raises public expenditures by about four percentage points, from 23 to 27 per cent of total spending. Official documents, available from 1995 onwards, report a difference of about 6.5 percentage points, which has remained more or less stable over time until today. For 2010, the federal US government budgeted close to 174 billion US$ as forgone revenues due to tax exemptions, which is almost 1.2 per cent of the projected GDP of that year, or seven per cent of total spending in 2008 (US OMB 2009: own calculation). Looking again at Figure 7.3b, we see a second remarkable trend in US healthcare financing, this time an interesting shift within private financing. Although private insurance funding reacted to the introduction of Medicare and Medicaid with a temporary drop, it soon recovered, assuming a constantly growing share in healthcare financing. While private insurance made up 25 per cent of total healthcare financing in 1965, this figure had risen to 35 per cent by 2007 (OECD 2009). Out-of-pocket payments for healthcare decreased from a high of 45 per cent in 1965 to about 30 per cent in 1975 and down to 12.2 per cent in 2007. This out-of-pocket-rate is remarkable, as it is lower than in most OECD countries, for example Germany (13.1 per cent) and Canada (14.9 per cent), and even slightly below Denmark (13.8 per cent) (OECD 2009). Thus, even as public funds have been accounting for an ever increasing portion of the healthcare bill, collective financing through private insurance has also expanded, and the share of out-of-pocket payments has declined (Levit et al. 1990). This development is the result of the inclusion of further benefits in private insurance from the 1970s on (Oberlander 2003: 46). It was enforced in the late 1980s by the spread of managed care arrangements, which has widened the scope of benefits and tightened the requirements for out-of-pocket payments in private insurance. These quantitative data, however, have to be read with some degree of caution. First, they do not reflect the degree of solidarity associated with collective financing in private insurance. Solidarity in private insurance financing is restricted, since premium calculation, within limits set by the federal and state governments, follows the principle of risk-equivalence. The insurance function therefore is reduced to ex post subsidization, that is, transferring burdens from the sick to the well. Second, it should be kept in mind that although the percentage of out-of-

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pocket payments has decreased, the absolute amounts are still enormous, due to the high overall spending level caused by considerable price increases in medical care. Finally, these numbers do not say anything about the distribution of out-of-pocket costs, which tend to be regressive. As shown in Chapter 3 this means that low income people have to spend a disproportionately high share of their incomes on out-of-pocket payments. Thus, although collective financing through insurance increased, coverage might still be unaffordable for severely ill individuals with high out-of-pocket costs, and for those whose employers do not offer coverage. Within healthcare sectors In order to investigate the trends described above in greater depth, public and private spending in selected sectors will be examined. The following paragraphs start with the development of public and private financing shares in the inpatient sector, thereby distinguishing between hospital and nursing-home care (Figures 7.5a/b). The outpatient care sector shown in 7.6a includes physician, clinical, dental, and other professional services, as well as home healthcare. In addition, the dental care sector is examined separately here in Figure 7.6b. Figures 7.7a and b, finally, show the public and private financing shares of pharmaceuticals and on (durable and non-durable) medical goods. These sectors have very different sizes, which in addition changed over time (see section on service provision). In 1965, with the notable exception of inpatient care, the government’s role in financing was very modest in all sectors. While public spending on inpatient care was slightly above 35 per cent, it accounted for only six per cent of outpatient care and less than that in all other sectors (CMS 2009). This public/private-mix altered fundamentally when Medicaid and Medicare were introduced and subsequently expanded. In hospital care, public expenditure rose steeply from 37 per cent in 1965 to about 55 per cent of total inpatient care expenditure in 1975. In the early 1990s a second leap is observable, increasing the public share to over 60 per cent. Starting in 1996, public financing of hospital care shrank slightly to 57 per cent in 2000, henceforward fluctuating around that margin. Within this time span, private insurance financing declined from 41 to about 36 per cent and out-of-pocket payments fell from 20 per cent to their all time low of three per cent in 2008. Very different from the hospital sector, nursing home care traditionally was financed by private out-of-pocket payments. In 1965, almost 60 per cent of spending derived from this source. Private insurance does not cover long-term care benefits and therefore plays a minor role in financing until today. With the introduction and expansion of Medicare and – particularly – Medicaid, public spending increased from an already high 40 per cent to slightly over 60 per cent in 2008. Today, 7.4 per cent of total spending on nursing-home care comes from private insurance and about 27 per cent is raised out of pocket.

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194 Mirella Cacace (a) 100

Hospital care

(b) 100 80

80

Total public financing

60

Total public financing

60

40

40 Private insurance 20

Nursing home care

Out-of-pocket

Private insurance Other private 0 1965 1970 1975 1980 1985 1990 1995 2000 2005

Other private

0 1965 1970 1975 1980 1985 1990 1995 2000 2005

Figure 7.5 homes)

Out-of-pocket

20

Public and private financing of inpatient care (Hospitals and nursing

Please note: Tax exemptions are counted as private spending. Source: CMS (2009).

(a) 100

Outpatient care

(b)

Out-of-pocket

80 60

Dental care

100 80 Out-of-pocket

60 Private insurance

40

Total public financing

20

40

Private insurance

20

Other private 0 1965 1970 1975 1980 1985 1990 1995 2000 2005

Total public financing 0 1965 1970 1975 1980 1985 1990 1995 2000 2005

Figure 7.6 Public and private financing as percentages of outpatient care sectors Source: CMS (2009) (for tax exemptions, see above).

Although the state assumed, and has always had, the biggest role in the inpatient sector, the growth rate of public financing was even more dramatic in the outpatient sector. From 1965 to 1975, public expenditure expanded from six to 25 per cent of outpatient spending, followed by a more or less constant increase throughout the 1980s and 1990s, reaching 35 per cent in 2008. Within a span of 30 years, out-of-pocket payments fell dramatically from 68 (1965) to only 18 per cent of total outpatient sector spending in 1995 and have continued to decline slightly until today (see Figure 7.6 a). Dental care, although part of the outpatient healthcare sector, shows a quite distinct pattern. In 1965, almost all care delivered in the dental sector was paid for out-of-pocket (see Figure 7.6b) The introduction of the public programmes did not bring about much change, since routine dental care

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procedures are not covered under Medicare, nor are most dental care services included in the basic Medicaid package (Kaiser Commission 2002). Here the expansion of private coverage played a major role, as, over time, private insurance offered more comprehensive benefit packages. While fewer than five per cent of the privately insured had dental coverage in 1965, this number increased to over 50 per cent by 1981 (Oberlander 2003: 46). For the financing structure this means that in 1980 about a quarter of all dental care, and by 2008 almost half, was paid for by private insurance. Out-ofpocket expenditure dropped steeply from 97 per cent in 1965 to 44 per cent. Public spending rose moderately from a low one per cent margin to seven per cent in 2008. The pharmaceutical sector also experienced a marked decline in out-ofpocket payments, which has even accelerated during the past two decades. Although the traditional Medicare programme did not cover outpatient drugs, and though they have been an optional benefit until today in Medicaid, public financing played an increasing role in paying for pharmaceuticals. The public share rose from a low two per cent in 1965 to 27 per cent in 2005. Since the MMA became effective in 2006, it even climbed to 37 per cent in 2008 (see Figure 7.7a). Thus, the pharmaceutical sector was influenced less by the introduction of the public programmes than by their expansion over time, especially over the last decade. Private insurance financing increased from less than four per cent in 1965 to 50 per cent around 2000 but then slowed down and dropped, eventually reaching 42 per cent in 2008. Out-of-pocket financing fell from over 95 per cent in 1965 to 20 per cent in 2008. The medical goods sector, which includes durable goods as well as non- durable, is still dominated by consumers’ out-of-pocket payments. Throughout the entire period, private insurance funding has played a

(a) 100 80

(b) 100

Prescription drugs

Medical goods Out-of-pocket

Out-of-pocket

80 60

60

Private insurance 40

Private insurance

40 20

20

Total public financing

Total public financing 0 1965 1970 1975 1980 1985 1990 1995 2000 2005

0 1965 1970 1975 1980 1985 1990 1995 2000 2005

Figure 7.7 Public and private financing as percentages of pharmaceuticals and medical goods Source: CMS (2009) (for tax exemptions, see above).

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marginal role, covering only five per cent of all expenditure in 2008. Meanwhile, however, public financing also increased in that sector, leading to a public funding share of almost 17 per cent today. Territorial aspects of healthcare financing The US case distinguishes three territorial levels: (1) the sub-national, defined by the US member states with their regional and local governments, (2) the national or federal, and (3) the international level. In public healthcare financing, territorial differentiation depends on which level of government contributes to financing. In 1965, before Medicare and Medicaid were introduced, the sub-national level was responsible for about 55 per cent of all public spending (CMS 2009). From then on, the federal government became an important payer, as it is responsible for Medicare financing and also provides matching grants to the state Medicaid programmes. The sub-national governments’ share, therefore, dropped by ten per cent from one year to the next after the introduction of the public programmes. As a result, the respective spending ratios almost exactly swapped places, to 45 per cent sub-national, and 55 per cent federal spending. Over time, as the federal government took ever-increasing responsibility for financing, the decline of sub-national financing continued, reaching 35 per cent in 1975. Especially in the early 1980s, during the first years of the Reagan administration, the federal government changed some features of the Medicaid programme in order to shift financial responsibility back to the US states (Patel and Rushefsky 1999: 178). Eventually, however, this manoeuvre led only to a temporary stagnation in the growth of the federal government’s share. From a long-term perspective, the centralization process in public financing has continued until today with the effect that the federal public spending share has reached almost 75 per cent in 2008 (CMS 2009). In private health insurance, it is not possible to make territorial distinctions according to funding levels. Here territorial shifts are measured as changes in the operating level of the private insurers (cf. Chapter 2 for the concepts referred to here). One of the most important developments to begin with here, is the high rate of mergers and acquisitions, leading to a movement from the sub-national to the national level (Chollet et al. 2003; Corrigan et al. 1997: 13). This concentration process was accompanied by an accelerated profitization, which means that many insurers converted from non-profit to for-profit enterprises (Patel and Rushefsky 1999: 308; Town et al. 2004). The Blue Cross/Blue Shield (BCBS) health plans, for example, started to operate as local, non-profit or mutual organizations. Due to fierce competition from for-profit insurers, many BCBS health plans converted into for-profit companies, thereby explicitly preparing themselves to merge with nationally operating public-stock companies (Beaulieu 2004). The first HMOs also began as local or regional plans, and typically also as nonprofit insurers (Gray 1991; Town et al. 2004). From the late 1980s on, large

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nationwide for-profit indemnity insurers sought mergers with non-profit HMOs in order to gain ground in the managed care market. Thus, between 1995 and 2005, more than 400 mergers and acquisitions occurred involving health insurers and managed care organizations (Ginsburg 2005). At the same time, more and more HMOs converted from non-profit to forprofit ownership status. While in 1981 only 12 per cent of all HMO enrolees subscribed to a for-profit plan, that number has since increased to 63 per cent in 2002 (CMS 2003a). Although for-profit ownership was the rule, it was not a necessary condition for centralization. The expansion history of Kaiser Permanente, which is the owner of the largest non-profit HMOs with overall about 8.5 million members, went back and forth, but finally Kaiser Permanente also spread from California to many other US regions. As a result, five of the largest for-profit heath insurers cover about 60 per cent of the private market today (Chollet et al. 2003; cf. White 2007: 413). According to the Forbes-ranking, which measures company size by an index composed of sales, profits, assets, and market value, the UnitedHealth Group is currently the market leader (Forbes 2009). UnitedHealth Group reported sales of 81 billion US$ with profits of almost 3 billion US$ in 2009, the year after the most severe financial crisis in contemporary times. It covers more than 70 million individuals and offers health plans in every US-state. WellPoint is the second largest health insurance provider, serving approximately 34 million members in 14 states. To continue the Forbes list, Aetna Inc., with almost 19 million is the third-largest, and Humana and Cigna are the fourth- and fifth-largest for-profit insurance companies in the US. Some health plans also achieved international spread. UnitedHealthcare, for example, offers full coverage health insurance to ‘expatriates’, that is to Americans who are living abroad, through a partnership with the Britishbased BUPA International. The corresponding holding company has either full ownership or joint venture arrangements with healthcare organizations in Hong Kong, Malaysia, India, the Philippines, and Portugal. Cigna has a health insurance branch in Europe, but is represented exclusively in Great Britain. Besides these full insurance coverage plans offered abroad, a great deal of the international business of American companies concerns supplementary private health insurance. The largest seller of supplemental insurance contracts is American International Group (AIG). In 2008, AIG was heavily affected by the financial crisis and received massive financial support from the US government. Evidence of the trend towards centralization and internationalization is corroborated once we count the employers who self-insure their employees as insurance carriers. This is reasonable, as by 2009 about 57 per cent of all employees with health insurance coverage were in a self-funded health plan (Kaiser Foundation/HRET 2009: 157). It is mainly large multi-state employers that are likely to self-insure their employees in order to avoid compliance with varying state law (Gabel et al. 2003: 209; NCHS 1997: 11).

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These employers mainly operate at the national or even at the international level. As self-insurance grew during recent decades, centralization at the national level and internationalization also accelerated. Summary of the changing role of the state in financing The summary starts with the territorial shifts in the financing dimension of the US healthcare system. There is a movement from the sub-national to the national level in public healthcare financing and also in private insurance. These developments are most pronounced in for-profit ownership, but also occur with non-profit insurers. Additionally, some internationalization trends are observed as private companies increasingly offer health insurance abroad, especially supplementary coverage. Concentration processes and profitization lead to a concentration of market power within the private insurance industry. The public/private-mix is increasingly tilted towards more public funding from 1965 onwards. The inflow of public funds is mainly attributable to the public Medicare and Medicaid programmes, but is also a result of constantly rising tax subsidies provided to the benefit of private, employer-sponsored health insurance. With social insurance contributions, a new element of healthcare financing was strengthened in the American system. Collective funding also increased through the expansion of private insurance, leading to a considerable decline in out-of-pocket payments in all healthcare sectors. Thus, looking at developments since the mid-1960s, a ‘privatization of risks’ (Hacker 2004: 254) in purely quantitative terms is not observed in the financing dimension. However, these quantitative data do not reflect the fact that insurance protection leaves severe gaps in coverage, leaving millions without insurance. What is more, due to the high cost of medical care, total healthcare spending levels in the US have increased substantially. Thus, even low out-of-pocket payment rates equate to relatively high absolute amounts. Another aspect is that the degree of solidarity in private health insurance financing is low, since premiums are risk-related. As will be discussed in detail, competition in the private health insurance market led, over time, to less solidarity in the mode of premium calculation, less redistribution, and therefore also to fewer options for single individuals to receive affordable coverage. All these aspects, however, are dealt with in the section on regulation, especially the regulation of the financing system.

