Social health insurance systems in continental Europe have been held up as models from which a beleaguered NHS could learn.But it is unclear how they would improve on the UK's tax-based system, say Anna Dixon and Elias Mossialos

Published: 24/01/2002, Volume II2, No. 5789 Page 24 25 26

Chancellor Gordon Brown's commitment to continue to fund the NHS from taxation has not ended the debate on how to pay for healthcare in the UK.There does seem to be agreement, however, that more needs to be spent and that we have lagged behind our European neighbours for too long.But what can we learn from them about how to raise the necessary funds?

Most of the extra spending on health in other European countries is from private sources.Among the top-spending countries in Europe, private sources of health funding account for over 2 per cent of GDP (Belgium 2.8 per cent, Germany and the Netherlands 2.5 per cent and France 2.2 per cent).

1In the UK, private spending is estimated at 1.2 per cent of GDP, mostly from sales of over-the-counter drugs, prescription charges and dental care.

In most countries the extra private funding is made up of payments by patients.Only in the Netherlands and France does private insurance account for most private funding.But in the UK, neither of these seem to be politically acceptable alternatives to general taxation.

In most other European countries, out-of-pocket expenses are higher than in the UK due to larger co-payments for drugs and dental care and more widespread charges, including 'hotel'costs associated with inpatient stays.

Even in the traditionally generous welfare states in Scandinavia, user charges for healthcare services have increased significantly.

The Wanless report discusses the possibility of charging for nonclinical services in the NHS.

2But increases in user charges in most European countries have been politically contentious and in the UK would undoubtedly fuel a heated public debate.

Private health insurance plays a more significant role in France.

User charges are high, but about 85 per cent of citizens have insurance covering the co-payments.The state, recognising that those without supplementary insurance are penalised and face significant barriers to access, is extending supplementary insurance to all citizens through state-financed subsidies, which does seem rather to defeat the purpose of user charges.

In the Netherlands, those with an income above a certain threshold are excluded from the social health insurance scheme.

Most buy private health insurance, but this segregation of high and low-income groups means there is no cross-subsidisation from rich to poor.Proposals are now being debated to make SHI compulsory for everybody.

Workers on higher incomes in Germany can choose whether to opt out of the SHI system, although less than a quarter actually do so.

This is mainly because private health insurance is less comprehensive, does not cover dependents, is more expensive and is risk-rated so premiums rise with age.

Clearly, private health insurance in other European countries has its difficulties.So what are the other means of raising public funds?

The main public alternative to taxation is SHI.

But the term is often used loosely without definition, and many misconceptions exist about how it works in practice.

What is social health insurance?

An SHI system is funded primarily from contributions levied on wages, paid to an independent organisation (insurance fund) and shared between the employer and the employee. It developed from a tradition of welfare first established by Bismarck in Germany in 1883, which aimed to provide workers with compensation for loss of income due to ill health.

3SHI usually pays for healthcare for those people who contribute and their dependants.Contributors are usually those who receive a wage, but many schemes have been expanded to cover the self-employed and farmers.

The non-working population is covered in different ways.Often the state uses taxes either to finance care directly or pay contributions on people's behalf. In Germany, pensioners and unemployed people have to pay contributions from their welfare benefits, while the employer's share is paid by the pension fund and unemployment fund respectively.

SHI is compulsory.Some sections of the population may be excluded or have a choice whether to join or not.These may be defined on the basis of income (for example, those on high incomes), or employment status or occupation.Everyone who contributes to a particular fund pays the same rate, although rates may be set by government at a single national rate for all funds, or by individual funds.There may be an income ceiling above which contributions are not levied, which makes the system less equitable.

SHI differs from payroll taxes in that it is collected by a designated body at arm's length from government.The revenue is therefore usually kept separate from other legally mandated taxes or contributions.The status of the fund(s) and their independence in practice varies between countries.

Management of the funds is usually made up of representatives of employers and trade unions.

Payment of contributions is shared between the employer and the employee.The percentage each partner pays varies between countries.But the issue of who actually pays for healthcare under SHI is not a straightforward one.Often wages are frozen when contributions rise so that the total bill to the employer does not increase.Thus, the employers'share of the SHI contribution may be 'shifted' to employees.Alternatively, costs might be transferred to the consumer through increased prices of goods and services or to shareholders in the form of lower dividends.

Membership of funds is according to occupation or region, or there may be a choice of funds. In most countries, there is more than one sickness fund, but little choice as people are assigned on the basis of their geographical location, occupation, or both.

In others, there is choice among funds, which stimulates competition but may also bring difficulties in ensuring equal access to care for all.

Choice of funds exists in Belgium, Germany, and the Netherlands and is accompanied by a complex system of redistribution to ensure that funds' incomes are adjusted according to the risk of the population covered.

