German Health Reforms: Changes Result in Lower Health Costs in 1993
(Letter Report, 12/16/94, GAO/HEHS-95-27).

Compared with the United States, Germany has successfully controlled the
growth rate of health care costs.  Since 1980, it has kept its
percentage of national wealth spent on health care between eight and
nine percent of gross domestic product while covering a broad range of
health care services for virtually the entire population.  Despite these
successes, the German government became concerned about growth in health
care premium costs in the Statutory Health Insurance System, which
covers the great majority of Germans.  In 1992, Germany enacted health
care reform legislation that imposed strict nonnegotiable budgets
lasting up to three years on major sectors of the system, including
hospitals, ambulatory care physicians, prescription drugs, and dentists.
A series of structural reforms intended to control outlays over the
longer term are expected to be worked out over the remainder of the
decade.  A July 1993 GAO report (GAO/HRD-93-103) discussed the nature
and extent of these changes.  This report covers the effects of the
first year of strict budgets on cost and access to care and briefly
discusses the status of the structural changes intended to allow the
Statutory System to contain costs over the longer term.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-95-27
     TITLE:  German Health Reforms: Changes Result in Lower Health Costs 
             in 1993
      DATE:  12/16/94
   SUBJECT:  Health care cost control
             Health insurance cost control
             Foreign governments
             Physicians
             Pharmaceutical industry
             Dental services
             Hospital care services
             Insurance premiums
             Health care costs
             Public health legislation
IDENTIFIER:  Germany
             Statutory Health Care System (Germany)
             Statutory Health Insurance Fund (Germany)
             
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Cover
================================================================ COVER


Report to the Chairman, Committee on Governmental Affairs, U.S. 
Senate

December 1994

GERMAN HEALTH REFORMS - CHANGES
RESULT IN LOWER HEALTH COSTS IN
1993

GAO/HEHS-95-27

Reforms Lowered Health Costs in 1993


Abbreviations
=============================================================== ABBREV

  AIDS - acquired immunodeficiency syndrome
  DM - Deutsche Mark
  DRG - diagnosis related group
  GDP - gross domestic product
  GSG - Gesundheitsstrukturgesetz
  PMC - patient management category

Letter
=============================================================== LETTER


B-254061

December 16, 1994

The Honorable John Glenn
Chairman, Committee on
 Governmental Affairs
United States Senate

Dear Mr.  Chairman: 

Compared with the United States, Germany has been successful in
controlling the rate of growth of health care costs.  Since 1980, it
has kept its percentage of national wealth expended on health care
between 8 and 9 percent of gross domestic product (GDP) while
covering a broad range of health care services for virtually the
entire population.  In contrast, over the same period, U.S.  health
care costs have risen from 9.2 percent of GDP in 1980 to a projected
14 percent of GDP in 1994, while the portion of the U.S.  nonelderly
population not covered by insurance is now estimated to be 17
percent.  In 1991, the annual cost per person for health care was
$1,659 in Germany compared with $2,867 in the United States. 

Despite this successful history of cost control, the German federal
government became concerned during 1992 about growth in health care
premium costs in the Statutory Health Insurance System, which covers
the great majority of the German population.  As a result of this
concern, in December 1992 the German federal parliament enacted a
health care reform law, the Health Care Structure Reform Act of
1993.\1

The reforms of this law consisted of two major parts.  First, it
imposed strict nonnegotiable budgets lasting up to 3 years on major
sectors of the statutory system, including hospitals, ambulatory care
physicians, prescription pharmaceuticals, and dentists.  These
budgets were intended to hold down expenditures while the details of
the second part of the reform, a series of structural reforms
intended to control expenditures over the longer term, were crafted
and implemented over the remainder of the decade. 

While our July 1993 report discussed the nature and intent of these
changes,\2 this report covers the effects of the first year of strict
budgets on cost and access to care and briefly discusses the status
of some of the structural changes intended to allow the statutory
system to control costs over the longer term. 


--------------------
\1 The Gesundheitsstrukturgesetz (GSG). 

\2 1993 German Health Reforms:  New Cost Control Initiatives
(GAO/HRD-93-103, July 7, 1993). 