The service provision dimension Service provision is the second dimension to be studied using quantitative measurement. The following paragraphs start with a general description of the overall level of provision before turning to the role of the state in the delivery of services. Analogous to the Public Provision Index provided in Chapter 4 of this volume, a trichotomous division of the structural indicator

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is estimated for the US. This starts by measuring the size of each healthcare sector, then combining this measure with the respective public/private-mix in each sector. This examination is followed by the description of developments with regard to territorial aspects. The section concludes by bringing together these findings on the changing role of the state in service provision. The level of service provision Between 1965 and today, far-reaching changes have also occurred along the service provision dimension in the US. The first remarkable trend can be seen in the form of a considerable decline in the number of inpatient beds. The total number of hospital beds decreased continuously from 8.8 per 1,000 of the population in 1965 to 3.2 in 2006, which is one of the lowest inpatient bed ratios in the OECD world (OECD 2008). After this consolidation, the AHA counted 5,815 hospitals with about 956,000 inpatient beds across the US in 2009 (AHA 2009). While the total number of inpatient care beds also includes psychiatric care, rehabilitation, long-term care, and palliative care, the number of acute-care beds counts hospital beds provided solely for curative care. Acute-care beds increased from 1965 until 1975 from 3.8 to 4.4 per 1,000 of the population, remaining stable until the early 1980s. From 1983 on, when DRGs were introduced in the inpatient sector by Medicare, this number started to decline steeply, eventually reaching 2.7 per 1,000 in 2006. Overall, as Figure 7.8 shows, in 1965, the number of acute-care beds was about 1.3 times (or 130 per cent) higher compared to the index year 2000. Until 2006, it continued to decline to 95 per cent of the year 2000 level. At the same time, there was an almost linear increase in health employment. The number of personnel employed in the healthcare sector (head counts) grew between 1965 and 2006 from 10.7 to 42 employed persons per 1,000 of the population. In relation to the index year, health employment increased steadily from about 25 per cent of its size in 1965 to almost 110 per cent in 2006. Hospital employment (not shown) increased from ten per 1,000 of population to 16 in 1983. Following a short decline after DRGs were introduced, hospital employment growth resumed a few years later, henceforward remaining around 16 per 1,000 until 2006 (OECD 2008). The decrease in the number of acute-care beds, therefore, should not conceal the fact that the hospital sector is still expanding in terms of employment. Time series for the number of physicians available in the OECD health data are much shorter. Between 1993 and 2006, these show a slight growth trend from 2.1 per 1,000 of the population to 2.4 (OECD 2008). In year 2000 terms, this means an increase from 90 per cent of this level to almost 105 per cent. The number of dentists and pharmacists remained fairly stable. Dentists increased slightly from 0.5 to 0.6 per 1,000 between 1975 and

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Mirella Cacace Hospital beds, practicing physicians, total health employment per 1,000 of population in percentages (Index year 2000=100%)

200

Figure 7.8 per cent)

160 140

Acute care hospital beds

120 100 80

Practicing physicians

60 Total health employment

40 20 1965

1970

1975

1980

1985

1990

1995

2000

2005

Changes in service provision levels in percentages (Index year 2000=100

Source: OECD (2008).

2005, pharmacists counted 0.8 per 1,000, with almost no change between 2000 and 2006. The public provision index in American healthcare delivery Turning now to the public/private structure and the role of the state in service delivery, the size of the different healthcare sectors is measured in monetary terms indicating the flow of funds into the sectors (see Chapter 4). In the first half of the study period, most monetary resources are absorbed by the inpatient hospital sector (OECD 2009, see Figure 7.9) From 1965 up to the turning point marked by DRG introduction, the percentage of total health expenditure allocated to inpatient care increased rapidly from about 37 per cent in 1965 to 42 per cent in 1983. The share subsequently decreased as quickly as it rose, eventually reaching 24 per cent in 2005. The corresponding monetary resources allocated to the outpatient sector remained constant at a few percentage points below the 40 per cent margin and increased from the early 1980s on, eventually reaching 53 per cent in 2005. The turning point is clearly marked by the introduction of the DRG-based prospective payment system. Although their effect on hospital rates is unclear in the long run, DRGs meant that procedures that had been performed on an inpatient basis have since been moved to less-costly outpatient settings (Getzen 2004). Medicaid and private insurers followed the Medicare example and introduced DRGs in the 1990s. The continuing horizontal integration of the healthcare sectors initiated by the spread of managed care intensified

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Resource flows in healthcare sectors in % of total personal healthcare expenditure

60 Outpatient care 50

40

30

20

Inpatient care Pharmaceuticals and medical goods

10 Long-term care 0 1965

1970

1975

1980

1985

1990

1995

2000

2005

Figure 7.9 Percentages of monetary resource flows in all sectors5 Source: OECD (2009).

the shift from inpatient treatments to the less costly outpatient sector, especially as prior authorization requirements for hospital stays stimulated efforts to provide care in the most appropriate setting (Kronenfeld 2002: 73; Levit et al. 1997). Hence, over time, relatively less monetary resources were directed into the inpatient and more to the outpatient sector. The relevance of long-term nursing-home care also increased during the present period of observation, mainly due to demographic changes. Between 1965 and 2007 the percentage of persons aged 65 and over in the population grew from 9.5 to 12.6 in 2007 (OECD 2009). Until the end of the 1990s the percentage of monetary resources devoted to that sector more than doubled from four to nine per cent. In 1998 DRGs were also introduced to the nursing-home sector with the consequence that ambulatory care was also promoted in long-term care (cf. CMS 2003b). Consequently, resource flows devoted to in-patient care in nursing homes decreased to 7.6 per cent of the total. The percentage of resources allocated to the pharmaceutical sector (including medical goods) declined sharply from 20 per cent in 1965 to about 12 per cent in 1980, remaining fairly stable from then on until 1990. Starting in the second half of the 1990s, however, due to price increases and higher consumption levels, prescription drugs have represented the most rapidly growing cost component of service delivery (AHA/Avalere Health 2008: 9; cf. Docteur et al. 2003). The percentage of monetary resources spent on pharmaceuticals, therefore, rose rapidly to 16 per cent in 2005. Having gathered the information on the size of the respective sectors and its changes over time, the next step is to describe the changing public/

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Mirella Cacace

private-mix in each healthcare sector. The hospital sector distinguishes between public, private non-profit and private for-profit ownership of facilities. As described in more detail in Chapter 3 of this volume, the role of the state is measured as the share of inpatient beds in public ownership. The AHA reports the number of short-term general and acute-care beds in community hospitals according to ownership as well as public beds in federal hospitals from 1975 on.6 From Figure 7.10 we see that beds in private for-profit as well as non-profit ownership increase their market share at the expense of public facilities. The share of public inpatient beds declined from almost 30 per cent of all hospital beds in 1975 to about 20 per cent in 2007 (AHA 2000; US DHHS 2010a: 384, own calculation).7 While an accelerated decrease is observable until the end of the 1990s, the share of public beds has remained relatively stable during the past decade. During the same period, the number of beds in private for-profit ownership nearly doubled from seven to almost 14 per cent. Most inpatient beds, however, are owned by private non-profit hospital care providers. In 1975, private beds in non-profit facilities accounted for about 64 per cent of all hospital beds. Although their absolute number decreased, this type of hospital was able to hold and even slightly expand its market share to 66 per cent in 2007. Hence, non-profit service provision still prevails in the US hospital sector today, although the market share of private for-profit hospitals is on the rise. These numbers reflect a fundamental and ongoing change in the American hospital industry as a response to both market requirements and government policies. In light of increasing market competition following the growth of managed care, the US government sold its municipal hospitals

100 80 Private non-profit 60 40 Public beds 20

Private for-profit

0 1975 Figure 7.10

1980

1985

1990

1995

2000

2005

Inpatient hospital beds according to ownership as percentages of total

Source: US DHHS (2010a), AHA (2000), own calculation.

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(Getzen 2004), which led to material privatization in the US hospital sector. Remarkably, not only the market, but also the government played a role in creating this competitive environment by shifting the beneficiaries of the public programmes into managed care arrangements and through the introduction of DRGs in the Medicare programme. As a result, in the 1980s there was an increasing concern that a few very large commercial suppliers would come to dominate the hospital industry (Döhler 1990). But this expectation did not come true, for two reasons. First, concentration in the hospital sector is prevented by competition law, although the Federal Trade Commission established several ‘safety zones’ for hospital mergers (Sage et al. 2003). Second, and perhaps even more relevant, might be the fact that the nonprofit sector is supported by tax subsidies and exempted from some regulations regarding malpractice liability and anti-trust laws (Gray 1991). As a consequence, non-profit hospitals even were becoming the more ‘profitable’ institutions (Marmor et al. 1986; Nullmeier and Klenk 2009). In exchange for subsidization, non-profit hospitals have to provide community benefits, that is, free or low-cost healthcare services to the poor or indigent.8 The tax instrument, therefore, also allowed the government to maintain its function as a safety-net provider while at the same time retreating from direct service provision. Apart from material privatization, there is a trend towards functional privatization through the outsourcing of secondary functions. Hospitals, for example, commission the US service industry with laundry services, facility cleaning and catering (for example ‘meals on wheels’). Management functions, such as human resource management, payroll accounting, and staff administration are also transferred to specialized organizations. Another form of outsourcing is the establishment of Pharmaceutical Benefit Management Organizations, which bundle the demand of many physicians and hospitals for prescription drugs in order to bargain for prices with pharmaceutical companies (Amelung 2007: 200). Most of these highly specialized suppliers of services are private for-profit businesses, therefore functional privatization, in contrast to material privatization, clearly promotes profitization. Data availability for the ownership structure of nursing homes in the US is limited to a shorter time series. Between 1994 and 2007, ownership structure remained relatively stable in nursing-home care (Harrington et al. 2001; Harrington et al. 2008). The share of government-owned facilities declined slightly from 6.8 to below six per cent. Throughout that period, about 66 to 67 per cent of all nursing homes were owned by for-profit organizations; the remaining 27 to 28 per cent being private non-profit facilities. Compared to the hospital sector, the ownership structure of nursing homes shows a much higher percentage of private for-profit facilities. Turning to the outpatient sector, the public/private-mix is determined by the employment status of providers. Except for funds allocated to the outpatient services provided by hospitals,9 most monetary funds in this

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Table 7.2 The Public/private-mix in US service provision, trichotomous distinction 1975

1980

1985

1990

1995

2000

14 29 57

13 30 57

11 27 61

9 24 67

8 22 70

6 21 73

Public Private non-profit Private for-profit

2005 6 20 74

Source: Own calculation.

sector flow to private practices, which are operated by self-employed, and therefore private for-profit, providers (De Alessi 1989). The fact that all (outpatient) dentists and pharmacists are also self-employed justifies the decision to count outpatient service provision entirely as private profit-oriented delivery. Nevertheless, there is some inaccuracy as it is not possible to quantify hospital outpatient services within the OECD data. In combining this information about the developments in the single healthcare sectors, a trichotomous distinction between public, private non-profit and private forprofit service provision is shown in Table 7.2. The results of this trichotomous distinction need to be interpreted carefully as several simplifications were necessary due to data limitations.10 Nevertheless, the data clearly corroborate the statement that the role of the state in service provision has declined over time (cf. Cacace 2007, see also Chapter 4). In 1975, 13 per cent of all service delivery was provided by public entities, while 30 per cent counted as non-profit and 57 per cent as for-profit provision at that time. This ratio indicates low public involvement in service provision at the start of data series. In the first decade until the mid-1980s, inpatient hospital care contributed the strongest weight to the computed indicator since most monetary resources were allocated to it. In inpatient care, the state slowly but persistently retreated from direct service provision, as measured by decreasing numbers of inpatient beds in public ownership. Thus, public provision shifted to 11 per cent in 1985. From the mid-1980s on, due to the introduction of DRGs and the spread of managed care, the size of the inpatient sector declined and relatively fewer resources were devoted to it. These developments corroborate the observed effect as resource flows were re-directed from the inpatient sector, where the state played at least some role, to the outpatient sector, which is entirely private profitoriented. Thus, as the direct retreat of the state from service provision continued, it was reinforced by an implicit retreat due to the withdrawal of resources from the inpatient sector. In sum, both effects in combination led to an acceleration of the observed phenomenon, ending with a public service provision of only eight per cent in 2005, thereby clearly indicating a retreat of the state in service provision. In the first decade,

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between 1975 and 1985, private non-profit delivery of services could hold its market share constant at about 30 per cent. As the importance of the inpatient sector declined, the share of non-profit provision fell to 25 per cent in 1990 and continued to fall, eventually accounting for 20 per cent of service delivery in 2005. Private-for profit service provision, by contrast, increased from 57 per cent in 1975 to almost 75 per cent in 2005. Its share is on a steady increase, mainly due to the growing significance of outpatient care. Territorial aspects of service provision On the service provision dimension, territorial shifts are measured as changes in the operating level of healthcare providers. Corresponding to the financing dimension, (de)centralization denotes a movement from the national or federal level to the individual US-member states and their regional and local governments and vice versa. In public service provision, the indicator of territorial shifts is a change in ownership of federal facilities in relation to states or communities. In 1975 the federal government operated almost 40 per cent of all public beds. This share decreased continuously to about 26 per cent in 2007, indicating a retreat of the nation state from service provision in relation to state and local governments (US DHHS 2010a: 384). In the private sector, hospital systems (defined by the AHA as two or more hospitals owned, leased, sponsored, or contract-managed by a central organization), as well as chain formation must be taken into account when observing changes at the territorial level. This fundamental reorganization in service provision started with the horizontal integration of hospital facilities into large hospital systems or national chains in the 1970s. While the private for-profit hospitals initiated this trend, non-profit providers soon followed suit. In 1982 almost 44 per cent of all hospitals in a system were for-profit, about 52 per cent were private non-profit providers, and only a small reminder of 3.5 per cent were public hospitals (Döhler 1990: 353). In the wake of the privatization of the hospital sector, the process of concentration into larger hospital networks and systems accelerated (Döhler 1990; Scott et al. 2000). This centralization process changed in character from the mid-1980s on. As a consequence of the introduction of DRG, which brought hospitals under strain as their revenue expectations declined, many for-profit networks and systems disintegrated horizontally by divesting their hospitals (Gray 1991: 41ff.). Instead, as a new strategy, they aimed at entering profitable market segments in fields where no DRGs were applied, such as psychiatric care, skilled nursing facilities, and outpatient care (Levit et al. 1997; Oberlander 2003: 125). Thus, throughout the 1980s, hospitals integrated forwards and backwards creating large multi-institutional chains (Tuohy 1999: 135). Private for-profit chains tended to grow faster, becoming larger than their non-profit counterparts.

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They spread across several US member states (Corrigan et al. 1997; Scott et al. 2000: 271). Horizontal integration resumed through the proliferation of managed care when hospitals merged in an endeavour to improve efficiency. At the same time, the financing and delivery of healthcare became vertically integrated as many hospitals entered the insurance business and large HMO insurers, aiming at geographic expansion, acquired their own clinics (Lesser and Ginsburg 2000; Scott et al. 2000: 288). From the second half of the 1990s, as a consequence of the managed care backlash, this centralization trend was partially reversed. Mergers and acquisitions peaked in the mid1990s, but have been on the decline since then (Cuellar and Gertler 2003). The move away from tight vertical and horizontal integration and towards ‘virtual integration’ reflected the preferences for looser forms, based on contractual networks instead of unified ownership (Ginsburg 2005; Lesser and Ginsburg 2000; Robinson and Casalino 1996). The incentive for integration further declined when DRGs or similar payment systems were implemented in fields formerly not covered by that payment method. In the nursing-home sector, 53 per cent of all facilities were owned or leased by multi-facility organizations in 2007, down from 56 per cent in 2001 (Harrington et al. 2008: 23). At the international level, some hospital chains have expanded outside US territory. The Hospital Corporation of America (HCA), the largest hospital system in the US, owns and operates approximately 182 hospitals and 94 freestanding surgery centres in 22 US states and operates hospitals in England and Switzerland. But only a few US hospitals have gained international spread. Tenet, the second largest for-profit hospital system, previously owned hospitals outside the US, but has since divested its international operations and is focused on a domestic business strategy today. The Health Management Association, the third-largest for-profit hospital chain, also maintains no hospitals outside the US. In the opposite direction, internationalization can also be measured in terms of foreign facilities entering the US hospital market. Since the American hospital sector has been opened to trade under the General Agreement on Trade in Services (GATS), market access is also granted to foreign competitors (Belsky et al. 2004). The Pacific Health Corporation of the German Asklepios Group, for example, operates six hospitals in California. Strong internationalization trends, however, are found in the pharmaceutical sector and in the production of medical devices and equipment (Holden 2005). Pfizer, for example, one of the largest pharmaceutical manufacturer worldwide, is located in the US and its international operations are spread all over the world. Internet pharmacies distribute their products to an international clientele, especially where over-the-counter products are concerned. Cardinal Health, the largest US-based supplier of medical devices, is represented in six continents.

