German health care. The sound of iron dropping

Scrapping a 19th-century system is a difficult but necessary step

EVERY time a German worker consults a doctor, the historical achievement of Otto von Bismarck grows a little greater. So say admirers of the 19th-century chancellor who created an impressive social safety-net, with a system of health insurance funded by workers and their bosses.

As German history students know, the iron chancellor was “dropped” in 1890 by Kaiser Wilhelm II - but his legacy, in the field of health care, is intact. After more than a century of political strife, economic crises and world wars, Bismarck's ideas still underpin the financing of German medicine. Only now do some people seriously suggest letting the chancellor go.

Why the pressure for change? As in most western democracies, the cost of treatment is surging. What marks Germany out is the way that workers, and their employers, shoulder those costs, thanks to a system which acts as an increasingly prohibitive charge on labour.

Economics apart, there are tactical reasons why many politicians want to bring this issue to a head. For the centre-left government, which aims merely to modify Bismarck's legacy, a policy success would show voters that its reform agenda can be humane as well as tough. As for Angela Merkel, who leads the opposition Christian Democrats, she sees a chance to prove herself a real, Thatcherite mould-breaker.

So how has the argument developed? In the past 25 years, health-care finance has been tinkered with as many times. Reforms have aimed to cut costs and to reduce coverage. In January, dental benefits were trimmed and patients made to pay a fee of €10 ($12.40) per quarter for visits to the doctor. Such steps have kept spending by statutory health-insurance firms stable - although Germany spends a big share of its GDP on health.

But so far nothing has solved the basic problem, the system's antiquated funding system. Bismarck based contributions on a worker's income; in his time the main aim of health insurance was to provide income for those on sick leave. To this day, a uniform percentage is docked from pay, with employers matching the amount. People above a certain income level (now €46,350 a year) can quit the public system and switch to a private health insurer, which links premiums to risk. For tenured civil servants, the state picks up a big part of the bill, with supplementary insurance taking care of the remainder.

These rules worked in days of full employment and closed economies; but they are not sustainable in a globalised era. Unemployment and early retirement have cut the base for contributions - driving up payments by employers and employees, from 8.2% of a worker's gross income in 1970 to 14.2% this year. If nothing is done, demography and rising costs will turn health contributions into an unbearable levy on labour: they could rise to 34% of a worker's wages by 2030. One supposed aim of the system is to make rich households subsidise poor ones, but often the opposite occurs. People with high earnings from investments often make lower contributions than humble wage-earners.

In the government camp, most people favour boosting contributions through a Burgerversicherung, or citizen's insurance scheme, which would broaden the range of people required to pay into the system. Several models are being discussed, but all would extend the current system to include civil servants and the self-employed as well as all sorts of income. Some would also abolish the income threshold, and limit private health-insurance firms to providing extra coverage for non-vital services. Others want private and public insurers to compete on an equal footing.

Yet this approach, critics say, does not solve the main problem: health-care payments are a tax on labour. Including other forms of income, and all citizens, would lower contributions by 2% at best. So radical Bismarck-droppers propose a flat-rate payment, which can go by various names. Supporters call it a health premium; opponents say Kopfpauschale - something like the “poll tax” which triggered riots in London in 1990. Whatever you call it, this proposal would also involve tax-financed subsidies for children and the poor.

For the cautious folk who advocate citizen's insurance, a big challenge is what to do with private insurance firms. Giving them only a complementary role, or having them compete with statutory insurers, would pose legal problems. The main headache for flat-fee folk is how to finance the subsidies. Paying off losers could cost €27 billion - almost impossible in an age of tight budgets. Political hurdles may be even harder to overcome, even within the opposition. Some Christian Democrats like the ideal of social equilibrium; the same, and more, goes for their Bavarian allies, the Christian Social Union. Its leaders regard flat-rate premiums as socially unjust and a hard sell. There is another factor: with flat fees, redistribution would be transparent, and harder to agree on.

Such obstacles have already led to a search for more palatable solutions. On July 15th, Bert Rurup, an economist at Darmstadt University, presented a proposal to set the health premium at €169. Children would pay only €78, with the differences financed by the federal budget. Low-income households would also get subsidies, but the money would be raised by such levies as a small supplementary health charge based on income.

In whatever form, flat fees seem to offer the only sure way of tackling the macro-economic problem. Introducing more competition into Germany's health-care industry would help as well.

Is is true that flat fees would desecrate German history? Reformers have an answer. Bismarck was a pragmatist, not a dogmatist; he wanted to pre-empt the socialists, not create a nanny state. If he was alive, he would cry “drop me” too.

Article discusses the system of financing health care in Germany and argues that it is vital to change it.

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