Private Health Care Insurance: Accessibility and Efficiency in the U.S. and Germany

Ines Läufer

Ines Läufer works as a systemic organizational consultant, specializing in the public sector. Starting in October 2021, she will work as in-house consultant for the association of municipalities in North Rhine-Westphalia.

She holds a PhD in economics and completed her dissertation at the Institute for Economic Policy at the University of Cologne, where she worked as a researcher, lecturer and policy advisor.

In 2013, she spent three months as a fellow at AICGS, where she conducted research on "Accessibility and Efficiency of Private Health Insurance in the United States and Germany."

After completing her PhD, she worked as an economist at the German Federal Ministry of Health for nearly three years before turning her attention to organizational change and workplace cultures in the public sector as a key issue of good policy.

Different Systems, Similar Debates

Despite different health care systems in Germany and the U.S., similar debates and health policy questions can be identified in both countries. Some common issues are the role of the private insurance market and competition in health care. In the U.S., the 2010 Affordable Care Act reform has been widely considered as a step toward a more state-governed health insurance market, foreseeing a stricter, more direct regulation of private health insurers. From a German economist’s point of view, this development is very interesting: Stricter regulation of private insurers has also taken place in Germany[1] and a controversial debate about the superiority of the Social Insurance System over the private health insurance system frequently takes place. Over the last several years, constantly-rising premiums in private health insurance have fuelled this debate.

Private Health Insurance in Germany…

Therefore, the “paradigm change” in U.S. health policy is followed attentively in Germany. In Germany, private insurance as a basic insurance covers only around 10 percent of the population. As far as the basic package of health insurance is concerned, most people (the other 90 percent) are mandatorily insured in the Social Health Insurance. Only high wage income earners, self-employed, or civil servants can opt for the private system, where they get individual contracts at individual risk rated premiums. Individual risk underwriting only takes place once, before signing the insurance contract. Contracts are long term, so individuals do not face any premium risk.

…and in the U.S.

In contrast to Germany, the private health insurance market in the U.S. is larger; it is the main health financing system for people under 65. Most individuals are insured via their employers, who either self-insure or buy a group insurance from a private insurer. In either case, the employees do not pay individual rated premiums, but an average group premium. Individuals who do not get access to a group insurance policy have to insure independently with a private insurer. Regulation of the private insurance market differs between states; in most states, those applying for individual health insurance have to pay risk-rated premiums before they are enrolled in the insurer’s risk pool.[2] The individual’s health status including pre-existing conditions is considered and reflected in the individual premium.

The individual private health insurance market is a residual market, alongside employer-sponsored health insurance. The Affordable Care Act regulations—aimed at increasing the coverage rate in the U.S.—focus on the individual (and small group) health insurance market (in combination with Medicaid expansion and premium subsidies). The focus on the individual market is understandable if one considers the dearth of options for today’s uninsured.

It is important to note that employer-sponsored group insurance does not provide long-term protection; generally, losing a job means losing one’s insurance coverage. [3] Therefore, people who have lost their employer-sponsored group insurance depend on the individual market. As stated before, private insurers on the individual market calculate premiums depending on the expected health care costs of the person. Consequently, older people or people with pre-existing conditions in particular pay a high premium, leading to questions of affordability. Medicaid, the government’s insurance plan for the poor, was not an option for most of these individuals because low income alone did not guarantee access to Medicaid coverage. As a result, many people ended up without any insurance at all.

To sum up, the U.S. health care system was based on employer-sponsored health insurance without systematically supporting those people lacking this option.

The Affordable Care Act: Increasing Access to Health Insurance

In light of this restricted access to individual insurance (or insurance at all), the Affordable Care Act aims at changing the way individual insurance is provided. The employer group insurance serves as a kind of role model for the future design of the private individual health insurance market.

First, individual risk premiums are no longer allowed, the premium differences between older and younger people will be restricted, and one’s health care status will not be reflected in the premium. This reduces the premiums for high risk, which are subsidized by low risk individuals. Second, the Affordable Care Act eliminates pre-existing conditions restrictions. To make protection of high risks effective, private insurers have to insure every applicant, known as the so-called guaranteed issue provision.

Finally, an individual mandate is necessary to guarantee that low-risk individuals will be in the risk pool—otherwise, the goal of subsidizing high-cost people by low-cost people will not be reached.

To sum up, the premium regulations imposed on private insurers and the individual mandate are expected to allow for large and sustainable risk pools, allowing today’s high risks to gain regular access to health care.

Regulation of the Insurance Market at the Expense of Access to Health Care? An Issue in Germany and the U.S.

However, the concept of increasing health insurance coverage by changing the way private health insurance is provided could have some negative side effects.

If premiums are not allowed to differ based on health status, then high-risk customers’ costs must be counteracted by people with low costs in order to finance the insurer’s expenditures. To hold overall premiums down, private insurers have an incentive for cream skimming, that is, to insure only the lower cost people.

And even if this risk selection could be effectively prohibited, there is still no incentive for insurers to act on behalf of the high-risk people, because attracting those individuals would lead to higher overall premiums and therefore to competitive disadvantages.

Risk-Adjustment Schemes: Necessary, but with Negative Side Effects

Thus, health insurance systems with a ban on risk-adjusted premiums need a risk-adjustment scheme if competition between insurers is to not occur at the expense of high-risk people.[4] Risk adjustment schemes adjust premiums for differences in the risk structure of the insurers, balancing health care expenditures and the premium revenues. The German statutory health insurance system has a long experience with risk adjustment schemes between the sickness funds. But this state-run risk adjustment scheme is frequently controversial.