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Thus, in sum, although some internationalization is observable in the hospital sector, this is still no general trend (see also Holden 2005: 678). Today, hospital chain formation rather needs to be understood as the formation of small, local chains instead of large national and international ones (Cuellar and Gertler 2003). Non-profit hospitals, in particular, traditionally respond to local community needs and receive public tax money in exchange. Therefore most multi-hospital systems with high non-profit provider participation are regional alliances and have a local focus (Cuellar and Gertler 2003; Lesser and Ginsburg 2000). Summary of the changing role of the state in service provision The role of the state in service provision was already low in the mid-1970s and continued to decrease. Over time, the state retreats from the direct delivery of services. This observation can in the first instance be verified as material privatization in inpatient care, where in the light of an increasingly competitive environment, the government has divested its hospitals. At the same time, the US government supports non-profit providers through tax subsidies, thereby preventing the profitization of the hospital sector. Hence, the hypothesis of a change from the ‘positive to the regulatory state’ (Majone 1997: 139) is supported in hospital care, which means that the retreat of the state is partially compensated for through government regulation. Functional privatization, by contrast, gave rise to the for-profit service industry. Nevertheless, and quite unlike the outpatient sector, the state plays at least a small role in inpatient care. From the mid-1980s on, fewer monetary resources have been devoted to the inpatient sector, leading also to an implicit retreat of the state in service provision. From the 1970s until the mid-1990s, horizontal and vertical integration stimulated the creation of large multi-institutional health systems. These concentration processes correspond to a territorial shift from the local to the regional and to the national level,and are most pronounced in for-profit ownership structures. The most recent development, however, is that hospital chain formation has become local, indicating a reversal and therefore a decentralization trend. Internationalization remains more or less at the fringes of healthcare delivery, affecting the pharmaceutical industry and the supply of medical devices more than the core competencies in inpatient or outpatient service provision.

The regulation dimension As outlined earlier, the US healthcare system consists of several sub-systems due to the coexistence of many public and private third-party payers. This property leads to most complex regulatory structures, which will be explored qualitatively within the regulation dimension. Following the analytical approach of our framework, this section describes who regulates the fundamental relationships between financing bodies, (potential) beneficiaries,

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and service providers. The discussion of the distinction between public and private actors in the regulation of the American healthcare system is followed by an examination of shifts at the territorial level. The conclusion brings together the findings on the changing role of the state in the regulation dimension. The evolution of private hierarchy in the managed care market Managed care will play a considerable part in the following argument. The regulation dimension therefore starts by describing the fundamental mechanisms of governing providers and patients in managed care. Consecutively, the spread of managed care and its different organizational forms will be shown. These sections distinguish between HMOs, PPOs and POS, which are the core organizational forms already mentioned. It is to emphasize, again, that this distinction is somewhat artificial as several mixed-types exist (cf. Hacker and Marmor 1999). Mechanisms of governance in managed care Although there is no single broadly accepted definition, there seems to be some agreement that managed care differs from conventional indemnity insurance11 in the specifications of the contractual relationship between insurers, patients and service providers. In the classic staff-HMOs, which were the first models of managed care that emerged in the American healthcare market, insurers and providers were integrated into one organization (see, for example, Patel and Rushefsky 1999; Wagner 2003). For this purpose, HMOs employed primary and specialist care providers on a salaried basis and built up or acquired their own clinics. Therefore, HMOs not only merged the functions of insurance and service provision under unified ownership, but also tightly integrated inpatient and outpatient care provision. This vertically and horizontally integrated organizational form stands in deep contrast to traditional indemnity insurance, where insurers and service providers operated independently from one another. Over time, the HMO market became highly diversified, with the group-model, the network-model, and the independent practice association (IPA) complementing the staff-model. The staff-model applies to an HMO where the medical staff, including primary and specialist care physicians, is employed. In the group-model, the HMO contracts with a provider group, which in turn might employ the individual physicians. In the network-model and in Independent Practice Associations (IPAs), the HMO usually contracts with more than one provider group and also with individual practices (cf. Wagner 2003). In addition, so-called ‘mixed models’ emerged, which combine at least two of the aforementioned HMO-models. Under the staff-model HMO, physicians are salaried employees; a remuneration method that provides incentives to limit the amount of provided services. In order to promote cost and/or quality-related performance,

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the providers can be offered a financial incentive (bonus/malus option) (Amelung 2007; Wagner 2003). Under all other models, providers are selectively contracted according to their economic and quality-related performance (credentialing), and contract renewal depends on the providers’ actual performance characteristics (Erdmann 1995: 92; Kongstvedt 2003). In contrast to the PPOs described in the following, payment in a HMO is usually made according to a prospective all-inclusive capitation rate, which means that providers receive a fixed sum per HMO-subscriber (Wagner 2003: 26). Whereas under traditional indemnity insurance the provider was reimbursed retrospectively according to the fee he or she demanded (feefor-service principle), all HMO models thus imply some sort of prepayment. Typically, the capitation is administered by a gatekeeper, generally the primary care physician, who is in charge of co-ordinating service provision and distributing payments accordingly. Although capitation rates today are risk-adjusted, usually by taking age and gender as indicators, much of the risk of treatment is shifted from the insurer to the provider. The service provider is therefore forced to match economic considerations with medical treatment decisions if he contracts with an HMO. For that reason, capitation payments became increasingly unpopular amongst physicians. In addition, providers have to accept review procedures and further interference in clinical decision-making in a HMO. Patient behaviour is also controlled in an HMO, as several restrictions are put on the utilization of care. For example, free choice of providers, a principle traditionally upheld for patients under indemnity insurance, is confined to the HMO-staff or to the pre-selected network. In addition, the gatekeeper restricts patients’ access to specialists. Depending on the seriousness of their condition, patients in HMOs might not even see a physician at all during their episode of illness, as new professional careers like the nurse practitioner or the physician assistant have been created to provide care at lower cost (Scott et al. 2000: 352). Cost-sharing, as an alternative method of steering the excessive consumption of services, is in general not applied by HMOs. In this respect, HMOs differ crucially from indemnity insurance and PPOs, which are discussed next. In a PPO, a network of self-employed providers is related to the managed care organization through contracts. This means a move away from tight vertical integration towards ‘virtual integration’ within a network of medical care providers and hospitals (Lesser and Ginsburg 2000; Robinson and Casalino 1996). As such, PPOs do not differ substantially from most contract-based HMOs. However, instead of a capitation, remuneration is usually performed on the basis of discounted fee-for-service rates (Wagner 2003: 21). As discounts are negotiated in advance, contract-based models imply some space for bargaining, and each party’s relative negotiation strength influences how the risk is shared between the provider and the managed care organization (Amelung 2007; cf. also Joffe 2003). PPOs typically do not

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concentrate as much risk on physicians as when capitation payments are applied (Hacker and Marmor 1999). At the same time, doctors are monitored by utilization reviews and the standardization requirements of procedures according to clinical guidelines. In addition, selective contracting can discipline physician behaviour, and since the network constitutes an important source of revenue, physicians are careful not to become de-listed from the provider panels (Rich and Erb 2005: 263). Because there is usually no gatekeeper, patients in a PPO have direct access to specialists. While patients are charged only a minor co-payment when receiving services within the pre-selected network, higher surcharges apply if a provider from outside the contracted pool is chosen (Erdmann 1995; Newbrander and Eichler 2001: 92). Finally, in POS plans, the consumer chooses a provider when the service is needed and makes co-payments if he does not accept gate-keeping or the pre-selected network. Thus POS plans and PPOs both provide more choice, but at the same time use cost-sharing as an instrument of influencing consumer behaviour. POS plans therefore combine some of the features of a HMO plan with elements of PPOs. The proliferation of managed care Although the fundamentals of managed care were laid out as early as the 1930s, it took a considerable amount of time before it broke through (Brown 1983). From the mid-1980s on, however, managed care has proliferated rapidly (Erdmann 1995: 88f.). Managed care health plans have essentially competed with traditional indemnity insurance by offering lower prices for services and less cost-sharing, while at the same time providing more comprehensive benefit packages, including prevention services. In the 1970s, when managed care was still rare, relatively small non-profit HMOs were the only arrangements offered. As shown in Table 7.3, in employer-sponsored health insurance, HMOs proliferated quickly. Between 1988 and 1996, HMOs almost doubled their market share, from 16 to over 30 per cent (Kaiser Foundation/HRET 2009: 71). In 2009, HMOs accounted for 20 per cent of all covered workers. From the mid-1990s on, due to the so-called ‘backlash’ against managed care, enrolment has declined and the more loosely structured, network-based HMO-models and PPOs have gained ground in the managed care market (Kaiser Foundation 2005). The term ‘backlash’ refers to the public’s increasing reservations about managed care, arising from a mix of quality concerns on the part of patients, (caused by the fear that managed care would not just restrict inappropriate services, but also deny necessary care), and a rising ‘uneasiness’ on the part of providers, concerned about the interference of payers into clinical decision-making. The backlash addresses HMOs in the first instance, as these set much tighter regulations on patients and providers (Blendon et al. 1998: 90; Rich and Erb 2005). Consequently, participation

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Table 7.3 Market shares of health plans in employer-sponsored insurance (as percentages of workers with insurance coverage)

Indemnity HMO PPO POS HDHP

88

93

96

99

00

01

02

03

04

05

06

07

08

09

73 16 11 – –

46 21 26 7 –

27 31 28 14 –

10 28 39 24 –

8 29 42 21 –

7 24 46 23 –

4 27 52 18 –

5 24 54 17 –

5 25 55 15 –

3 21 61 15 –

3 20 60 13 4

3 21 57 13 5

2 20 58 12 8

1 20 60 10 8

Source: Kaiser Foundation/HRET (2009: 71).

in PPO plans grew continuously from 11 per cent in 1988 to 42 per cent in 2000 and eventually to 60 per cent in 2009. In response to declining enrolee numbers, most HMO insurers, in addition to offering networkmodels, have started POS plans in order to regain market share. In 1999, almost a quarter of all covered workers were enrolled in a POS plan. But this number decreased as quickly as it rose, ending up with a ten per cent market share in 2009. Indemnity plans constantly lost market share, thereby changing from the dominant organizational form of private insurance until the beginning of the 1990s to a small remainder, covering only one per cent of all employed workers in 2009. In 2006, for the first time, so-called consumer-driven health plans (CDHP), mainly in the form of the aforementioned Health Spending Accounts, gained a few percentage points of market share. CDHP differ from managed care in that they rely on the price mechanism to make consumers sensitive for their choice of provider (for details, see Robinson 2005). The level of subscription to CDHP increased to eight per cent in 2009. Turning now to the role the state played in these changes, the federal government clearly supported the spread of HMOs in public and private settings, for example, by passing the HMO Act in 1973. The HMO Act advised employers with more than 25 employees (those who offered any health insurance to their workers) to include at least one managed care plan in their set of choices. In addition, federal funds were provided to HMOs, which qualified to serve Medicare beneficiaries. The HMO Act had some effects on the growth of managed care, although it cannot explain the break-trough more than a decade later. A different explanation offers the hypothesis that concentration in the private health insurance business as described in the financing dimension, attended by and the gain of market clout vis-à-vis providers, enabled the breakthrough of managed care (Cacace 2010). Further deregulation, including the federal requirement to relax state-level restrictions on selective contracting in the 1980s, supported this development (Glied 2000: 719). In the 1980s, the state assumed

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a more active role in promoting managed care amongst the beneficiaries of the public programmes. Through the Omnibus Budget Reconciliation Act (OBRA) of 1981, the states could obtain permission to force Medicaid recipients into managed care (section 1915(b) waiver), a procedure that was explicitly supported by the Clinton administration in the 1990s. This support culminated in the BBA of 1997 that made the section 1915(b) waivers obsolete (Glied 2000: 720; Patel and Rushefsky 1999: 15). The percentage of Medicaid beneficiaries choosing (or having to choose) managed care grew enormously from 9.5 per cent in 1991 to 61 per cent in 2004 (Hackey 2001: 21; CMS 2003a; Kaiser Foundation 2005). In the Medicare programme, the incentives to join managed care plans are modest by comparison, as most beneficiaries hold private Medigap policies to insure against cost-sharing and incomplete benefit packages. Moreover, Medicare beneficiaries are accustomed to free choice of provider and treatment; a principle that is not supported by managed care (Reinhardt 2005: 93). Thus market penetration of managed care in Medicare was low; peaking at 16 per cent in 1999, and declining thereafter to less than 12 per cent in 2005 (CMS 2003a). The introduction of the drug benefit in 2006 gave an impetus to participation in managed care. According to own estimates, about 17 per cent of all Medicare beneficiaries participate in managed care today (Cacace 2010; Kaiser Foundation 2009b). While the federal and state governments took an active role in moving Medicare and Medicaid beneficiaries into managed care plans, the state governments – in response to lobbying by consumers and healthcare providers – have also been active in passing laws that hold managed care organizations responsible when the quality of care is not met (Rich and Erb 2005: 244). From the mid-1990s, many state legislators have enacted Patients’ Bills of Rights for consumer protection (Flood et al. 2001; Quadagno 2005). These provide the legal basis for litigation against health insurance plans in the event of the denial of services regarded as necessary. Some regulatory power has thus been given to the courts, which may be regarded as typical of the American ‘juridical–regulatory’ style of policy intervention that brings in government through the back door (Hacker and Marmor 1999: 682). In addition, so-called ‘anti-managed care laws’12 were enacted, which grant providers, especially pharmacies, access to managed care markets (Jensen and Morrisey 1999). In addition, lobbying by the managed care industry and ERISA prevented the states from effective regulation. Thus, although states intended to limit the degree of control managed care organizations can exert on patients and providers, it is debatable how successful these efforts actually have been (White 2007: 426ff.). The following sections demonstrate how regulation in the American healthcare system changed in the relevant relationships as conceptualized

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in Chapter 2. It emphasizes the role of the state, but also of private actors, focusing particularly on managed care organizations. Coverage Starting with the relation between beneficiaries and financing bodies, this section examines who is responsible for coverage decisions and the inclusion of further sections of the population. Table 7.4 provides an overview of the most relevant forms of coverage in the US healthcare system and their changes over time. Private coverage increased from 72 per cent of the population in 1965 to 85 per cent in the mid-1970s, but declined thereafter. Today only 67 per cent are covered by private insurance (HIAA and AHIP 1999; US Census Bureau 2009: 23). Remarkably, inclusion into public schemes increased steadily. At present, all government-funded healthcare programmes, taken together, cover about 29 per cent of the population (US Census Bureau 2009: 23). As these include the aged and the poor, they cover the most expensive health risks. Medicare and Medicaid have undergone a series of major inclusion processes since their inception. After Medicare was set up for the aged, the federal government in 1973 incorporated disabled people and patients with end-stage renal disease into the programme. As the percentage of persons aged 65 or older increased, the proportion of the population covered by Medicare rose correspondingly. Although only Part A, hospital insurance, is mandatory in Medicare, almost all beneficiaries also subscribe to Part B for covering outpatient treatment. Part D coverage, which was available from

Table 7.4 Health insurance coverage as percentages of total population 1965 1970 1975 1980 1985 1990 1995 2000 2005 2007 2009 Total Covered Medicare Medicaid Military Total Public

– – – – –

– 10 – – –

– 12 – – –

– 13 – – –

87* 13 8* 4* 23*

86 13 10 4 24

85 13 12 4 26

86 14 11 3 25

85 14 13 4 27

85 14 13 4 28

Employmentbased Direct Purchase Total private

–

–

–

–

62*

60

61

64

60

59

–

–

–

–

11

10

9

9

72 –

79 –

85 –

83 –

70 15

72 14

69 15

68 15

(n.A.) (n.A.) 77 13*

73 14

85 14 14 4 29 59 9 67 15

Notes: Due to double coverage, figures do not add up to 100 per cent. (*) Data for 1987. Source: US DHHS (2010b: 426); HIAA/AHIP (1999: 39), own calculations; US Census Bureau (2009: 59).

