June 24, 2009
Continuing our series of interviews looking at health systems from around the world, Milliman consultant Axel Meder discusses the healthcare system in his native Germany.
Q: The healthcare system in Germany has been in place for a long time. How is it funded?
A: The system is more than 150 years old, and has remained viable through economic ups and downs—notably, two world wars and the depressions that followed. It's a hybrid system, funded through both public and private entities. Most of the population is covered through the public system. But those who are self-employed or who earn more than 4,050 Euros per month may purchase private health insurance coverage. We call it "substitute" coverage, because it takes the place of the public insurance coverage others use.
Q: Are there differences in coverage between the public and private systems?
A: In the German healthcare system, coverage is mandatory. All citizens can see a physician or use a service as they see fit, regardless of whether they are covered by public or private insurance. It is essentially a one-tier system. About 90% of the German population is covered by the public healthcare system, with the remaining 10% covered privately. Private insurance must provide a minimum level of coverage and it also allows people to purchase additional benefits, like a single-bed hospital room, consultations with the chief doctors, and upgraded benefits for prescription drugs. But all patients have access to essentially the same treatments and options, although there are physicians and clinicians who offer their services to private patients only. There is no obligation for higher-earning people to opt out of the public system—private insurance is entirely voluntary.
Q: How is the insurance funded?
A: Financing for public health insurance is pay as you go. The premium one pays depends upon income. This year, the rate is 15.5% of gross income up to a maximum of 3,675 Euros per month. The employee pays 8.2% and the employer pays 7.3%. After retirement, the premium rates remain the same; only the basis changes from gross wages to state and private pensions. So after retirement, the state pension system pays the 7.3% instead of the employer
Private insurance premiums are initially rated based on risk factors such as gender, age at purchase, and coverage. Premiums cannot increase due to the increasing age of an individual, but can increase for inflation, changes in medical practice, and utilization, for example, if more insureds receive expensive treatments or drugs. In addition, private insurance premiums usually include a risk premium (for the underwritten health risk), lifelong aging reserves, cost loadings, and a contingency margin between 5% and 10% depending on exposure. The contingency margin ensures coverage in the event there is a major problem affecting many people, such as a pandemic or other catastrophe risk. Most years, this part of the premium is not used, and it becomes profit for the insurance company. Some of the profits are repaid to insureds; for instance, if a person doesn't make any claims during the year he may get back 5%, 10%, or even 30% of the premiums paid.
Q: What is the purpose of lifelong aging reserves, and how do they work?
A: When a person is young, an aging reserve is added to his or her premium and is invested in an interest-bearing account. It must earn 3.5%, but often earns more. In this way, when the risk-based premium is higher later in life, the invested amounts can offset what might otherwise be an unaffordable premium, so coverage can continue. The aging reserves are tax-privileged for policy holders and insureds, and they can be used only for this purpose. The 3.5% interest earned is mandated by law and can be reduced only if there is a sustained reduction in market interest rates. If someone changes private insurance companies, he or she takes part of the aging reserves they’ve built up to their new insurer. Insurers have built up aging reserves of more than 125 billion Euros through the private system.
Q: Under what circumstances does a person lose or change coverage?
A: Everyone in Germany has to be covered, either through public or private insurance, so a person cannot lose coverage. People always have the right to cancel their policy and choose a different one. Companies have the right to cancel the policy only in the first three years. The private system tends to be more attractive for younger people, because of lower premiums and the reserve account. When someone is around age 45, the premiums in the private system may be higher than in the public system, so private insurance becomes less attractive and only a few people change from public to private insurance. If someone opts out from public insurance, he or she cannot go back into the public system.
Q: Can insurance companies change the premiums in the private system?
A: Insurers can change premiums under certain circumstances. For example, inflation, changes in the billing rates of physicians, dentists, and other service providers, or medical/technical advances. In these circumstances, insurance companies are able, and obliged, to examine their premiums to make sure they are planning adequately for their risk. When the premium increases, the increase becomes, in effect, a new layer of coverage, beginning with the age of the insured at that time.
Q: How does the availability of public insurance affect German insurance agents and companies who sell private coverage?
A: Private health policies are typically sold by independent brokers and agents. As private health insurance is a consulting-intensive product, direct sales play a lesser role. The lifelong aging reserves mean that the private insurance premiums are higher in the early years of the contract, making the policies more challenging to sell. Therefore, most of the policies are sold when the insureds are at age 25 to 40. Private insurers also offer supplemental insurance, which is not considered to be a substitute for public coverage. With these policies, one can purchase enhanced benefits like a private room in a hospital, or overseas coverage.
Q: How do private and public insurance coexist in Germany?
A: Some constituents would like to see the private insurance system abolished, but others believe its existence is critical to the system's survival and that some physicians and providers would not survive without it. From an actuarial perspective, the private insurance system is more financially solid compared to the public pay-as-you-go system, because private premium rates include assumptions for, among other things, interest and increasing benefits. However, when interest rates are low, it can be difficult to earn the mandated 3.5% return on the reserves. In addition, as private premiums are increased, the resulting premiums are becoming unaffordable for retirees on fixed incomes. Insurers are trying to defuse this situation by using more of the surplus capital they have accumulated to mitigate increases.