   BACKGROUND
------------------------------------------------------------ Letter :1

About 90 percent of the German population obtains its health
insurance through one of the more than 900 Statutory Health Insurance
Funds, usually called sickness funds.\3

Virtually all working Germans with an income below a statutory
threshold--Deutsche Mark (DM) 68,400 (about $44,200) in 1994--are
required to join one of these funds, and their nonworking spouses and
dependents are also automatically covered.\4 The sickness funds also
cover most retirees and persons receiving unemployment or disability
payments.  Persons with incomes above the threshold may choose to
remain in the statutory system, and many do. 

The German Statutory Health Insurance System is mainly financed
through an income-based premium, 50 percent paid by employers and 50
percent by employees, on wages up to the statutory threshold amount
mentioned above.  At the beginning of 1993, this premium, called a
contribution, averaged 13.4 percent of wages up to the income
threshold in former West Germany.  However, this contribution rate
can vary across sickness funds, depending on the income and
demographic structure of the fund's membership.  In 1993,
contribution rates varied from 8.5 percent to 16.5 percent. 


--------------------
\3 For a description of the various types of sickness fund, see 1993
German Health Reforms, page 3, table 1.  The total number of sickness
funds has declined in the past year. 

\4 Throughout this report, when converting Deutsche Marks to dollars,
we use the exchange rate of Thursday, September 22, 1994, of DM 1 =
$0.6466. 


      CONTRIBUTION RATE INCREASE
      TRIGGERED 1993 REFORMS
---------------------------------------------------------- Letter :1.1

Between July 1991 and the end of 1992, the average contribution rate
of the statutory sickness funds rose from 12.2 percent to 13.4
percent.  Alarmed by the size and speed of this increase, all the
major political parties in Germany agreed that action to control
health care spending was needed.  The result was the Health Care
Structure Reform Act of 1993.  This act imposed strict budgets
beginning January 1, 1993, for periods of up to 3 years on the major
sectors of the statutory health insurance system, including
hospitals, ambulatory care physicians, prescription pharmaceuticals,
and dentists. 

These budgets were designed to stabilize the contribution rate by
restricting the rate of increase in spending to the rate of increase
in the total amount of workers' wages subject to the contribution. 
Spending increases in each sector are subject to this restriction. 
If successful, this would have the effect of stabilizing the
contribution rate at its current level.  If any sector exceeds its
budget, its payment rates may be reduced during the next year to
recoup the excess spending. 

The Health Care Structure Reform Act also provided for a series of
major structural reforms to be implemented over the remainder of the
decade and intended to build cost control structures and incentives
into the Statutory Health Insurance System.  Some of these changes
are discussed in appendix I. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

During 1993, the strict budgets imposed on most sectors of the German
Statutory Health Insurance System were generally successful in
controlling the growth of health care costs.  Outlays per member fell
by more than 1 percent from 1992 levels, although the budgets
permitted small increases for wage growth.  As shown in figure 1,
rates of growth fell significantly from 1992 levels in all major
sectors of the system.  The most spectacular declines were registered
in the categories of dentures, in which spending per member fell by
almost 27 percent, and pharmaceuticals, where spending per member
fell by nearly 20 percent. 

   Figure 1:  Rate of Growth per
   Member in the Statutory Health
   Insurance System

   (See figure in printed
   edition.)

Source:  The German Federal Ministry of Health. 

The negative growth rate had enabled the contribution rate for the
Statutory Health Insurance System to decline slightly from about
13.40 percent at the beginning of 1993 to 13.25 percent in April
1994.  Sustaining this degree of cost constraint seems unlikely. 
According to one expert, the reduction in spending on dentures and
pharmaceuticals was a one-time event, and expenditure growth could be
expected to resume in 1994. 

There was little evidence that these reductions in the rate of cost
growth caused a significant decline in access to appropriate care
during 1993.  Although there were fears that the sharp decline in
pharmaceutical expenditures meant that some patients were not
receiving needed pharmaceuticals, there was little evidence that this
had occurred (see pp.  8 to 10). 

Although some feared that ambulatory care physicians would attempt to
shift potentially costly patients from the physician budget to the
hospital budget by unnecessarily admitting them to hospitals, the
German government could find no evidence that this occurred to any
significant extent.  Because hospitals were individually budgeted,
others feared that some community hospitals would unnecessarily
transfer costly patients to tertiary care hospitals so that they
would be on the latters' budget.  This may have occurred to some
extent. 