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2006, meanwhile extends to 26.7 million or 59 per cent of all Medicare beneficiaries (Kaiser Foundation 2009a). In the Medicaid programme, the federal government determines which groups of the population have to be included, such as parents, children, pregnant women as well as blind, aged or disabled persons under a certain income threshold (categorically needy population), and which groups may be included by discretion of individual states (optionally needy). Remarkably, not all poor individuals can receive their healthcare through Medicaid. Childless adults under 65, for example, have virtually no access, no matter how low their income (Finegold 2005: 157; France 2006: 25). The federal government, furthermore, sets general guidelines for decisions on coverage, such as the federal poverty line (FPL) as a reference parameter for eligibility. Individual states may decide to expand Medicaid coverage and receive federal matching funds on an open-ended basis as long as the federal criteria are met. Differences in Medicaid eligibility criteria are one explanation for the considerable disparities in healthcare coverage between states. Additionally, states may set up their own general assistance programmes. The most noteworthy expansion of Medicaid occurred in 1997 with CHIP, when the federal government mandated states to extend public coverage systematically to include children whose families incomes are above Medicaid limits (Finegold 2005: 158; France 2006: 26; Quadagno 2005). In contrast to Medicaid, the duration of CHIP was restricted to ten years. While President Bush vetoed the extension in 2008, the continuation and expansion through CHIPRA was one of the first legislative actions of Congress under the Obama administration. Some expansion in Medicaid coverage, however, has been offset (‘crowded out’) by reductions in employer-sponsored coverage for families and by a contraction of other state programmes (Stone 2000; Weissert and Weissert 2002: 222). Moreover, Medicaid and CHIP have very complex eligibility rules, making it hard for some eligible persons to draw on the programmes (Hacker 2004: 253; Reinhardt 2005: 109). The most recent reform of 2010 aims to expand Medicaid by raising the eligibility requirement. The CBO estimates that an additional 16 million eligible persons will join the Medicaid programme. Until the enactment of the Patient Protection and Affordable Care Act in 2010, the purchase of private insurance was not obligatory in the US. In this situation, people with low health risks have an incentive not to seek coverage while those with high health risks may face difficulties in finding it because insurers were free to deny contracts to severely ill persons. Furthermore, employers offered insurance on a voluntary basis, so coverage traditionally is linked to the specific working place. Major inclusion processes into the employer-sponsored scheme date back to the time during and after World War II when employers started to offer health insurance as a ‘fringe benefit’ as mandated wage freezes restricted their means of attracting and rewarding employees (Döhler 1990). For promoting employer-sponsored insurance, the

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federal government regulates that employers’ expenses for health insurance are exempt from income and payroll taxes. As demonstrated earlier, the level of tax exemptions is considerable. But although government subsidies are supportive, premium costs and economic performance in general also influence employers’ decisions (Blumenthal 2006; Glied and Borzi 2004; Kronick and Gilmer 1999: 45). Since the beginning of the new millennium, due to the growing cost of health insurance, the recession following 9/11, and the financial crisis in 2008, employer-sponsored insurance has wound down, from covering almost 65 per cent of the population, to under 60 per cent today (US Census Bureau 2009: 59). The percentage of firms offering health benefits declined from 69 per cent in 2000 to 60 per cent in 2009 (Kaiser/HRET 2009: 38). Nevertheless, until today, private employmentbased insurance has been the most important scheme in terms of the population covered. The number of uninsured has increased in recent years. According to the US Census Bureau, currently about 46.5 million Americans are without coverage (US Census Bureau 2009: 59). It is a major objective of the most recent healthcare reform to reduce this number. Beyond the provision of tax incentives, the federal government also plays a role in the direct, hierarchical regulation of employer-sponsored coverage. For example, in order to mitigate the problem of losing group coverage in case of job loss or in the transition between jobs, it forced private insurers to offer COBRA-plans. Since 1986, COBRA-plans enable the individual to continue group health plans on a premium, which is calculated on the basis of risk pooling. Yet their duration is restricted,13 and the insured has to pay the full costs out of pocket. From 1996, through HIPAA, the federal government further enabled the portability and the continuation of group insurance even for individuals who have exhausted their COBRA. It must be emphasized here that direct coverage regulation by the state – like incentive-based regulation through tax subsidies – usually refers only to employer-sponsored group health plans. Individual insurance, therefore, is much less regulated. Based on the provisions of the Patient Protection and Affordable Care Act, the CBO estimates that an additional 32 million people will be included in existing schemes. For that purpose it requires individuals to buy health insurance or pay a penalty, starting at 95 US$ per year in 2014 and increasing to 695 US$ in 2016. At the same time the government offers premium credits and cost-sharing subsidies to individuals on low incomes. Individuals for whom the lowest cost plan option exceeds 8 per cent of income, and some other minorities, will be exempted from the mandate. At the same time, employers with more than 50 employees will be forced to offer insurance or pay a 2,000 US$ penalty per full-time employee, although the first 30 employees will be excluded from this assessment. As the penalty is quite low, some observers question whether the bill will have the expected effect

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on coverage. Small employers with fewer than 25 employees and annual wages of less than 50,000 US$ can receive tax subsidies, if they offer insurance. It further is to bear in mind that, even if coverage expansion will unfold as planned, almost 15 million people still will lack health insurance coverage in the US. Very briefly summing up the regulation of coverage, the role of the state has certainly increased over the past four decades. The state provides insurance to the aged and the indigent and also subsidizes private employersponsored coverage. But although several federal laws were designed to mitigate the problem of losing group coverage, from a historical perspective, we cannot view the state as exerting strong regulation of healthcare. Tax exemptions are a rather weak, incentive-based and market-conforming instrument, compared to other means of regulation. Thus, although the state has been an important actor in providing coverage for the most expensive health risks, private employers so far have been the main actors when it comes to coverage decisions for the bulk of the population. The most recent healthcare legislation will strengthen the role of the state, particularly with respect to the coverage decision. Financing system The regulation of the financing system affects premiums, premium increases and cost-sharing requirements in health insurance. In the Medicare programme, contribution payments and cost-sharing requirements are set at the federal level. In hospital insurance, Part A, the contribution rate is set at 2.9 per cent of the taxable wage base. While employer and employee share the premium payment (1.45 per cent each), the self-employed have to raise the entire payment from their own pockets. A ceiling, which was imposed on the taxable wage base when the programme was set up, was abandoned in 1994 (Hoffman et al. 2007: 9), thereby allowing for a considerable inflow of funds into the programme. Under Part A, substantial cost-sharing is required and the nominal amounts of co-payments and deductibles grew considerably over time.14 Some observers, however, emphasize that no new cost-sharing elements have been introduced in Part A (Oberlander 2003: 96ff.). In Part B, the government decreed that the programme should be funded in equal parts by general tax revenues and beneficiaries’ contributions when it was implemented. After several readjustments, premiums, were set to cover 25 per cent of programme cost in 1997 through the BBA (Green Book 2004: 2–14). While Part B premium was a flat-rate per capita premium until 2007 (93.50 US$ per month), the most recent changes in the programme entail a means-test, which requires high-income beneficiaries to pay higher premiums.14 Furthermore, the government sets the annual deductible in Part B, which was 133.50 US$ in 2009, and establishes co-payments, accounting for 20 per cent today (US DHHS 2010b). In Part D, federal legislation regulates the general features of the packages

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private insurers must offer. The monthly subscriber premium and the costsharing requirements of each plan must reach a defined standard15 or its actuarial equivalent (or better). The federal government also regulates the private Medigap policies by imposing requirements on the standardization of plans and by putting restrictions on the exclusion of risks (Keen et al. 2001: 119f.). In Medicaid, the federal government gives states the option of receiving the so-called ‘federal medical assistance percentages’ (FMAP), if they structure their programmes along federal guidelines. The states have some discretion in adjusting their Medicaid programmes to specific regional needs, especially with regard to the optionally needy population. This is most relevant, as the bulk of Medicaid expenditures (1998: 65 per cent) is spent on this group (Kaiser Commission 2002: 55). The FMAP varies between a minimum of 50 and 77 per cent and is adjusted annually in line with the average state citizens’ per capita income. Thus the poorer a state is, the higher the federal matching rate. Federal co-financing is made on an open-ended basis, which means that the more a state spends on its Medicare programme, the more federal funds it can receive. For that reason wealthier states have an advantage, as they can more easily expand their programmes. With regard to cost-sharing requirements in the Medicare programme, the federal government allows only small, nominal cost-sharing (for example up to 3 US$) (Kaiser Commission 2002: 63f.). In addition, it forbids any cost-sharing for certain services like emergency room visits, and on specific population groups, for example, children and pregnant women. A change came along with the Deficit Reduction Act of 2005, through which the federal government introduced a provision that allows new kinds of cost-sharing, especially in the field of outpatient drugs (Iglehart 2007: 734f.). Federal funding in CHIP was set in advance at 40 billion US$ for the ten year duration of the programme (France 2006: 26; Finegold 2005: 157). In private insurance, the insurers set risk-adjusted premiums according to market requirements, and also decide on cost-sharing. The adjustment of premium rates to health risks (‘medical underwriting’) is essential for insurers in order to avoid adverse selection (see Cutler and Zeckhauser 2000: for details). They therefore deploy a great deal of resources in order to accommodate pre-existing conditions (Keen et al. 2001: 115). Over time, competition in the health insurance market led to changes in risk-adjustment practices. Premium calculation changed from community rating, based on regional averages, to experience rating, where premium is calculated based on average risk expectations of smaller groups, such as the staff of one company or even on the individual’s health risk. This implies less risk-pooling and therefore less solidarity in healthcare financing than the community-rated health plans they squeezed out of the market (Enthoven and Fuchs 2006). As a consequence, premiums may be unaffordable for poor individuals or for those with high health risk. Interestingly, the federal ERISA legislation,

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which promotes self-funded health plans, contributed to this trend (cf. Cacace 2010: for details). There are, however, some relevant differences that distinguish the individual market from employer-sponsored insurance. While there used to be at least some regulation in employer-sponsored insurance in every US state, which of course can be countervailed by ERISA, almost no government regulation applied to individual insurance. With the recent reform and the requirement for individuals to purchase health insurance, the individual market becomes more important, and therefore a new target for state regulation. For example, the Patient Protection and Affordable Care Act of 2010 requires private insurers to guarantee the renewability of contracts and restricts the degree of risk-rating. In employer-sponsored insurance, the average health risk of the employee group is relevant for premium calculation, which leads to the spread of risk. The larger these groups, the lower therefore the premium tends to be. Furthermore, every employee in the group must be offered the same premium rate, since federal legislation (HIPAA) prohibits discrimination against individual group members based on health status or age (Age Discrimination Act) (Jost 2001: 465f.; Pollitz et al. 2000; Quadagno 2005). Experience rating discriminates against small employers, who are not able to spread risk over many employees and therefore may face prohibitively high premiums. In addition, large employers, or those represented by one of the powerful employer-associations, have substantial scope for bargaining on premiums (Keen et al. 2001). As a consequence, far fewer small businesses offer health insurance. In order to enable small employers to offer health insurance, some state governments impose rate bands or other premium regulation. Most states also regulate the insurance business with regard to solvency criteria or force businesses to contribute to a high-risk pool to cover individuals who are unable to receive coverage in the private market. Starting in 2014, the Health Insurance Exchanges to be created under the new legislation will offer individuals and small business with fewer than 100 employees (and from 2017 on, larger ones also) to buy qualified insurance coverage, which will be administered by the government or non-profit organizations. At the federal level, HIPAA precludes insurers from imposing pre-existing condition clauses on new employees (cf. Walshe 2003: 81). But although premium increase and risk-adjustment practices have increasingly been regulated from the mid-1980s onwards, the individual US member-states regulate insurance business to varying degrees (France 2006: 58; Jensen and Morrisey 1999; Jost 2001). It also should be kept in mind that the federal government prevents the states from effectively regulating employer-sponsored health insurance. Again, it is ERISA that absolves all self-funded health plans from the obligation to comply with state regulation. Thus, in fact, neither the federal nor the state governments have exerted much influence

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on the private insurance market (Stone 2000: 956). The history of managed care shows, that one of the greatest influences on the overall level of private insurance premiums and cost-sharing requirements was the competitive market forces triggered by the expansion of HMOs (Baker et al. 2000). Managed care organizations offer health plans at lower rates and also compete with indemnity insurance by requiring less cost-sharing. We should also note that with managed care participation of the beneficiaries of the public programmes, the power to regulate cost-sharing requirements (not premiums, however) devolves from government to private organizations. In conclusion, the federal and state governments tightly regulate the financing system of the publicly funded programmes. In private insurance, however, with the countervailing effects of increased state-based regulation and federal deregulation, the state so far fell well short of its potential. Although the most recent reform changes this slightly for the individual market, private insurers are given a relatively free reign in setting their premiums according to market requirements. Individual contracts used to be less regulated by the state and are more strongly exposed to competitive market pressure. They might therefore be regarded as ‘more private’ than employer-sponsored plans. In employer-sponsored group coverage there is at least some government regulation, although often fragmented and ineffective. For that reason, most important changes in premium amounts and cost-sharing can be attributed to the spread of managed care, which has triggered fierce price competition in the private insurance market. The penetration of managed care in the public programmes also means that it is no longer the government, but private managed care organizations that are determining the financing system to a certain degree. Remuneration Remuneration is the first aspect to be considered in the relation between financing agencies and service providers. The question to be dealt with in this section is who regulates provider payment, namely the rate and the method applied. This feature is critical as it may have implications on the quality- and/or cost-related performance of providers and therefore also on the care given. When Medicare was enacted in 1965, the ‘prohibition against any federal interference’ in the statutes temporarily barred the government from hierarchical provider regulation. In hospital insurance, this meant that the federal government paid hospitals on a retrospective basis at ‘reasonable cost’. This negative incentive for cost containment led to a considerable price increase for medical services (Marmor and McKissick 2000). But neither a mandatory price stop in the early 1970s, nor a ‘voluntary effort’ of hospitals to reduce their rates, was effective (Brown 1992: 390; Levit et al. 1997). The most pathbreaking reform in hospital remuneration in Medicare was the introduction of the DRG-based prospective payment system (PPS) in 1983. DRGs gave

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Medicare considerable rate-setting power and required hospitals to match economic considerations with treatment requirements (Frisina and Cacace 2009; Ruggie 1992). Interestingly, the long-term effects of DRGs on overall programme spending are uncertain, as they presumably led rather to shifts within public spending, that is between Medicare Part A and B (Getzen 2004: 391). Nevertheless, from a regulatory perspective, the introduction of DRGs is a milestone, as it indicates the switch from autonomy of providers to a hierarchical mode of interaction, by means of which the public payer gained leverage over private providers. DRGs also spilled over to the Medicaid programme, as an overall upper payment limit was set for most hospital services according to the amounts that would be paid under Medicare payment principles (Kaiser Commission 2002: 100). The reduction of provider payment rates under the DRG payment system was intensified through the BBA in 1997, by which Medicare achieved large savings (Oberlander 2003: 183). At the time of their introduction, DRGs applied only to Medicare patients, but as Medicare is almost a ‘monopsony buyer’ of inpatient care, the bulk of procedures fell under this payment system (Oberlander 2003: 122; Ruggie 1992: 932). In Part B, Medicare adopted the ‘usual, customary, and reasonable’ method developed by private nonprofit Blue Shield plans in order to limit fee-for-service reimbursements (Blumenthal 2006: 107; Getzen 2004). Furthermore, payments became restricted since physicians are allowed to bill for the balance only up to 15 per cent of the scheduled fees (Kaiser Commission 2002: 64; Reinhardt 2005: 90). In 1992, the resource-based relative value scale (RBRVS) was introduced. RBRVS represents a fee schedule assigning each physician service a point value. After the physician and insurance company agree on the value per point, payment is determined. RBRVS is coupled with a strict budget for the total annual outlay on physician services, the volume performance standard. Currently, a number of demonstration projects are running with the objective of adjusting provider payments according to their performance. In prescription drug insurance, Part D, Medicare decided to refrain from interfering in the bargaining process between private insurers and the pharmaceutical companies. Thus Medicare leaves the bargaining on pharmaceutical prices to private insurers, thereby catering for the demands of the pharmaceutical industry but also precluding the realization of major rebates on prescription drugs. In Medicaid, the federal government required the states to pay hospitals ‘reasonable and adequate’ fees from 1981 on (Boren Amendment) (Kaiser Commission 2002: 106). As these rates were very low, in a move to prevent risk-selection, the states were also obliged to make payment adjustments to hospitals which serve a disproportionate share of Medicaid and low-income patients (Disproportionate Share Hospitals programme). With the BBA of 1997, the government repealed all federal payment regulation. Since then, the states have made the decisions on reimbursement policies and are only