Traditionally, funds contracted with all providers - and patients had a free choice of provider.Social health insurers have traditionally been passive payers, using reimbursement or activity-related payments with no incentives for the providers to contain expenditure growth.More recently the patterns of purchasing, payment and providers are changing, with greater use of budgets, selective contracting and gate-keeping.This pattern has been changed by the introduction of budgets at a national level in France and for specific areas of expenditure such as drugs, primary healthcare and laboratory tests in Belgium, France and Germany. Insurers have become more active purchasers.The ability of funds to contract selectively with providers has been discussed in Germany but resisted due to professional associations'opposition.Free choice of provider has been possible in France and Germany because of a surplus of providers.

Reforms in France and Germany France and Germany are the two countries with which the UK is most frequently compared, usually unfavourably.Certainly they spend more than other EU countries.But it is not clear whether this is because they fund healthcare through SHI, or due to the way purchasing and provision are organised, or because a political decision was taken to allow higher spending.Growth in healthcare expenditure has been a major concern in both countries, and public dissatisfaction with rising costs has led to reform.

The drivers for change were similar in both France and Germany.Uncontrolled increases in healthcare expenditure were reflected in increasing contribution rates and deficits and rising labour costs.Problems such as the negative impact on the international competitiveness of industry, the ability to attract direct foreign investment, and employment were highlighted in public debate.

Furthermore, because of their sole reliance on formal wage income for generating revenue, both systems were experiencing a declining revenue base. Income generated through profit, capital and investment is increasing at a faster rate than earned income, but is not subject to social insurance contributions.Nor is wealth.

The changing nature of the job market, with more people employed part-time, in more than one job or on fixed-term contracts, means that fewer workers are paying contributions.

The responses to these problems have been quite different. In France, the state has taken a more proactive role and exerted greater control over the system. It extended entitlement to the whole population while broadening the revenue base by creating an earmarked health income tax levied at 5.25 per cent on overall income and profits and at 3.95 per cent on state benefits.

In addition, the state has increased its representation on the management boards of insurance funds and sets an annual global budget for healthcare.

In Germany, the government opted for increasing competition between insurers to increase incentives for efficiency and reduce the gap in contribution rates between funds.

Before competition,27 per cent of the insured paid a contribution which differed by more than 1 per cent from the average; in 1999 this had reduced to 7 per cent of the insured.

4In addition, Germany introduced measures to control costs associated with demand, including user charges and budgets for ambulatory doctors.Already debate has begun about the sustainability of SHI funding and whether it might be necessary to broaden the revenue base.

Social insurance for the UK?

A wholesale move to SHI in the UK would require significant upheaval, and the benefits are not clear.First, if the benefits of SHI were restricted to contributors, some people who now benefit from the NHS would be excluded.Alternative arrangements would have to be made to make sure they still got access to healthcare.

Second, if the UK were to establish an independent organisation to manage healthcare resources, it would probably not be appropriate to have employers and trade unions in charge as in France and Germany.

But the status quo in the UK, with its constant reorganisation and chronic underfunding, is not ideal either.Perhaps discussion is needed about how to increase independence while retaining an element of democratic accountability in the NHS.

If multiple competing funds were established, offering choice to consumers, there would also have to be a complex mechanism for re-allocating resources between funds to ensure equity.

Another problem is that if contributions were levied on wages, labour costs would rise and the revenue base would be narrower, creating distortions in the labour market.

Elements of SHI systems could be combined with a tax-based system of revenue collection: for example, the explicit definition of benefits or choice of provider.But it seems unlikely that a shift to SHI would benefit the UK, and as France and Germany look to widen the revenue base through taxation on overall income, it would seem ill-advised for the UK to abandon tax funding for SHI.

But if increases in healthcare spending in the UK are to be funded through taxation, we must decide what sort of tax increases will be acceptable - 'stealth'or indirect taxes, the reform of national insurance contributions, an earmarked income tax, devolved local taxes or increases in income tax, and who will manage the money.This debate will not be an easy one for the chancellor to resolve.

REFERENCES 1OECD Health data 2001: a comparative analysis of 30 countries. CD-ROM Paris, OECD and CREDES, 2001.

2Wanless D.Securing our Future health: taking a longterm view. Interim Report.HM Treasury, 2001.

3Mossialos E, Dixon A, Figueras J, Kutzin J (eds).Funding health care: options for Europe. Open University Press, 2002.

4Busse R. Health Care Systems in Transition: Germany.

Copenhagen: European Observatory on Healthcare Systems, 2000.

5Normand C, Busse R.Social health insurance financing. In: Mossialos E, Dixon A, Figueras J, Kutzin J, editors.

Funding health care: options for Europe.Open University Press, 2002.

Key points

Social health insurance systems in Europe are complex and this makes it difficult to establish who is paying for healthcare.

France and Germany are seeking to widen their revenue base through taxation.

A wholesale move to SHI in the UK would involve significant upheaval and it is not clear what benefits it would bring.

Anna Dixon is research associate, European Observatory on Health Care Systems, and Elias Mossialos is co-director, LSE Health and Social Care.They are co-editors of Funding health care: options in Europe .