Controversy arises over two points. First, there is the question of how to determine the relevant health risk factors by which premiums get adjusted. The German risk-adjustment scheme considers eighty diseases, mostly cost intensive and chronic. Sickness funds are compensated for their enrollees’ costs related to those diagnoses. But the central determination of the relevant diseases and the amount of compensation does not necessarily meet the insurers’ expectations about the costs of the ill persons. Therefore, insuring certain risks under these circumstances could still be disadvantageous for the insurers and consequently, some incentives to risk select or disincentives to engage in health care provision for some enrollees could remain. Second, compensation for sicker enrollees simultaneously reduces the incentive for prevention or targeted health programs, since improving individuals’ health care condition complements reduced payments of the compensation scheme.

The aim of including the high number of uninsured people in the insurance market is certainly understandable, but the planned regulations come with negative side effects, which risk inhibiting efficient competition between insurances. It is assumed that, generally, insurers competing on prices and on quality of health care services would steer and organize health care delivery on behalf of all their insured . In “normal markets” the incentives to provide a low cost, high quality good are set by competition, because the risk of losing clients keeps the companies striving for good results. Interestingly, it seems that private insurers are not facing that risk in the pre-ACA health care system.

Today’s U.S. Health Care Market: The Negative Side Effects of Lacking Competition

On the individual health insurance market, people who turned out to be high-cost patients (in particular) do not have an option to switch insurance companies, because in this case, they would have to pay a high, newly risk-adjusted premium. They are locked in, without an option to exit and as a consequence, the pressure on the insurer to steer health care provision on behalf of these persons is quite low. If anything, insurers have the incentive to get rid of high-risk individuals.

In a lot of states, the market for health insurance is very concentrated, which leaves individuals or employers with very few choices when seeking insurance. Therefore, the pressure on insurers to strive for cost-saving and high quality insurance products is reduced. In the last ten years, there have been over four hundred health care mergers, which were able to take place due to lacking anti-trust litigation.[5]

But the health insurance market is not the only highly concentrated market in the U.S. health care system. In fact, health insurers face increasingly powerful health care providers that dominate the price bargaining process. Many hospital mergers have taken place in recent years; furthermore, hospitals are cooperating more and more with private doctors, frequently buying physicians’ practices. These consolidations restrict the competition between providers and therefore reduce the bargaining leverage of the insurers.[6] In the U.S., private insurers have freedom of contract—but bargaining prices for health care or changing payment schemes (such as fee for services and diagnosis related groups (DRGs)) is difficult for a private insurer given the pricing leverage of health care providers.

To sum up, neither insurers nor providers are facing fair competition. Instead, both sides keep struggling for bargaining power, which is currently more worthwhile than making efforts for insured people or patients! This is a striking diagnosis, as Germans often perceive the U.S. health care system as a liberal and competitive market system.

In Germany, in contrast to the U.S. system, private insurers do not have freedom to contract selectively, therefore excluding choice of provider and of payment. Rather, the private insurers have to contract with every health care provider and the payment schedule is set by government ordinance. Therefore, the health policy debate often focuses on the possible advantages of selective contracting and payment flexibility, such as better quality of health care.

Conclusion

It becomes clear that in both countries, healthy competition in the health care sector is far from being established and functioning: While the German health care system relies on collective contracts and state control of pricing, the U.S. health care system seems to be lacking efficient competition as well as state control of the insurers’ and health care providers’ power. This results in a very costly health care system and low health care quality.

Of course, freedom of contract alone cannot guarantee healthy competition; effective anti-trust and market structure control is at least one important factor to consider. Deeper analysis of the health care delivery process in the U.S. and the interplay between market structure, prices, and quality outcomes can be very interesting for the reform debate in Germany.

If the current systems’ incentives do not allow for competition on behalf of the consumers, it is worthwhile to think about possible market-based alternatives for a re-organization of health care. The positive effects of competition are cost-saving behavior and consumer-oriented product design. As both countries’ health care systems lack conditions for healthy competition, it is too early to conclude that competition in health care cannot work out. It is also too early to give up the idea of improving resource allocation in health care by competitive market structure at the benefit of all persons needing health care.

Ines Läufer is a Research Assistant at the Institute for Economic Policy at the University of Cologne.  She was a DAAD/AGI Fellow in February and March 2013.

[1] Dirk Göpffarth, Access, Quality, and Affordability in Health Care in German and the United States, AGI Policy Report no. 51 (Washington, DC: American-German Institute, 2012).
[2] American Academy of Actuaries, “The Individual Medical Insurance Market: A guide for policymakers,” Issue Brief (October 2008).
[3] Mark Pauly, Allison Percy, and Bradley Herring, “Individual versus job-based health insurance: weighing the pros and cons,” Health Affairs 18:6 (1999).
[4] Dirk Göpffarth, Access, Quality, and Affordability in Health Care in German and the United States, AGI Policy Report no. 51 (Washington, DC: American-German Institute, 2012).
[5] David Balto, “Obama’s healthcare trust busting,” USNews.com, 15 April 2012,  http://www.usnews.com/opinion/blogs/economic-intelligence/2012/10/19/obamas-healthcare-trust-busting.
[6] Steven Brill, (2013): “Why medical bills are killing us,” Time Magazine, 4 March 2013; Julie Appleby, Julie (2012): “Higher prices charged by hospitals, other providers, drove health spending during downtown,” Kaiser Health News, 21 May 2012, http://www.kaiserhealthnews.org/Stories/2012/May/21/higher-health-care-prices-hospitals.aspx; Robert A. Berenson, et.al., “The growing power of some providers to win steep payment increases from insurers suggests policy remedies may be needed,” Health Affairs 31:5 (2012).