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obliged to publish final rates, methodologies, and justifications. The states are thus given much more discretion, with the consequence of large regional disparities in provider remuneration (Reinhardt 2005: 95; Weissert and Weissert 2002: 222). This said, however, many states have adopted the DRG payment system for hospitals on a voluntary basis (Getzen 2004: 159). In private insurance, the traditional fee-for-service principle implied virtually no payment regulation, thereby favouring the autonomous, selfregulatory status of service providers. This changed considerably when managed care gained ground and introduced new remuneration methods such as salaries and capitation payments. Especially in the first decades, when vertically integrated HMOs dominated the managed care market, strong hierarchical control was exerted over providers (Hsiao 2002; Jacobson 2001). Through capitation payments, the health risk and also the risk of effective treatment were shifted from the health plans to the providers. As a consequence, the growth of managed care had a considerable impact on the incomes of physicians (Kronenfeld 2002: 87). But service providers were also able to restore their autonomy. With the managed care backlash, ‘virtually integrated’ models like PPOs and network-HMOs became prominent. These imply less restrictive remuneration methods, such as (performancerelated) discounts on fee-for-service rates. When discounted fee-for-service payments are applied, bargaining procedures become relevant in the interaction between insurers and providers; and each party’s relative negotiation strength influences how the risk is shared (Amelung and Schumacher 2004; Joffe 2003). Another highly relevant feature is that the states increasingly forced their Medicaid beneficiaries to receive their care through managed care, where provider remuneration is subjected to the management techniques of the private health plans. Today, almost all public and private third-party payers negotiate with providers for service rates. Thus, depending on the parties’ respective bargaining power, prices for services can differ a great deal, even if services are substantially the same. The public payers, and especially Medicare as it is the largest third-party payer, usually pay the lowest rates (White 2007: 420). The uninsured, however, receive the highest medical bills (Reinhardt 2005: 100). Looking at the whole period, we can see that it was a considerable time before provider regulation set in. Before private insurers took action, however, it was the government that introduced a PPS in the Medicare programme. But although the government increasingly regulated the payment of providers in the public programmes, it gave the medical profession a relatively free hand in transactions with private insurance. Meanwhile, managed care organizations have created their own instruments for gaining control over service providers. The remuneration of service providers is therefore one particular relevant aspect of regulation where a hierarchical form of governance through private actors has been established. Over time,

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the methods for remunerating providers spilled over from private to public programmes. Accordingly, as more beneficiaries of the public programmes join managed care, the power to regulate service providers is being transferred from the government to private actors. Access of healthcare providers to markets The market access of healthcare providers refers to their access to public or private financing sources. By regulating the access of healthcare providers to markets, the quantity, quality, and price of services in the healthcare market are controlled. In the 1960/70s the number of physicians and hospital beds in the US healthcare system was perceived as a sizable surplus in need of reduction (Döhler 1990; Kronenfeld 2002: 84). For reducing the number of inpatient beds, the regulation of hospital construction began under the federal Health Planning and Resources Development Act in 1974. This law required all states to adopt certificate-of-need (CON) laws by 1980, subjecting expansion, as well as new entrants to the hospital market, to a certification process. A system of state and local health planning agencies was created to oversee the programme. Until the 1980s, the CON laws were quite successful, but the Supreme Court came to the conclusion that CON laws constituted an illegal restraint of trade and repealed the process (Getzen 2004; Marmor et al. 1992: 192). In addition, the government perceived CON laws as obsolete once DRGs were introduced. The state therefore retreated from direct regulation of the quantity of hospital beds, leaving the selection process to budgetary regulation through the PPS (Brown 1992: 27). Although it no longer controlled the level of bed provision in the hospital sector, the state continued to play a role in influencing its structure, that is the public/private-mix, through the subsidization of non-profit providers (Gray 1991). As another instrument to gain control over inpatient care providers and their access to public financing, the federal and state governments mandated review processes for performance monitoring (Tuohy 1999: 145; Walshe 2003: 77). In 1972 the federal government established the Professional Standards Review Organizations (PSROs) as a peer review mechanism. The PSROs were able to deny approval of payment if the treatment provided was not medically necessary, not of adequate quality, or delivered in an inappropriate facility. But the PSROs remained ineffective, mainly because they functioned more as an instrument of self-regulation for the medical profession. In 1983, with the introduction of the DRG-based payment systems in Medicare, PSROs were substituted by the Peer Review Organizations (PROs), which have the status of private organizations and may be organized as for-profit enterprises (Brown 1992; Döhler 1990: 115). Nevertheless, PROs showed similar self-regulatory features as their predecessors and did not generate any significant savings (Oberlander 2003: 119).

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In private insurance, the medical profession was largely able to preserve its autonomy and the scope for self-regulation with regards to market access until managed care gained ground. Managed care has had a major impact on physicians’ access to the healthcare market through its policies of selective contracting and credentialing, by means of which competition was introduced amongst service providers (Amelung and Schumacher 2004), where regional supply allows for a choice of provider. But the medical profession has also been able to exert pressure on policy makers in order to avoid the restrictions imposed by managed care organizations (Blendon et al. 1998; Quadagno 2005). Especially between 1995 and 1998, the states passed several anti-managed-care laws, amongst them the any-willing-provider legislation that requires a managed care organization to contract with any provider who is willing to adhere to the network conditions, thereby weakening the instruments of managed care (Jensen and Morrisey 1999; Patel and Rushefsky 1999: 326). Thus, through consumers’ backlash against managed care, more loosely structured organizational forms gained ground in the market. As a private sector approach to quality control, the National Committee for Quality Assurance (NCQA) was established as a non-profit organization in 1991. The NCQA makes information on private managed care plans and available to employers and to the general public, and is also responsible for the management of HEDIS (Health Plan Employer Data and Information Set). HEDIS provides a set of standardized performance measures on the quality of health plans. NCQA certifications have no regulatory character, but their accreditation is frequently required, for example if managed care plans are to serve Medicare or Medicaid beneficiaries. In addition, the Joint Commission on Accreditation of Healthcare Organizations (JCAHO), a private non-profit organization composed of members of medical associations, provides voluntary accreditation to hospitals. The JCAHO is, however, under the control of professional bodies and is thus in effect a self-regulatory structure (Jacobson 2001: 1168; Walshe 2003: 58). Summarizing these observations briefly, we find that government has restricted provider access to markets through several instruments, especially where public funding sources are concerned. When managed care came into play from the private market side, it initiated fierce competition amongst service providers over access to financial resources. Selective contracting and credentialing allowed competition and control to enter a formerly autonomous professional field. But service providers also sought to restore their autonomy and to regain market power. As a consequence of the managed care backlash, the medical profession has been able to regain scope for self-regulation since the mid-1990s.

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Access of patients to healthcare providers When exploring the access of patients to healthcare providers, the underlying concern for freedom-of-choice comes into play, as it may be explicitly or implicitly restricted when it comes to regulation. In the Medicare programme, access of patients to healthcare providers is restricted to service providers who take assignment, which means they have to acknowledge an approved rate as payment in full. Medicare payments are an important source of revenue, so service providers regularly agree to take assignment (Getzen 2004: 111). Medicaid beneficiaries, in contrast, face much stronger restrictions to their access to service providers. Here the federal government gave the states wide discretion to limit recipients’ freedom to choose doctors or hospitals through the Boren Amendment in 1981 (Patel and Rushefsky 1999: 66). Another aspect is that physician treatment, although assured by law as well as by the ethical standards of the medical profession, is often actually denied to Medicaid patients. As mentioned earlier, the charges of service providers differ substantially depending on the specific third-party payer, with Medicaid usually reimbursing the lowest rates. It is an objective of the 2010 legislation to end that discrimination by paying providers higher fees when treating Medicaid patients. In order to guarantee minimum access to healthcare even for the uninsured, the federal government enacted the Emergency Medical Treatment and Active Labor Act (EMTALA) as part of the COBRA plan in 1986. EMTALA requires that hospital access be granted to emergency patients even when they are not able to pay. Uninsured people have access to emergency care in hospitals, which are legally bound to provide at least minimal treatment. In addition, non-profit hospitals have to provide charity care in exchange for their tax-exempt status. If the patient is not able to pay the hospital bill, the costs for the treatment provided are either borne by the hospital or shifted to other patients with more generous insurance (Getzen 2004; Giaimo and Manow 1999). In private insurance, the unrestricted freedom-of-choice of medical care providers prevailed, a principle that for a long time was upheld by organized physicians. This changed fundamentally when HMOs gained a foothold, restricting the access of patients to contracted group of physicians. In some cases, for example when routine treatments are required or in the case of less severe illnesses, patients have no access to doctors at all as nurse practitioners or physician assistants replace them. Most importantly, in HMOs a gatekeeper is established who co-ordinates care by channelling the patient’s pathway within the provider system and restricting direct access to specialists. In PPOs, the gate-keeping requirement was dropped and the option to choose one’s provider restored. Most states supported this development with legislation enabling direct access to specialists. Unlike free choice of provider in indemnity insurance, however, PPOs still restrict patient access to providers as they rely on a

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pre-selected network, and allow a free choice of provider only at the price of higher cost-sharing. The restrictions in access to service providers are most important for Medicare and Medicaid beneficiaries, who (are forced to) subscribe to managed care, as they forego the free choice of providers they were used to in the fee-for-service programme. When summarizing these changes, it is necessary to start from the fact that, traditionally, a free choice of provider was promoted as a patient’s right, a right that was heavily protected by the medical profession. While the government restricted the access of patients to healthcare providers under the public programmes by setting a limit on provider payments, it was managed care that has brought about the most crucial changes by restricting patients’ choice of providers without state intervention. Private managed care organizations brought in the strong and effective elements of gate-keeping and pre-selected networks to govern the access of patients to healthcare providers and thereby found a way to gain control in an area that was almost unregulated by the state. With the increasing participation of Medicare and Medicaid beneficiaries in private managed care arrangements, the restrictions put on patient access to providers spill over to the public programmes. The content of the benefit package The definition of the benefit package comprises the number and type of services that are covered by an insurance contract. Whether the content is defined by law or whether insurers and/or other actors determine the scope of benefits offered to patients is indicative of the government’s role. Right from its inception, it was the function of the Healthcare Financing Administration (HCFA) to determine whether these are to be rated as ‘reasonable and necessary’ for Medicare services. Nowadays, the CMS evaluate services on the basis of Health Technology Assessment (HTA) reports (Jost 2005: 209). In Medicare Parts A and B a uniform benefit package is defined by law. As described earlier, the defined-benefit catalogue was far from complete at the time the programme was set up, excluding long-term care, medical physicals, hearing aids, eye glasses, dental care and outpatient prescription drugs (Marmor 2000: 81; Oberlander 2003: 37f.). Part A and B benefit packages have been surprisingly static over time (Oberlander 2003: 37f.). In 2003 prescription drug insurance was added, however, remarkably, not as an expansion of the benefit package as defined here, but as a new programme part, Part D. The Medicare statutes specify that private insurers, which contract with Medicare in Part D, must offer either a defined standard benefit or an alternative that is at least equal in value. In the Medicaid programme, the federal government determines a minimum benefit package by requiring that in order to receive federal matching funds certain basic services, such as long-term care, inpatient as well as outpatient hospital care and doctor visits, must be offered in any state

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programme (Finegold 2005: 157; Kaiser Commission 2002: 56). The states have broad discretion on determining which benefits their programme will additionally cover (France 2006: 97). Under a special category of waivers (section 1115 waiver); the US-member states may also vary the mandatory benefit package. The most renowned experiment with the section 1115 waiver is the Oregon Health Plan of the 1990s, which aimed at an expansion of the programme at the cost of denying some benefits to all Medicaid recipients (Rothgang et al. 2004; Weissert and Weissert 2002: 223). As the benefit package in Medicaid is generally more comprehensive than in Medicare, some dual-eligible persons can receive benefits under both schemes provided that their income is low. In the private scheme, there used to be no systematic support of comparative effectiveness research for medical treatments. In 2009, the American Recovery and Investment Act provided funding of 1.1 billion US$ for research on the relative benefits of treatments. But even with the Patient Protection and Affordable Care Act of 2010, findings from this research may not be used as recommendations for payment or coverage, or used to deny coverage (Kaiser Foundation 2010). Furthermore, there is no state regulated minimum standard for the benefit package. It is thus the subject of contractual agreement between the insurer and the insured person or group, which services are included into the benefit package. While some core services usually are covered, such as inpatient and general outpatient care in hospitals and practices, there is wide variation of additional services that may be included, for example dental services or optometry. The definition of the benefit package may also be part of the private insurers contracting policy. Depending on the composition of the offered package, the insurer able to deter high health risks, for example by offering no mental health or drug abuse coverage. In addition, in employer-sponsored insurance, decisions concerning the benefit package are influenced by employers’ pre-selection of health plans. In contrast to government programmes, private insurers have gradually adapted to the changing needs of the population and included further benefits such as dental care and pharmaceuticals in their packages quite early in the 1970s (Oberlander 2003: 40). An important expansion of the benefit packages also occurred as a consequence of the breakthrough of managed care. In general, managed care offers more comprehensive benefit packages including prevention. Nevertheless, due to utilization reviews and the appliance of clinical practice guidelines the content of the benefit package in managed care is subjected to the management techniques of private insurers. Thus the benefits offered are contingent upon the actual treatment standards defined under evidence-based medicine (Amelung and Schumacher 2004; Jost 2005: 208). This could also mean that certain services might be denied, for example if they are regarded as unnecessary. As a consequence of the managed care backlash, most states started to regulate the content

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of the benefit package in private insurance to a certain degree. They mandate, for example, coverage for special treatments (for example prevention) or they require the inclusion of some types of services, such as optometry and chiropractic services (US GAO 1996). Virtually no definition of a benefit package applies to CDHP. These therefore can be characterized as defined-contribution health plans (in contrast to defined-benefit plans), as the account-holder receives no guaranteed benefit package at the time the savings are spent. One consequence is that he bears the full risk of rising healthcare costs. These arrangements, which still are not yet widespread, however, constitute a major shift in the fundamentals of private insurance. As shown above, beneficiaries in the traditional fee-for-service Medicare and Medicaid programmes have a clearly defined-benefit package however incomplete it may be. If Medicare beneficiaries enrol in managed care, the same or a superior benefit package must be provided. In Medicaid managed care, however, there are no mandated benefits. The federal statutes only require that each contract must ‘specify’ the benefits the managed care organization will cover (Kaiser Commission 2002: 65). Usually, managed care organizations provide more comprehensive packages with less costsharing than the fee-for-service programmes. It is, however, a radical departure from traditional programme structures for the government to delegate the management of benefits to private organizations when beneficiaries join managed care (Reinhardt 2005: 92; Stone 2000). To summarize, while under the public programmes the benefit package is determined by government regulation, it is variable and therefore constitutes an element of competition in private insurance. Over time, while de facto the benefit package in private insurance was at one time becoming more complete, it remained rather static in the public programmes. With government regulation of benefit packages in private insurance being weak, their content is in the first instance left to the insurers, and is also determined by employers’ pre-selection of health plans. Most importantly, the decision on the scope of the benefit package partially devolves from government to private insurers when Medicaid and Medicare beneficiaries join managed care. Territorial aspects of regulation The territorial axis of the regulation dimension distinguishes between the federal (or national) level and the individual US member states at the subnational level. However, one must bear in mind the well-known metaphor which describes American federalism as a ‘marble cake’ with an intertwining of powers at all levels of government. Medicare is a national programme with a centralized administrative structure and unitary approach to regulation (Marmor 2000: 81; Oberlander 2003). However, there are some exceptions. For example, the processing of claims is delegated to private insurers, which are locally based. The vast majority of coverage decisions