The budgets are intended as temporary measures to control costs while
structural reforms designed to hold down costs in major sectors of
the statutory system are worked out and implemented. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3

We interviewed officials of the German Ministry of Health and key
German health experts, obtained relevant health care spending data,
and reviewed English and German language literature on the results of
the first year of implementation of strict sector budgets and on
progress toward implementation of structural changes mandated by the
German Health Care Structure Reform Act of 1993.  This review also
incorporates information from our 1993 review of German health care
reforms and from current and past work using other international
studies. 

Although the German Statutory Health Insurance System covers unified
Germany, this report, like our 1993 report, focuses on the results of
changes in the former West Germany because it provides a better basis
for comparison with the United States and with earlier conditions in
Germany.\5 We conducted this review between June 1993 and June 1994
in accordance with generally accepted government auditing standards. 


--------------------
\5 The German government keeps separate health care statistics for
former Eastern and Western Germany for the Statutory Health Care
System. 


   STRICT BUDGETS RESTRAINED COST
   GROWTH IN 1993
------------------------------------------------------------ Letter :4

During 1993, strict budgets for each health care sector initiated
under the Health Care Structure Reform Act restrained growth in
expenditures and stabilized the contribution rate in the Statutory
Health Insurance System.  Table 1 shows that the 1993 rate of growth
in all major sectors declined sharply compared with the previous year
in former West Germany.  Total expenditures in the system in former
West Germany declined slightly in 1993. 

The major percentage decreases in outlays were in pharmaceuticals and
dentures, which declined 19.6 and 26.9 percent, respectively. 
However, even if pharmaceuticals and dentures are removed, outlays
per member of the Statutory Health Care System rose only about 3
percent, easily meeting the Health Care Structure Reform Act's goal
of restraining growth to the rate of growth of income of members of
the system subject to the contribution rate. 



                           Table 1
           
            Rate of Change per Member\a in Outlays
           by Health Care Sector and Wages Subject
           to the Contribution (Former West Germany
                            Only)

                    (Figures are percent)


Sector                                          1993    1992
--------------------------------------------  ------  ------
Physicians                                       3.6     6.7
Dentists                                         0.4    10.5
Dentures                                       -26.9    19.8
Pharmaceuticals                                -19.6     9.1
Remedies and aids                                2.2     9.8
Hospitals                                        5.2     8.3
Sick pay                                        -1.3     6.4
Home nursing care                                8.1    26.0
Administration                                   0.6     8.6
Other                                            0.7    12.0
============================================================
Total                                           -1.6     9.2
Percentage increase in wages subject to the      3.7     5.3
 contribution
------------------------------------------------------------
\a Workers excluding dependents.  However, expenses are for all
insured persons. 

Source:  The German Ministry of Health. 

From a 1992 deficit of DM 9.1 billion (about $5.9 billion) in the
area of former West Germany, the Statutory Health Insurance System
showed a DM 9.1 billion surplus in 1993. 

Contribution rates have stabilized and even declined slightly.  From
a high of 13.42 percent on January 1, 1993, the average general
contribution rate for the system had fallen to 13.25 percent by April
1, 1994. 


      PHARMACEUTICALS AND DENTURES
---------------------------------------------------------- Letter :4.1

The largest rates of decrease in expenditures were seen in the
sectors of pharmaceuticals and dentures, which had negative growth
rates of 19.6 and 26.9 percent, respectively.  Of these two, by far
the largest absolute decrease was in pharmaceuticals.  Pharmaceutical
outlays fell from DM 27.1 billion in 1992 to DM 21.9 billion in 1993,
an absolute decrease of DM 5.2 billion (about $3.4 billion). 

Several factors contributed to this startling decrease in outlays for
pharmaceuticals.  First, about 15 percent of the decrease represents
a shifting of drug costs to consumers in the form of co-payments for
prescription pharmaceuticals.  The Ministry of Health ascribes an
additional 20 percent of savings to a combination of three factors: 
the effects of the reference price system for pharmaceuticals,
created by the Health Care Reform Act of 1989;\6 a 5-percent
reduction in the price of prescription pharmaceuticals not under the
reference price system mandated by the 1993 act; and a mandated
2-percent reduction in the price of over-the-counter pharmaceuticals
also mandated by the 1993 act. 

