There’s a lot of hope and angst surrounding the implementation Patient Protection and Affordable Care Act, aka Obamacare. However, there isn’t much debate on the need to reform our healthcare system. We rank first in per capita health care spending, at $7,960 per year, which is about $2500 more than the next highest large country, Norway (I’m not counting Monaco and Luxembourg). Countries such as Switzerland ($5,105), Canada ($4,314), the UK ($3,438) and Japan ($3,045) spend a fraction of what we spend on healthcare.
Some would say that this is fine; we’re getting what we paid for. We have the best hospitals, the best doctors, and the best technology. But we’re not getting what we paid for. If we look at any of the major health indices, such as infant mortality (#50 in the world, behind Greece and Cuba), life expectancy (#51 in the world, behind Bosnia and Portugal), we rank behind countries that spend a fraction of what we spend on healthcare. Also, even though we spend far more than any other country of healthcare, approximately 62% of all bankruptcies are due to medical bills. Finally, close to 50 million Americans, or 16.3% of the US population, has no health insurance. We are the only wealthy, industrialized country not to offer universal healthcare.
A question to ask at this point is; how do these other wealthy, industrialized countries provide good if not better healthcare, to more of their populations, with less money? How do these countries finance and administer healthcare? How are costs controlled? To understand this, we need to go over the four basic types of healthcare systems found around the world. Almost all countries use a variation of one of these systems. The four types are the Beveridge Model, the Bismark Model, the National Health Insurance Model and the Out-Of-Pocket Model.
The Beveridge Model
The Beveridge Model was envisioned by the British social reformer William Beveridge during World War II. It was adopted after World War II by the British government, and would lead to the creation of the National Health Service, the current healthcare provider in the UK. A strong believer in social justice, Beveridge believed that a major role of national governments was to provide a social safety net from the five “giant evils” of want, disease, ignorance, squalor and idleness. He believed that governments should have an active role in social engineering, that government can actively better the plight of their citizens through government programs and policy.
Consistent with these values, the Beveridge Model is a completely government-operated system. Healthcare is financed, administered and regulated by the national government. Healthcare is financed through general tax revenue, most if not all hospitals and medical facilities are government-owned, and most healthcare personnel, including doctors and nurses, are government employees. The government, as the sole payer, controls what costs are and what is paid for services. Hospitals and clinics are typically paid a fixed sum per patient enrolled per set time period, regardless of whether they are seen or not. This is a scheme known as capitation.
There are several advantages to the Beveridge model. One, the capitation scheme of financing healthcare incentivizes preventive medicine, since hospitals and clinics are paid the same amount whether a patient is seen or not. Two, since the government determines pricing, costs are typically low. Three, administrative costs are very low, because the government is the sole entity that administers healthcare. Four, pharmaceutical costs are lower, because the government negotiates as one entity with the pharmaceutical companies. And finally, there are no bills and no bankruptcies due to medical costs. Because of these advantages, the National Health Service in the UK is extremely popular. Politicians risk the ire of their constituents when there is talk of modifying the system.
The main disadvantage of this model is that because the government controls healthcare, there are fewer consumer choices in terms of elective care. There are often longer waiting periods for elective procedures, although it isn’t much longer than waiting periods in the United States. In addition, it can be argued that because everything is government owned and operated, there is little competition and therefore little incentive among hospitals and healthcare personnel to increase quality and decrease costs.
Countries that use the Beveridge Model are the United Kingdom, Spain, most of Scandinavia, New Zealand, and even Hong Kong, whose population simply refused to give it up when the former British territory was turned over to Chinese control. Cuba has what is probably the purest Beveridge-inspired healthcare system in the world.
The Bismarck Model
The Bismarck Model was named for the Prussian Chancellor Otto von Bismarck, who envisioned this system as part of his social welfare system used to unify Germany in the late 19th century. Bismarck, similar to Beveridge, was also a strong proponent of social welfare, and his system, which included healthcare, accident insurance, unemployment benefits and retirement pensions, became the model for the modern welfare state.
However, Bismarck’s approach to healthcare differed significantly from Beveridge’s approach. In fact, it is very similar to the US system. Unlike the Beveridge Model, hospitals and clinics are independently owned and operated, much like in the US. Healthcare is financed through private health insurance companies, called “sickness funds” in Germany. There are about 240 independently-operated, privately owned funds in Germany. These funds are typically financed through employers with employee contributions and compete for customers, similar to the US.
Unlike in the US, the government provides large subsidies for those citizens who are unemployed or self-employed (although this is changing in the US). All citizens must be insured. And finally, the government tightly regulates sickness funds. For example, sickness funds must provide a set standard of benefits. They must be non-profit. And pricing for healthcare is set during negotiations between hospital systems and the sickness funds, and these prices are set, by region, for a set period of time. Hospitals and clinics can only charge those negotiated prices. Sickness funds can compete for customers by offering additional benefits outside of the required standard benefits package.
The tight regulation of the sickness funds by the government has given this model almost as much cost-control power as the Beveridge Model. Furthermore, the requirement for all citizens to be insured, along with government subsidies for those who cannot afford it, allows for 100% insurance coverage. This also reduces insurance costs, since risk is better distributed among all citizens, healthy and otherwise. Finally, because sickness funds and hospitals are all private sector, there is an element of competition that continuously lower costs and increases quality of care.
Countries that use the Bismarck Model include Germany, Switzerland, Japan, France, Belgium, and several countries in Latin America.
The National Health Insurance Model
The National Health Insurance (NHI) Model has elements of both the Beveridge Model and the Bismarck Model. Like the Bismarck Model, most hospitals and clinics are privately owned and operated. However, the government provides all funding through a single, government-operated insurance program that is financed through tax revenues, similar to the Beveridge Model. This insurance model is sometimes called the single-payer system. In these countries, the only way a hospital or a clinician is paid is through the government insurance program.
There are several advantages to the NHI Model. Because the government operates the insurance program, administrative costs are very low. Taiwan has an innovative NHS system that has reduced administrative costs to 2% of total healthcare costs. As a comparison, it’s been estimated the US spends as much as 31% of total healthcare costs on administration. In addition, since hospitals and clinics are privately owned, there is an element of competition that increasingly lower costs as well as increase quality. Furthermore, because there is only one payer, there is considerable market power to negotiate lower prices with hospital and clinic system and with pharmaceutical companies. Finally, insurance costs are controlled because insurance coverage is 100%, spreading risk among the entire population.