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are therefore local (Jost 2005: 210). Another exception is the 1972 Social Security Amendments which allowed the states to experiment with hospital reimbursement; a provision that finally resulted in the invention and nation-wide implementation of DRGs (Oberlander 2003: 121). The ‘diffusion of federal authority’ (Marmor 2000: 101) continued throughout the 1970s, when Congress mandated the states and local governments to implement the CON laws and to establish PSROs to control providers’ access to healthcare markets. Both these decentralized approaches, however, became centralized in the 1980s (Brown 1992; Getzen 2004). Yet, compared to Medicare, there is much more potential for territorial shifts in the Medicaid programme (Finegold 2005: 154ff.). When the programme was set up, the federal government established a national framework of regulation in all key areas of Medicaid, such as coverage, benefit package and the financing system. In the early 1980s, in line with Reagan’s approach to New Federalism, the central government gave the US member states more discretion in defining eligibility rules and far-reaching rights to receive waivers. More specifically, section 1915(b) and section 1115 waivers were made available (Weissert and Weissert 2002: 223). Under the former, Medicaid beneficiaries were moved into managed care plans, whereas under the latter, states were given the permission to vary the benefit package in Medicaid. From the late 1980s on, therefore, waivers became an instrument for expanding states’ discretion over substantive health policy (Finegold 2005: 170ff.). The strengthening of the sub-national level also becomes most evident when considering the field of provider remuneration. From the implementation of Medicaid in 1965 until the enactment of the BBA in 1997, decisions concerning remuneration policies were highly centralized. Since 1997, the states decide on reimbursement policies and on the fees paid to service providers. In a similar vein, the Deficit Reduction Act of 2005 gives the states more discretion in regulating some features of the financing system, in particular, giving them powers to impose new cost-sharing requirements (Iglehart 2007). Other decentralization efforts, although they appeared several times on the political agenda, did not come to fruition. Especially noteworthy here is the scheme to change the funding mechanism from providing federal matching funds to giving a lump-sum to the states, without tying these monies to any federal regulation. In private health insurance, since the McCarran-Ferguson Act of 1945, general regulatory competence is assigned to the single US-member states (Jost 2001: 463; Pollitz et al. 2000). Intensity of state regulation was low, but increased from the mid-1980s onwards (Jensen and Morrisey 1999; Jost 2001). As described earlier, most US states now mandate private insurers to include certain benefits and services in their health plans and also regulate premium calculation to some degree. But regulation varies considerably from state to state (France 2006: 58). What is more, has the federal

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government exempts all self-funded health plans from state regulation and control, through ERISA, states are unable to effectively regulating employer-sponsored health insurance. The deregulatory effect of ERISA was one motivation for the enactment of COBRA in 1986 by the federal government and also for the passing of the HIPAA in 1996. Both laws secure the portability and the continuation of group insurance, thereby slightly mitigating some of ERISA’s adverse effects (Gabel et al. 2003: 209). This shift towards more central power in regulation has been intensified with the most recent legislation, which also is a federal law and therefore binding for all US states. At an international level, the North American Free Trade Area (NAFTA) and the World Trade Organization (WTO) together with the GATS, are the most relevant trade agreements with the potential to influence healthcare regulation in the US. It is, however, controversial as to what degree the regulation of healthcare is de facto affected by international (trade) regulation (Adlung and Carzaniga 2001; Belsky et al. 2004). With regard to the hospital sector, for example, the US has granted market access to foreign competitors, but has reserved the right to establish quotas to limit the number of hospitals regionally. At the same time, any subsidies granted to domestic providers must also be extended to foreign suppliers. However, to date, little is known about the consequences of these commitments. Summary of the changing role of the state in regulation Due to the influence of many public and private actors, using a broad range of coordination modes from strictly hierarchical to highly competitive, the regulatory structure of the US healthcare system is most complex (Cacace 2010). Over time, with regards to the public/private-mix in regulation, we discern at least two major trajectories: increased state-hierarchy on the one hand, and the emergence of a new form of hierarchical governance through private market actors on the other. Increased state regulation is a direct consequence of the introduction of Medicare and Medicaid. While state-hierarchy traditionally plays a role in the public programmes, there used to be not much government regulation in the realm of private insurance until the most recent reform of 2010. With the countervailing effects of increased state-based regulation and federal deregulation through ERISA, government fell well short of its potential. In particular, the medical profession was largely able to preserve its self-regulatory structure until managed care gained a foothold. Hierarchically structured, private managed care arrangements proliferated quickly from the 1980s, exerting a considerable degree of control over patients and providers, especially in their first stages. In many respects, they therefore acted as a ‘functional equivalent’ of government regulation. Managed care organizations introduced completely new instruments to

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govern providers. At their core were new remuneration methods that forced medical care providers to assume part of the risk. Through selective contracting, managed care introduced competition in a formerly autonomous field. Managed care organizations were thus able to exert control within private contract arrangements in the absence of state-hierarchy. In the first stages of the evolution of managed care, vertical integration between insurers and providers supported hierarchical control as a mode of interaction. But the medical profession was also able to restore its autonomy. With the backlash against HMOs, more loosely structured managed care arrangements gained ground, and hierarchical control was amended through long-term contractual relations and negotiations as new organizational forms and alternative remuneration methods were established. It finally, should be emphasized here, however, that this does not mean that managed care governed all issues not regulated by the state, especially where the financing system is concerned. On the contrary, competitive forces triggered by managed care, and the subsequent profitization of the insurance industry led to a less equitable mode of premium calculation in private insurance. Another observation in this complex field of the regulation of the US healthcare system is that the boundaries between the public and the private sphere have become increasingly blurred. On one hand, payment methods introduced by Medicare constitute a ‘public good’ which is also applied today by private insurers. On the other hand, more Medicare and especially Medicaid beneficiaries (have to) join managed care today. Regulatory competency has thus been partially devolved from public to private actors, and we observe a spillover from private governance mechanisms to the public programmes. From a territorial perspective, a continuous decentralization process is observable in Medicaid, while in Medicare the delegation of tasks from the national to the sub-national is mainly a phenomenon of the 1970s. In private insurance, too, involvement by the federal government in healthcare legislation increases, particularly with the most recent healthcare reform. The role of the international level in healthcare regulation is, as of yet, controversial and uncertain. In sum, major change has occurred in the regulation dimension with regard to its territorial aspects and to the public/private-mix. Drawing on the conceptual framework we provided for regulatory structure (see Introduction), the most remarkable development witnessed here appears to be the emergence of a completely new regulatory structure: we see private actors such as managed care organizations implementing hierarchical modes of interaction and bargaining based on long-term contractual relationships.

Conclusion Starting from the two major trajectories explored in this chapter, the present results will now be broken down into the main categories of analysis: the dimensions of financing, service provision and regulation. The first

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conclusion to be drawn is that the role of the state has indeed increased considerably in the US healthcare system, especially in financing, and thereby also in the hierarchical regulation of the government financed programmes. Similarly, the new healthcare legislation also strengthens the role of the regulatory state in the realm of private insurance. The second point to be made is that private insurance arrangements commonly subsumed under the term ‘managed care’ developed their own governance mechanisms. Thus another most remarkable change is the emergence of new modes of hierarchical governance initiated by private market actors. The financing dimension witnesses a considerable hybridization of the ‘private regime’ of healthcare financing through the incorporation and strengthening of the publicly financed programmes Medicare and Medicaid. Social insurance financing, a source of almost no relevance until 1965, thus became an important element of the financing mix. Out-of-pocket payments declined considerably in relation to other sources of funding. Further evidence for the immense growth of the role of the state appears when we take into account tax exemptions accruing to employer-sponsored insurance. Taken together, more than half of total healthcare expenditure today comes from public sources. Collective funding also increased due to the expansion of private insurance induced by an ongoing expansion of the benefit packages. However, the profitization of the insurance industry also led to decreasing solidarity as reflected in premium calculation, thereby threatening the benefits derived from the expansion of private insurance. In the service provision dimension, state-involvement in the delivery of services had traditionally been low, and continued to diminish over time. Evdience for the retreat of the state can initially be found in the form of material and functional privatization in the hospital sector. Across all sectors, we observe not only that the role of the state decreases directly as a consequence of diminishing bed capacity in public ownership, but we also witness an implicit retreat of the state as fewer resources are devoted to the inpatient care sector. At the same time, the government influences ownership structure to the benefit of private non-profit providers, which allows especially non-profit hospitals to maintain a high market share. When finally comparing financing and service provision, we observe strongly countervailing developments in these two dimensions. While the public modes of financing increased over time, the provision of services in the US has become predominately private. In the regulation dimension, increased hierarchical state regulation is a direct consequence of the introduction of Medicare and Medicaid and the responsibility to spend public funds cautiously. The recent healthcare reform, addressing particularly private insurance, initiated another phase of hierarchical state regulation. Until then, however, the government did not exert much hierarchical control over the insurance business. Moreover, government regulation traditionally was weak vis-a-vis service providers in private insurance. As

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a ‘functional equivalent’, private insurance experienced the emergence of managed care, which expanded rapidly from the 1980s on. Although private by nature, managed care has given way to a series of hierarchical arrangements. HMOs not only introduced completely new instruments for managing provider and patient behaviour, they were also able to enforce these mechanisms within private contract arrangements. As HMOs and PPOs contract selectively with providers, they introduced competition in a formerly autonomous field. Today, as a consequence of the managed care backlash, provider networks based on ‘virtual’ integration partially replaced the purely hierarchical relationship, emphasizing bargaining elements in the interaction between insurers and providers. Furthermore, the demarcation line between public and private schemes became blurred during the past decades. Payment methods established under Medicare constituted a ‘public good’ which was also adopted by private insurers. The other way round, with more Medicare and especially Medicaid beneficiaries joining managed care, private instruments of hierarchical control spilled over to the public programmes and the competence to regulate the healthcare system was partially devolved from the government to private actors. From a territorial perspective, internationalization has taken place in the financing dimension, though this trend has not (yet) broken through to the regulation dimension, nor to the core of service provision. We also observed a strong centralization in the financing dimension, mainly driven by concentration in the private insurance industry. This trend is remarkable, as it strengthened the bargaining position of private insurers vis-a-vis providers in managed care and therefore affected the regulation of the system. In the delivery of services, in contrast, centralization became reversed to a certain degree. Thus in the past decade, we see countervailing directions when comparing territorial movements in financing and service provision, which is a quite remarkable strategy in times of large integrated managed care organizations. When the regulation dimension is examined in terms of its territorial aspects, we find that the regulation of private insurance became more centralized, control in the Medicaid programme further devolved to the single US-member states. Medicare experimented with decentralization in the 1970s, but experienced more federal involvement from then on. Therefore, in the regulation dimension, both centralization and decentralization occur, depending on which sub-system comes under scrutiny. As a concluding result, we can see that within the past forty years the American healthcare system has changed from a private competition-based structure into a most complex public/private-mix. The state has become an important actor, especially in financing, but also in the regulation, while it is generally on the retreat in service provision. One of the basic characteristics of the system, however – the significance of private market actors – has

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been preserved over time. This chapter has emphasized that it is these private actors who played a sizeable role in the hierarchical regulation of the US healthcare system. When compared to all other OECD countries, the US system is still closer to the private healthcare system type than any other, though it shows far fewer typical private features than at the start of our period of observation in 1965.

Notes 1. According to the US Census Bureau, people are considered uninsured if they are not covered by any type of health insurance at any time in the previous calendar year. Due to double-coverage, the figures do not add up to 100 per cent. (cf. US Census Bureau 2009: 20). 2. Waivers allow the state governments to deviate from federal regulation in the Medicaid programme. In this case, section 1915(b) (freedom-of-choice) waivers were made available through the Omnibus Budget Reconciliation Act (OBRA), which allowed the states to experiment with new modes of provider remuneration. This waiver also allowed the states to force Medicaid beneficiaries to receive their care through managed care organizations. 3. Self-insurance is a healthcare financing technique by which employers pay claims out of an internally funded pool bearing the full financial risk for the healthcare cost of their employees. While in 1984 only about 8 per cent of all covered workers were covered by self-insurance, this share increased to 44 per cent in 1999. Currently, 57 per cent are in some sort of self-insured health plan (Erdmann 1995: 102; Kaiser Foundation/HRET 2009: 185). 4. Medical Saving Accounts and Health Spending Accounts are part of a broader range of insurance products called consumer-driven health plans (CDHP), which rely on high deductibles in order to make consumers price-conscious about their choices. In the saving accounts a certain amount (defined by government regulation) of income-tax free money is deposited, which is used exclusively for healthcare expenses at the time services are needed. Medical Saving Accounts must be combined with a high-deductible health plan that covers larger medical expenses only. 5. This classification follows a functional logic as it distinguishes between inpatient and outpatient care, regardless of whether these are delivered in a hospital setting or not. 6. Federal hospitals are mainly owned by federal government institutions, such as the military hospitals operated by the Department of the Army or by the Department of Veterans Affairs. 7. Data on community hospitals do not explain the ownership status of all registered beds although the quality of data improves over time. As the author does not assume that specific ownership categories are systematically underreported, the percentages in Figure 7.7 are adjusted according to their respective shares to 100 per cent. Public beds are calculated as the sum of hospital beds owned by the federal government and state and local governments at the community level. 8. Since the relative importance of non-profit organizations in providing charity care is declining, however, the current debate is about whether non-profits still deserve their tax-free status today. For a discussion of this subject, see, for example, Schlesinger and Gray (2006), Hyman and Sage (2006) and Bloche (2006).

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234 Mirella Cacace 9. It is, however, not possible using the OECD data to differentiate hospital outpatient services from outpatient services delivered in private practices. This shortcoming unfortunately makes the measurement of the public/private-mix somewhat imprecise. 10. The author’s assumption is that ownership status between 1975 and 1993 in the nursing-home sector remained stable, as it did in consecutive years. Furthermore, data count facilities, and not beds. This is an inaccuracy compared to the information available on hospitals. Finally, as already explained, it is not possible to quantify hospital outpatient services. Monetary resources devoted to the outpatient sector therefore are attributed to the for-profit sector, which is clearly a simplification. 11. Indemnity insurers reimburse for covered healthcare services according to the fees the providers demand (fee-for-service principle). Indemnity insurers reimburse providers the ‘usual and customary’ rate. The provider is allowed to charge the patient for the difference (balance billing). 12. Anti-managed care laws denote any-willing-provider, freedom-of-choice and direct-access regulations designed to delineate the nature of provider-panels created by managed care firms. Any-willing-provider regulation requires a managed care organization to include or contract with any provider who accepts the terms of the network. Freedom-of-choice and direct-access laws allow subscribers to obtain service from any licensed provider outside the network (at higher copayments) or to bypass their gatekeeper (Jensen and Morrisey 1999). 13. From 18 months in case of loss of employment to a maximum of 36 months if there is a change in family status. 14. In 2010, hospitalized patients were charged with a deductible of 1,100 US$ per episode of up to 60 days and daily co-payment of 275 US$ for the next 30 days. After 90 days, the patient may draw upon a 60-day lifetime reserve. During this lifetime reserve, daily co-payments increase to 550 US$. There is no option to receive Medicare benefits in excess of 150 days within a given benefit period (US DHHS 2010b). 15. In 2009, for example, a single person with an annual income up to 85,000 US$ paid about 96 US$ monthly for the Part B premium. If a person with the same family status earned 213,000 US$ or more, he or she pays 308 US$. 16. Besides a monthly subscriber premium, which will presumably average 39 US$ in 2010 across all plans, the standard drug benefit allows for an annual deductible of 310 US$. Once this deductible is reached, the enrolee pays a co-insurance rate of 25 per cent until total spending for drugs reaches 2,830 US$. From then on, until total spending reaches about 6,440 US$, a so-called doughnut hole exists, where the consumer has to pay 100 per cent of drug cost. Finally, the enrolee contributes a five per cent co-insurance rate for all prescription drug cost exceeding the doughnut hole (Kaiser Foundation 2009b). The Patient Protection and Affordable Care Act of 2010 intends reducing the doughnut hole by providing a rebate of 250 US$ when reaching the gap.

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Part IV Conclusion

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8 The Converging Role of the State in OECD Healthcare Systems Heinz Rothgang

Introduction Healthcare systems can be characterized by the ways they fulfil three basic functions: financing, service provision and regulation, which can be conceptualized as the dimensions of a healthcare system. Part I of this book presented concepts for the systematic description of healthcare systems and the role of the state in healthcare according to these dimensions. Three modalities have been distinguished: a state, a societal and a private form of financing, service provision and regulation. In Part II of this book an account on the changing role of the state in financing and service provision based on 23 OECD countries over four decades was given. Changes were analyzed with respect to general trends but also with respect to the developing differences among states. In Part III, case studies for England, Germany and the US provided more detailed analyses of financing, service provision and, especially, the regulation dimension. As discussed in Chapter 2, these cases have been systematically selected in order to represent three healthcare system types: the National Health Service (NHS), the social insurance system, and the private healthcare system. In this concluding chapter the results of these parts of the book are used as the basis for a synopsis of the developments in all three dimensions of the healthcare system with respect to changes in the role of the state. These findings are presented in order to prove our main thesis: considering all dimensions of the healthcare system, the most remarkable development over the last 40 years is that distinct healthcare system types have become hybrids. The systems have thus, converged in the sense that they now have more similarities and are much less distinct systems than at the beginning of our observation period in the 1970s. Variation between healthcare systems has declined and the corridor for national features of the healthcare system has narrowed markedly. In the following, therefore, our major findings on financing, service provision and regulation are first summarized and a configurative approach is 237

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used to identify how the healthcare system types are affected. Against this background, the changing role of the state in healthcare is discussed.

