Earlier, I described some of the problems with our healthcare system. I then told you I thought structuring our market the way the Bismarck model does could get us the quality and affordable care we need. I will now outline why I like this idea.
The Bismarck Model Promotes Competition and Quality
It’s not just physicians who compete for patients, pharmaceutical companies and hospitals do so as well. If a hospital wants to receive tax funds for investment, it has to contract with all insurers. This means hospitals need as many patients as they can attract. This encourages hospitals to raise their standards of care. It also means Germans don’t get “surprise billed” by out-of-network hospitals. There are no out-of-network hospitals.
Pharmaceutical companies find it easy to enter the German market but once they do, they must prove that their products are superior. Ease of entry is guaranteed by the fact that there are no formularies in Germany (i.e, no lists of what drugs insurers cover); there is only a negative list of drugs that are not covered. The negative list includes drugs that treat minor illnesses (such as cold and flu), most over-the-counter medicines unless a child under 12 with a chronic condition needs them, so-called “lifestyle drugs” (e.g., Viagra and birth control), and “non-economic pharmaceuticals” (i.e., vitamins). If you are a manufacturer whose drug does not fall in one of these categories, your product will be covered by all insurers. Furthermore, for the first 12 months, you get to set whatever price you want.
During those 12 months, the German government contracts with an independent institute much like our own Institute for Clinical and Economic Review to compare the new drug or therapy to existing treatment using a six-point scale. The institute determines whether the drug or therapy provides a major additional benefit (e.g., cancer cure), a considerable additional benefit (such as a moderate extension of life), a minor additional benefit (decreases some symptoms), a non-quantifiable additional benefit, no additional benefit, or the drug is worse than what we now have. The institute submits its analysis to a Federal Board consisting of: representatives of five patient groups, five care provider representatives, five insurance representatives, and three impartial members. The Board decides whether the new drug or therapy will be covered and how many points it is worth. To use a somewhat trivial example, they may decide that a telephone conversation with a patient is worth 80 points, a home visit 360 points and a radiology test 900 points.
Once the drug or therapy is covered the health plans step in to calculate the drug’s price according to the “lower third rule.” If there are three or more non-patented drugs that are similar (have identical or comparable ingredients or have the therapeutically comparable effects), the price of the new drug will be at the top end of the lower third of the price range for that class. The drug manufacturer can price his drug higher than the “lower third” price but the patients will be responsible for paying the difference between what is covered and the manufacturer’s price out of pocket. In addition, if the drug’s price is 30% less than the median price, there is no co-pay at all.
This provides a clear incentive for drug manufacturers to be first in the German market. That may be one of the reasons Germany ranks in the top five countries for uptake of new cancer drugs. The reference pricing scheme can also lead a pharmaceutical company to pull its drug from the German market once it loses its patent and becomes subject to reference pricing. One could argue this happened with GLP-1 inhibitors although it is also true that most patients had a hard time controlling glucose with them. The manufacturer may therefore have received a lower price than they expected.
Insurers too compete for German patients’ business. There are around two hundred non-profit insurers (like Kaiser or Blue Cross) which comprise what may be thought of as the “public option”. All insurers have to offer cover the same types of services so they have to compete on quality and price. To do so, insurers may, for example, pay their members if they don’t submit claims in a given year or if they allow a general practitioner to act as a gatekeeper. They also compete on quality of care. For example, some insurers may cover homeopathic treatment, others acupuncture.
The Bismarck Model Promotes Access
This competition leads to better care. Patients can choose any doctor or hospital they want, they can see a specialist without a referral, their waiting times are low, and on most outcomes Germany performs better than the United States. Competition also leads to affordable care. Part of the reason healthcare is affordable is that everyone must have insurance. But the main reason is the design of the system.
Affordable, in Germany is defined in accordance with one’s ability to pay. Unless you are poor or under 18 (23 if you are going to school or in job training), your premiums are 15% of your income. That’s 15% for you and your dependents. If you work but your wife does not and you have a child, you are the only one paying 15% of your income for health insurance. If both you and your wife work, you both pay 15% of your incomes. Your employer pays half and you pay half. Retirees remain with the last insurer they had before retirement. They pay half out of pocket and half is paid by their pension. The unemployed continue with the last insurer they had before being laid off. They too pay half out of pocket and the other half is paid by the German equivalent of the Employment Development Department until their unemployment benefits run out. The poor use Germany’s largest insurer and their premiums are paid by the German social fund (what we would call welfare). No-one pays deductibles; only minimal copayments. If your income exceeds a certain threshold or you are a freelancer, you may choose to be insured by private insurance. However, once you opt into the private insurance scheme, you cannot go back to the public option.
Only 10 percent of the population decide to be insured completely through private insurance, especially since they can buy supplementary insurance. Germans also make sure that unnecessary visits to the labs and pharmacists are avoided by letting the patient keep his/her medical record on his insurance card. This helps ensure that people don’t get “trapped by the system” as they often do here.
The Bismarck Model Promotes Affordability
Insurers can afford to provide a comprehensive benefits package because: they are paid per member on a risk-adjusted basis that was modeled after our Reinsurance scheme and because they only have two virtual budgets: inpatient and outpatient. To bill an insurance company in the public option, an office-based doctor has to belong to the regional physician association which pays him and negotiates the outpatient budget with all insurers. This means German doctors pay far less for malpractice insurance than their American counterparts. It means that the associations that advocate on behalf of doctors have a stake in the system because they are not telling others how much to pay their members; they will ultimately pay doctors’ salaries. It also means that doctors’ salaries are lower and that they never know exactly how much they will get paid.
Doctors bill their associations in service points and receive Euros. As you will recall, each service is assigned a set number of points. The value of each point is calculated as follows: point value=negotiated budget/points billed by all physicians. As you can see from the formula, the more physicians, the less any one of them will get paid. The dotors’ associations (which also regulate licenses) have tried to mitigate this issue by restricting where a new doctor can settle. In other words, they will not issue a license if you are a doctor who wants to practice in an area that is already heavily impacted. Despite that, 48% of German doctors felt the German health care system was working well. (23% of American doctors felt that the same about the American system.)
Each hospital bills insurers based on a Diagnosis Related Group system or an all-inclusive rate per stay. This is technically similar to how Medicaid and Medicare reimburse hospitals. The difference is that Medicare and Medicaid statutorily define these payments. In Germany, the supplemental payments are negotiated by the hospital and insurers.
The Bismarck Model Works
The Bismarck model meets the three tests I described earlier: access to care is easy because you can choose any doctor, specialist or hospital. Healthcare is affordable because how much you pay depends on how much you earn. You get the right treatment because your insurance card has your medical record on it and because you choose your providers. So you are likely to get better and not go bankrupt.