Financing Due to data limitation any observation of the whole period for the OECD sample has to be based on a dichotomous distinction between public (tax and social insurance) vis-à-vis private (private insurance, out-of-pocket) healthcare financing. Analyzing the healthcare financing of 23 OECD countries shows an increase of public and private healthcare expenditure, both in absolute terms but also as a share of GDP. Growth rates for total health expenditure were particularly high in the early 1970s, when the growth process was almost completely fed by an increase in public healthcare spending. Since the end of the 1970s, cost-containment became the prevailing policy in OECD healthcare systems. Nevertheless, total healthcare financing still continued to grow in absolute terms but also as share of GDP, though at a lower pace. This time, however, the process was mainly driven by increases in private healthcare financing: consequently, the publicly financed share of total healthcare expenditure decreased for the next two decades. We have referred to these twin movements – a growing share of the GDP going into public healthcare financing while at the same time the share of public as part of total healthcare expenditure was decreasing – as ‘relative privatization’. Since 2000, however, the share of public healthcare spending has been growing again – as a percentage of GDP as well as in relation to private financing responsibilities. All in all, we do not find a declining public financing share and therefore no decline in the role of the state in healthcare financing throughout the OECD world. That is why corridor effects, as defined in Chapter 2, proved to be more interesting than the level effect. Corridor effects refer to changes in the distinctness of national solutions. Generally speaking, convergence denotes a shrinking range of the area in which national solutions are placed while divergence denotes an increasing range. In order to measure convergence quantitatively, sigma- and beta-convergence in particular have to be distinguished. While sigma-convergence is defined as a reduction in the variance (denoted as ) between different systems with regard to one parameter, j beta-convergence measures catch-up processes among ‘laggard’ countries and uses the ß parameter in regression models for this end. With respect to healthcare financing, we particularly studied in how far the share of certain types of healthcare financing as a percentage of total healthcare financing has converged. The in-depth analyses of our case studies revealed countervailing trends: while we find an increasing share of private financing and a slightly decreasing share of public financing nurtured by a strong decline in tax financing since the mid-1970s in Germany, we see quite the opposite in the US: a massive increase in tax financing,

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Table 8.1 Changing role of the state in healthcare financing Great Britain

1970–2002: decreasing role of state financing as the share of public financing, and tax financing in particular, declines Since 2002: increasing role of state financing as the share of public financing, and tax financing in particular, rises

Germany

Decreasing role of state financing: Relative retreat of public healthcare financing since the mid-1970s nurtured by a rises share of tax financing

United States Increasing role of state financing: increasing tax financing in relation to both GDP and total health expenditure OECD 23

No significant retreat of public financing, but a relative retreat in the 1980s and 1990s Converging public/private-mix in healthcare financing

which continued even after the introduction of Medicare and Medicaid in 1965. In England private healthcare financing goes both up and down, with an increasing share until 2002 and a revival of tax financing thereafter. The difference between these three systems has thus become smaller (Table 8.1). This finding is reinforced by the cross-sectional analysis of 23 OECD countries, where we observe a decreasing variance (sigma-convergence) and consequently a negative correlation between expenditure growth and its initial levels (beta-convergence). Sigma-convergence is statistically significant for total health expenditure per capita, for public health expenditure as a percentage of GDP and particularly for the financing mix, measured as the public financing share in percentage of total health expenditure. This effect is due to the catch-up process of countries with low public healthcare financing in the early 1970s. Correspondingly, beta-convergence is highly significant for both public healthcare expenditure as share of GDP and public healthcare expenditure as a share of total healthcare expenditure. These findings seem to indicate that extreme shares of public financing has dysfunctional effects. A certain amount of private financing seems to be necessary in order to prevent moral hazard. This is particularly true for amenity services provided, for example, in hospitals. Increasing shares of private financing in some national health service system could be interpreted this way. The US case, on the other hand, clearly demonstrates that at least some public financing is necessary to secure access to the healthcare system for vulnerable groups, namely those with low incomes and high risk who cannot achieve or afford private insurance and cannot buy healthcare out-of-pocket. Significant differences, however, prevail. We thus see significant convergence, but at the same time, important differences between countries and system types still prevail.

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Service provision With respect to service provision, three categories of privatization must be distinguished: material, formal and functional privatization (Schneider and Tenbücken 2004). While material privatization refers to changes in ownership, formal privatization refers to changes in the legal status of entities that remain public but gain more independence. Functional privatization, finally, refers to the outsourcing of certain functions within healthcare premises. Material privatization may be the consequence of changes in ownership in a certain sector (explicit privatization), but may also result from the growing importance of a sector with a higher share for private service providers compared to a sector with more public service provision (implicit privatization). While the case studies also contain information on formal and functional privatization, the quantitative analysis in the case studies, but also in the cross-sectional analysis in Chapter 4, is limited to material privatization. In Britain in the wake of the Griffiths reform, from 1984 onwards outsourcing, particularly of hospital catering and cleaning, led to considerable functional privatization. As a consequence of waiting lists and waiting times additional capacities were created in the dental and long-term care sectors, leading to implicit material privatization. In hospital care in the 1980s consultants increasingly used NHS facilities for private practice. Moreover, the number of private hospital beds increased (explicit material privatization). As a consequence of the 1990 NHS reform, in particular, we have seen formal privatization with formerly directly managed units becoming independent NHS Trust hospitals. In Germany, the amount of material privatization is limited, as the share of private service provision was high even at the start of our observation period. Using the Public Service Provision Index (PPI) as developed in Chapter 4 of this book, we find the share of public service provision declining from 20.8 per cent in 1975 to 16.6 per cent in 2007. Correspondingly, the share of private for-profit service provision has increased from 61.3 per cent to 64.0 per cent in the same period. These figures underestimate the amount of overall material privatization, as re-unification initially led to a drop in private service provision which is hidden in the overall rate of change referred to above. The effect is even clearer when we analyze the hospital sector, which was originally characterized by both public and private non-profit service provision and therefore offered some room for privatization. During the last two decades, the share of private for-profit hospital beds more than tripled from 4 per cent in 1991 to 15 per cent in 2007, a trend that continues. During the 1990s this growth was at the expense of public hospitals, while since 2000 we also observe a decline of the number of private non-profit hospitals. Moreover, material privatization is accompanied by formal and functional privatization in German hospitals, pointing toward organizational restructuring in the public hospital sector.

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In the US healthcare system, service provision is mainly a matter of private providers. It is only in the hospital sector where we find considerable public service provision. From 1975 to 2005, however, the share of public hospital beds has decreased from about 30 to 20 per cent. In the same period of time, the share of private for-profit beds has almost doubled from 7 to 13.5 per cent, while the share of private non-profit beds has slightly increased, from 64 to 66 per cent (see Chapter 7). Private non-profit providers thus still dominate the hospital sector, though private for-profit providers are gaining ground. Apart from this, the shift from inpatient to outpatient care leads to implicit material privatization. Together, these processes caused a decline in the Public Service Provision Index from 14 per cent in 1975 to 6 per cent in 2005. Within the hospital sector, material privatization has been accompanied by functional privatization. With respect to material privatization, once again the findings from the case studies were reinforced by the cross-sectional analysis of our 23 OECD healthcare systems. Due to data limitations the PPI and its development could only be calculated for 15 countries, and for some of them, only for limited time periods. The analysis nevertheless revealed – weak – (material) privatization tendencies across the board. Moreover, the cross-sectional analysis shows that the privatization of healthcare services is not always implemented explicitly. The strengthening of the outpatient and pharmaceutical sectors, which often results from technological progress in medicine, causes implicit privatization, since these sectors are generally dominated by private providers. Table 8.2 summarizes these findings. Concerning the role of the state in service provision, the analyses in Chapter 4 of the book produced some useful insights: first, on average, the role of the state in service provision is much weaker than in financing. Even in the US, more than half of total healthcare expenditure now comes from taxes (tax exemptions included), and, on average, in the 23 OECD countries analyzed in Chapter 3, more than 70 per cent of all healthcare expenditure is publicly financed. In contrast, public service provision only amounts to 35 per cent in the 12 OECD countries for which comparable PPI-values could be calculated (Chapter 4). In addition, we see a common privatization tendency since about 1990, as the PPI decreases in 11 countries while

Table 8.2 Changing role of the state in service provision Britain

Considerable formal and functional privatization; weak material privatization

Germany

Material privatization, considerable formal and functional privatization in German hospitals

United States

Material privatization, functional privatization within the hospital sector Weak material privatization

OECD 23

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remaining constant in two (France and the Netherlands) and increasing slightly in two more others (Iceland and Japan). Taking the mean PPI of those countries for which comparable data is available in 1990 and 2002/5 shows a decline from 38 to 36.4 per cent, while there is no evidence for sigma-convergence. Finally, the range of the PPI is very large, spreading 74 per cent in Finland, where public service provision dominates, to six per cent in the US, with a marginal public service provision. Interestingly, the PPI also varies within the same healthcare system type. While the Nordic NHS countries display high levels of public provision, the PPI scores only half as high for the NHS of Italy and Australia. Correspondingly, the social insurance systems of Austria and France are characterized by a comparatively high PPI, whereas Japan and the Netherlands display PPI levels that are closer to the market-dominated system of the US. Seemingly, notwithstanding the common privatization pattern, there is considerable room for national patterns when it comes to service provision.

Regulation It is not possible to provide an adequate account of changes in regulation in all OECD countries within a book such as this. Therefore, in part III we concentrated on three cases that represent certain healthcare system types, namely Britain, representing a National Health Service system, Germany, representing a Social Health Insurance system, and the US, representing a private healthcare system. The analysis below is based on these detailed case studies. By way of summary, Table 8.3 shows the changes that have taken place in the regulatory structures of these healthcare systems. As shown in Chapter 5, the British NHS is an example of a state-led healthcare system that has introduced market elements in order to improve efficiency. Service providers have been formally, but not materially, privatized.

Table 8.3 The changing regulatory structures of Britain, Germany and the United States

Market actors Corporate actors State

Competition

Bargaining

Hierarchy

United States Germany Germany

–

United States

Germany

–

Britain

–

Britain Germany / United States

Note: While the bold letters country names identify the original situation, country names in normal print show the additional forms of governance that have emerged since then. Source: Own depiction.

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Competition therefore takes place among actors that can still be characterized as state agencies and units. Furthermore, much essential decisionmaking on healthcare has been devolved from central government to regional and local bodies. Interestingly, the prevalence of market mechanisms in the British healthcare system has been accompanied by stronger state-involvement, as indicated, for example, by the increasing role of the state in the regulation of service providers. This finding is clearly at odds with the view that regulation is a zero-sum game, in which an increase in market competition necessarily leads to a loss of hierarchical state regulation. On the contrary, it has to be emphasized that the growing role of market competition strengthens rather than weakens state authority, especially as these reforms, once initiated, require further state intervention. In the case of the German social insurance system, discussed in Chapter 6, the dominant structure of mutual self-regulation by corporatist actors was largely preserved, if not expanded, in the first two decades of our observation period. These developments, however, have to some extent been offset by the introduction of competition between health insurance funds in 1992, which led to subsequent legislation even increasing the role of competition, and an ever increasing role of the state in the regulation of healthcare policy. As a result of these developments, both the state and the market now play a greater role in the regulation of healthcare policy. The state also heavily regulates private health insurance, transforming it into a means of implementing welfare state policies. Although there is continued reliance on corporatist self-regulation, space has been opened up in the German healthcare system for public (state) and private (market) actors on the one hand, and competition and hierarchy on the other, with the traditional system of selfregulation among corporate actors being squeezed between the two. Finally, with regard to the US healthcare system portrayed in Chapter 7, hierarchical state regulation increased significantly as a result of the creation of the public programmes Medicare and Medicaid in 1965. In addition to this, the federal government uses market incentives, as it employs public funds to subsidize employer-sponsored private insurance. Yet within the realm of private insurance, hierarchical state regulation remained weak, paving the way for hierarchical regulation implemented by private actors. Thus, the private insurance sector saw the emergence of managed care, which expanded quickly from the 1980s onwards. Although purely private in nature, the development of managed care has led to the establishment of a number of hierarchical arrangements. However, as a consequence of the backlash against managed care, the hierarchical regulation of providers and patients was amended by bargaining elements. Due to the spillover of managed care to the private programmes, and as private insurers adopt remuneration methods borrowed from the Medicare programme, the boundaries between the public and the private have become blurred in the US healthcare system.

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It is evident that it is not a common trend – such as ‘more competition’ – which correctly describes the overall changes in regulation. Instead, each system adopts mechanisms that were absent before. Interestingly, the new structures are not always found on the main diagonal in Table 8.3. So, in the US, the managed care revolution increased hierarchical regulation, albeit not as state hierarchy, but by way of private hierarchy. To some extent, managed care thus can be regarded as a functional equivalent of the absent state-hierarchical regulation. In Britain, on the other hand, competition was introduced, but as an ‘internal market’ of state actors, and in Germany it is corporate actors that also engage in competition. Thus, in all three healthcare systems, the regulatory structure has changed profoundly. Although each system inevitably retains its basic character, that is state-hierarchy in Britain, corporatist self-regulation in Germany and market competition in the US, we now find more complex regulatory structures, in which the dominant regulatory mechanism is supplemented by mechanisms that were originally absent. As a result, the systems are moving towards hybrid forms of regulation, and in doing so they become more similar. On the regulation dimension we therefore see some kind of sigma-convergence.

Configurative approach: The hybridization of healthcare system types In Chapter 2 healthcare system types were characterized by distinct combinations of modalities in financing, service provision and regulation, as well as a certain set of dominant values (see Table 2.3). What do the changes reported above in financing, service provision, and regulation mean for the healthcare system types? How do changes in these dimensions interrelate, and what is the overall effect if a configurative perspective is taken? Table 8.4 summarizes the changes for each dimension and each healthcare system type, as well as the complete OECD sample. Results for financing and service provision are based on statistical analyses of the complete OECD sample; changes in regulation relate to the three case study countries. However, further analysis has confirmed that these results also hold for other countries that operate the respective healthcare system type (Götze et al. 2009; Schmid et al. 2010). The role of the state in National Health Services is still dominant, but not as dominant as it was in the 1970s. The – slightly – declining share of public financing might be interpreted as an attempt to increase efficiency by setting more incentives to avoid moral hazard. The major change, however, is to be found in regulation. In several countries with an NHS system, such as Britain, Finland, Italy and some regions of Sweden and Spain, service providers were formally privatized and internal markets were established (Schmid et al. 2010). The introduction of competition marks a path-breaking

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Table 8.4 Changes in financing, service provision and regulation Healthcare system type

Financing

Service provision

Regulation

National Declining share of Health Service public financing

Formal and material State-hierarchical privatization planning amended by competition of state actors

Social Insurance System

Almost constant share of public financing

Formal and material Corporatist privatization arrangements still dominate but squeezed between state hierarchy and competition

Private Healthcare System

Increasing share of public financing

Material privatization

Market competition amended by state regulation and private hierarchy

All systems

Only relative retreat of the state, in the 1980s and 1990s, but convergence in the public-private-mix

Privatization tendencies in all system types, starting from and reproducing a huge range of public service provision

Hybridization of regulation regimes

innovation in what had been a command and control system, affecting access of providers to the market as well as remuneration. So, for example, the commissioning of services requires a corresponding remuneration system. Thus, the introduction of a new form of hospital remuneration in England, the Health Care Resource Groups (HRGs), was a necessity. Internal markets can only work as long as service providers have some freedom of manoeuvre. Formal – and to some extent material – privatization therefore goes hand in hand with this innovation in regulation. At the same time competition needs – public – re-regulation. Thus we see the creation of new arms-length bodies in Britain such as the National Institute for (Health and) Clinical Excellence. In the end a new configuration results, with changes in financing, service provision and regulation being strongly interrelated. The role of the state in NHS systems therefore is different, but still dominant. Something similar applies to social insurance systems. For them as well, the introduction of competition as a co-ordination mechanism in its own right is the most important element of change. Interestingly, the location of this competition is different from NHS systems. While the latter introduced

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competition in the relation between financing body and service provider, social insurance systems such as those of Germany and the Netherlands started with competition between sickness funds for contracts with insurants, that is, in the relation between financing bodies and potential beneficiaries. As this kind of ‘halfway competition’ cannot produce effective and efficient results, competition has necessarily spread to the relation between financing agencies and services providers (Götze et al. 2009). Once again, formal privatization is a necessary development as competition hits the providers. So it is not by chance that in Germany material privatization in the hospital sectors has gained speed in the last decade, when it has become clear that competition will be the major factor shaping the future hospital landscape. As in NHS systems, the introduction and strengthening of market principles goes hand in hand with intensified direct hierarchical state regulation. Private healthcare systems suffer from different inefficiencies. Private insurance cannot provide coverage for people with high risks and/or low income (Glied 2001; Schoen et al. 2008). The introduction of Medicare and Medicaid in the US was a necessary reaction to this problem (Marmor 2000). Even though coverage for these programmes was broadened later on, there still remains a high number of uninsured, triggering the recent Obama healthcare reform. As a consequence of the introduction and broadening of state programmes in the US, the share of public healthcare as percentage of total healthcare has increased. Private healthcare systems also face another problem: Due to lack of regulation expenses tend to get out of control, not least because of high expenditure on administration and marketing. This is true for the US, but also for the Swiss healthcare system, which was the second most expensive in the world. In 1996, Switzerland introduced the ‘Krankenversicherungsgesetz’, which brought about mandatory health insurance and a lot of state regulation. In the US, the Clinton healthcare reform plan failed in 1994, but the managed care revolution of the 1990s created a somewhat functional equivalent for missing state regulation in form of private hierarchy. An increasing share of public healthcare financing and increased hierarchical regulation therefore goes hand in hand in (formerly) private healthcare systems. For the OECD world as a whole, the tendencies described lead to a kind of convergence. The public-private-mix in financing shows significant sigma- and beta-convergence. As a result, the financing mix today differs much less between OECD states than 40 years ago, and regulation has become much more hybrid. Healthcare systems introduced regulatory mechanisms that were not part of the respective ideal typical regulation structure at the beginning of our period of observation. By moving towards more hybrid forms of regulation, healthcare systems in the OECD world have become more similar and thus displayed a specific form of convergence.

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The changing role of the state in healthcare systems What does the growing convergence imply for the changing role of the state in OECD healthcare systems? First, the role of the state in healthcare service provision is declining across the board and in all healthcare system types. In this dimension we do not see convergence but rather a common privatization trend. While formal privatization can be regarded as a prerequisite when market mechanisms are introduced, material privatization is not. It rather seems to be the effect of a common ideology, which expects higher degrees of efficiency once private providers provide services. Second, with respect to financing and regulation we do not see a general retrenchment of the state, but rather developments that differ according to healthcare types. The role of the state has been strengthened where it was weak before and weakened where it was strong. In financing, in particular, a certain amount of public financing seems to be necessary in order to reach a sufficient level of performance of the system. In regulation, the US example demonstrates that hierarchical regulation can in part be realized by private hierarchy. The recent Obama reform, however, and its original emphasis on a ‘public option’, which should bring down costs through competition with established private insurers, also indicates that the effects of private hierarchy might be limited. Moreover, there seems to be a seesaw effect between financing and service provision on the one hand, and regulation on the other: A declining role of the state in financing and service provision is accompanied by increasing state regulation – a pattern which has also been seen in other areas of welfare state policies (Dingeldey and Rothgang 2009; Majone 1997; Powell 2007). The introduction of competition and market mechanisms in NHS and social insurance systems has also been accompanied by additional state regulation and re-regulation. The role of the state therefore is different, but not necessarily of lesser importance. Finally, the convergence raises questions about the ability of each individual nation state to create a distinct healthcare system of its own. The smaller the corridor is in which national peculiarities are displayed, the lesser seems the ability of each nation state to maintain national patterns. Convergence can therefore be interpreted as a sign of the decreasing potential of nation states to find their own solution to the question of how best to organize healthcare. In this respect it is not the role of the state in a healthcare system that has decreased, but the ability of each particular national state to find a national solution vis-à-vis common functional necessities.

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Index

Balanced Budget Act (BBA), 185, 212, 220 Beitragsentlastungsgesetz, 122, 153 Bevan, Aneurin, 106 Bismarck, Otto von, 4, 16 Blair, Tony, 75, 80, 101, 104, 111–12 Blue Cross/Blue Shield (BCBS), 196, 220 British Medical Association, 100, 102 British United Provident Association (BUPA), 85, 93, 94 Brown, Gordon, 81 budget global budget, 31 NHS budget, 79, 82, 86, 98 sectoral budgets, 124, 157–60, 163, 176

Commission for Health Improvement (CHI), 114 Commission for Healthcare Audit and Inspection (CHAI), 101, 114 Comprehensive Spending Review, 98 consensus management, 77 Consolidated Omnibus Budget Reconciliation Act (COBRA), 185, 215, 224 consultants, 88–9, 102–4, 242 Consumer Driven Health Plans (CDHP), 211 convergence, 20–1 beta-convergence, 21, 31, 38, 41–3 delta-convergence, 21, 31, 38 sigma-convergence, 21, 33, 47 co-payments, 12, 28, 83–4, 155–6, 162–3, 210, 216 corporatist government, 16, 121, 146, 150, 171 corridor effect, 6–7, 19–20, 34–5, 238 see also convergence cost containment, 3, 31–2, 121, 124, 129, 157, 184, 188–9, 238 see also KrankenversicherungsKostendämpfungsgesetz (Health Insurance Cost Containment Act) Cost Containment Amendment Act, see KostendämpfungsErgänzungsgesetz Council for Healthcare Regulatory Excellence, 99 cream-skimming, 27–8, 122, 151, 153, 174 cross-boarder healthcare, 173

capacity planning, 79, 112, 165, 172 Care Quality Commission, 114 Care Standards Act, 101 Children’s Health Insurance Program (CHIP), 185, 214, 217 Christian Democratic – Liberal Government, 120 coefficient of variation, 38

Democratic Constitutionalist Interventionist States (DCIS), 7 Department of Health, 79, 92, 94, 98, 100–3, 106, 114 Department of Social Security, 76 Diagnosis Related Groups (DRGs), 55, 60, 103, 122, 142, 160–2, 165, 175, 183, 200, 205, 219

1. GKV-Neuordnungsgesetz, 122 1st Statutory Health Insurance Restructuring Act, see 1. GKV-Neuordnungsgesetz 2. GKV-Neuordnungsgesetz, 122, 159 2nd Statutory Health Insurance Restructuring Act, see 2. GKVNeuordnungsgesetz adverse selection, 28, 217 America’s Health Insurance Plans (AHIP), 182 American Hospital Association (AHA), 182, 199 American Medical Association (AMA), 183, 184 Area Health Authorities, 76, 77 Arm’s Length Body, 99, 101 associations of panel doctors, see Kassenärztliche Vereinigung

275

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276 Index Disease Management Programme (DMPs), 122, 151–2, 168, 174 District Health Authorities, 77–8, 80, 107 East German healthcare system, 120, 129 Emergency Medical Treatment and Active Labour Act (EMTALA), 224 Employee Retirement Income Security Act (ERISA), 185, 212, 217–20, 229 European Insurance Intermediaries Directive, 96 European Union (EU), 31–2, 81, 99, 106, 155, 172–3 Executive, NHS, 86, 103 Federal Committee of Physicians and Sickness Funds, 164, 169, 171 Federal Joint Committee, 162, 165, 170–1, 179 Federal Medical Assistance Percentages (FMAP), 217 fee-for-service, 157, 159, 221, 227 Financial Service Authority (FSA), 96 foundation hospitals, 92–3, 103 freedom-of-choice, 224 fund holder, 78, 102, 105, 112 funding mix, 45–50 gate keeping, 104–5, 167–8, 172, 174–5, 209–10, 224–5, 234 General Dental Practitioner (GdP), 99, 100–4 General Dental Service, 76, 84, 106 general management, 77 General Medical Council (GMC), 99, 100 General Medical Service Contract (GMS Contract), 99, 100, 104 general practitioner (GPs), 76, 78, 85, 90, 99, 100, 102–6, 115, 167 General Practitioner Register, 99 General Practitioners Committee, 100 German Hospital Association, 160–1 German unification, 129, 126, 141, 148–9 Gesetzliche Krankenversicherung (GKV), 135, 146–7, 164 Gesundheitsreformgesetz (GRG), 122, 128, 156, 162

Gesundheitsstrukturgesetz (GSG), 122, 152–5, 158, 160, 164, 170–3 GKV-Gesundheitsreformgesetz (GKV-GRG), 122, 149, 155, 160, 170 GKV-Modernisierungsgesetz (GMG), 123, 153–4, 156, 158–9, 166–7, 171 GKV-Wettbewerbs-Stärkungsgesetz (GKV-WSG), 123, 135, 150–3, 158, 162, 169 Grand Coalition, 121 Griffiths, Roy, 77, 88, 94, 112, 113 Health and Social Care Act, 79, 92 Health Care and Education Reconciliation Act, 187 Health Care Provider Index, 54 Health Care Resource Groups (HCRGs), 103 Health Cash Plans (HCPs), 95, 96 Health Insurance Contribution Rate Exoneration Act, see Beitragsentlastungsgesetz Health Insurance Cost Containment Act, see KrankenversicherungsKostendämpfungsgesetz Health Insurance Development Act, see KrankenversicherungsWeiterentwicklungsgesetz Health Insurance Portability and Accountability Act (HIPAA), 185, 215, 218 Health Maintenance Organizations (HMOs), 79, 196, 208–10, 219 Health Planning and Resources Development Act, 222 Health Service Act, 101 Healthcare Commission, 78, 101, 114 Healthcare Reform Act, see Gesundheitsreformgesetz healthcare reforms overview Germany, 124–5 overview USA, 186 Healthcare Structure Act, see Gesundheitsstrukturgesetz healthcare system types, 16–18 see also NHS system, SHI system, and PHI system healthcare systems, 5–6, 10–11 HMO Act, 184, 212

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Index hospital financing, 55, 79, 84–5, 91, 97, 102–4, 121, 132, 160–5, 206, 221–2, 228, 245 see also Diagnosis Related Groups, Health Resource Groups, and Prospective Financing Schemes Hospital Financing Act, see Krankenhausfinanzierungsgesetz Hospital trust, 78, 85, 102, 110, 115 hybridization, 21, 244–6 indemnity insurance, 208 Independent Diagnostic and Treatment Centres, 92, 93, 105, 110 Independent Hospital Association (IHA), 91 index of similarity of the funding mix, 38, 45–6 individual health services (IGeL), 134 Iinpatient healthcare sector, 130, 131–2, 140, 160, 193, 202–5, 222 Institut für Qualität und Wirtschaftlichkeit im Gesundheitswesen (IGWiG), 123, 166, 170, 175 Institute for Quality and Efficiency in Healthcare, see Institut für Qualität und Wirtschaftlichkeit im Gesundheitswesen insurance contributions, 12–13, 26–8, 34, 81–2, 98, 120, 123, 126, 130, 132, 148, 152–3, 182, 190–1, 198, 217 internal market, 77–8, 86, 88, 91, 96, 100, 104, 109, 112–13 Kassenärztliche Vereinigung, 120–1, 147, 157 Kostendämpfungs-Ergänzungsgesetz (KVEG), 121 Krankenhausfinanzierungsgesetz (KHG), 121, 132–4, 160–1, 165 KrankenversicherungsKostendämpfungsgesetz (KVKG), 121, 133, 156 KrankenversicherungsWeiterentwicklungsgesetz (KVWG), 121 Leistungsverbesserungsgesetz, 121

277

level effect, 6, 19–20, 34–5, 37 Levene’s Test, 39 Local Health Authorities, 76, 99 Local Health Boards, 110, 111 Local Improvement Finance Trust (LIFT), 85 Long-Term Care Insurance Act, see Pflege-Versicherungsgesetz managed care, 188, 209, 217, 223, 225, 229 Managed Care Plans, 212 Medicaid, 188, 193, 196, 226, 228 medical care unit, 167 Medicare, 182, 185, 188, 193, 196, 212, 216, 219, 225, 227 Medicare Prescription Drug Improvement, and Modernizations Act (MMA), 185 monitor, 93 moral-hazard, 155, 159, 239, 244 National Care Standards Commission, 101, 114 National Health Service (NHS) system/ country, 31, 45, 65 National Institute for Health and Clinical Excellence (NICE), 78, 105–6, 114, 123 National Insurance Fund (NI Fund), 81–2 National Service Framework, 78, 106, 114 nested design, 7–8 New Labour, 78, 82, 92, 96, 103, 105, 107, 111 NHS Act, 76, 104 NHS and Community Care Act, 77 NHS pay beds, 84, 91 NHS Plan, 78–9, 86, 88, 103, 105, 109 office-Fee, see Praxisgebühr out-of-pocket-payments, 28–9, 83, 97, 130, 155, 181, 190, 192, 194, 198 outpatient healthcare sector, 131–2, 138, 140, 157, 164, 167, 194, 203–4 path dependence, 33–4, 47 Patient Protection and Affordable Care Act, 187, 214, 218, 226

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278 Index pay-as-you-go, 120 Payment by Results (PbR), 79, 103 Peer Review Organizations (PROs), 222 Personal Medical Services scheme (PMS), 64 Pflege-Versicherungsgesetz (PflegeVG), 122, 130, 136, 155 Point of Service (POS), 181, 208, 210 Praxisgebühr, 123, 163, 167 Preferred Provider Organizations (PPOs), 181, 208, 210, 221, 224 Primary Care Groups (PCGs), 78 Primary Care Trusts (PCTs), 79, 86, 92, 100, 103, 105, 109, 113 principle of parity, 153 private expenditure, 191 Private Finance Initiative (PFI), 84–6 101, 110 private financing, 12, 28 private funding, see private financing Private Health Insurance (PHI) system, 45 private health insurance, Germany (PKV), 130, 135, 150, 154 private insurance schemes complementary private insurance, 28–9 duplicate private insurance, 28–9 primary private insurance, 28–9 substitutive private insurance, 28–9 Private Medical Insurance (PMI), 85–6, 95, 96, 97 privatization explicit privatization, 69 formal privatization, 61–2, 203, 207, 240–1 functional privatization, 61–2, 65, 240–1 implicit privatization, 61, 69 material privatization, 61–2, 203, 207, 240–1 passive privatization, 61 Prospective Payment System (PPS), 219 Public Service Provision Index (PPI), 53, 59, 67, 137, 142, 144, 204–5, 241–2 public/private mix, 129, 139, 181, 190, 199, 229 purchaser-provider split, 57–70, 64, 113

quasi-markets, 77, 102 see also internal markets Regional Health Authorities, 76, 86, 100 Resource-based Relative Value Scale (RBRVS), 220 risk equalization schemes, 28 Risk Structure Compensation Scheme (RCS), 122–3, 126, 151, 153, 174 Selbstverwaltungsgesetz, 119 Self-Government Act, see Selbstverwaltungsgesetz self-regulation, 119, 171, 223, 230, 243–4 Service Improvement Act, see Leistungsverbesserungsgesetz sickness fund, 120–1, 135, 148, 152 sickness fund associations, 121, 146–7, 171–2 Social Democratic – Green Government, 120, 158 Social Health Insurance (SHI) system/ country, 45, 65–6 social insurance, 129–32, 136, 152 Social Security Act, 184 Specialist Register, 99 state service provision, 207 Statutory Health Insurance, see Gesetzliche Krankenversicherung Statutory Health Insurance Competition Strengthening Act, see GKVWettbewerbs-Stärkungsgesetz Statutory Health Insurance Modernization Act, see GKVModernisierungsgesetz Statutory Health Insurance Reform Act, see GKV-Gesundheitsreformgesetz Strategic Health Authorities, 79, 92, 100, 106, 110 tax exemptions, 29 tax funding, 26, 129–30, 135, 154, 190 taxes, 12 Thatcher, Margaret, 77–8, 96 waiting time/lists, 29, 77, 79, 104–5, 181, 240

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