The Ministry of Health ascribes the remainder of the decrease--about
DM 3 billion--to changes in the behavior of physicians towards
prescribing drugs.  These changes include

  a decrease in the number of prescriptions;

  increased prescribing of less costly but qualitatively similar
     pharmaceuticals, including generic drugs and pharmaceuticals
     with prices under the reference price; and

  reduced prescribing of certain categories of pharmaceuticals,
     including drugs considered by the Germans to be excessively or
     inappropriately prescribed, such as vitamins, mineral
     preparations, and vascularity improving drugs. 

Statutory system outlays for dentures fell from DM 6.8 to DM 5.0
billion, about DM 1.8 billion ($1.2 billion).  This decrease was all
the more remarkable in that there was no fixed budget for dentures
themselves, although there was a budget for general dental services,
including the prescribing and fitting of dental prostheses. 


--------------------
\6 Under the reference price system, a maximum reimbursement level is
set for each drug.  If the price of the drug is higher than the
reference price, the patient must pay the difference. 


   LITTLE EVIDENCE OF IMPAIRED
   ACCESS TO APPROPRIATE CARE
------------------------------------------------------------ Letter :5

Despite the introduction of stringent budgeting in most major sectors
of the German Statutory Health Insurance System, access of patients
to appropriate care was not impaired.  In particular, fears had been
raised that

  physicians might not prescribe needed pharmaceuticals to their
     patients;

  physicians might seek to hospitalize costly patients to transfer
     these costs to the hospital's budget rather than treat them on
     the outpatient budget where they might affect future payments;
     and

  hospitals might transfer (dump) costly patients to other hospitals,
     usually tertiary care hospitals, to move these costs from the
     transferring hospital's budget to the receiving hospital's
     budget, which is usually higher. 


      PHARMACEUTICAL PRESCRIBING
      PATTERNS
---------------------------------------------------------- Letter :5.1

Statistics on prescribing patterns of German physicians suggest that
fears that physicians would not prescribe needed drugs to patients
did not materialize.  According to the German Ministry of Health,
preliminary prescription statistics suggest that physicians responded
to the budgetary constraints in part by prescribing less expensive
but qualitatively similar generic drugs instead of brand-name
pharmaceuticals and by decreasing prescribing of pharmaceuticals in
categories where some drugs are considered by the Germans to be of
questionable therapeutic effectiveness or frequently inappropriately
prescribed.\7

As shown in figure 2, the number of prescriptions in several
pharmaceutical groups, including vein drugs, gallbladder and duct
drugs, immunological drugs, vascularity improving drugs, urologic
agents, mouth and throat drugs, and antihypotensive agents, declined
20 percent or more.  Most of these categories contain a relatively
high percentage of doubtful or inappropriately prescribed
preparations.  In contrast, the number of prescriptions for some
pharmaceutical groups containing a high percentage of drugs
considered to be both therapeutically effective and usually
appropriately prescribed, such as diabetes-related drugs,
antibiotics, and angiotensin converting enzyme-inhibitors, remained
stable or increased slightly in 1993. 

   Figure 2:  Rate of Change in
   the Number of Prescriptions in
   Specific Drug Groups for
   Unified Germany (1992-93)

   (See figure in printed
   edition.)

   Note:  This chart does not
   include all recognized German
   drug groups.  Rather, it
   includes drug groups at the
   extremes of the distribution
   for comparison purposes.

   (See figure in printed
   edition.)

   Source:  Schwabe and Paffrath,
   eds., Arzneimittel-Report '94
   (Gustav Fisher Verlag,
   Stuttgart, 1994), p.  5.

   (See figure in printed
   edition.)

These statistics do not support the view that the global budget for
pharmaceuticals caused widespread problems of patient access to
appropriate drugs in Germany in 1993.  Independent experts and Health
Ministry officials with whom we spoke in Germany generally agreed
that the pharmaceutical budget had not caused significant access
problems in 1993.  Experts from the Research Institute of the Local
Sickness Funds said that the pharmaceutical budget can be credited
with improving quality of care because the amount of inappropriately
prescribed pharmaceuticals has decreased. 

However, one physician pointed out that long-term quality effects may
eventually become apparent.  For example, the decline in prescription
of lipid-lowering drugs might simply reflect past overuse of this
class of pharmaceuticals or might result in future increases in the
incidence of heart attacks and strokes. 


--------------------
\7 According to a German drug expert, such pharmaceuticals, called
therapeutisches umstrittenes Arzneimittel (therapeutically
questionable drugs), fall into several categories; first,
pharmaceuticals prescribed for a condition that may not warrant it. 
An example would be a person with moderately high cholesterol
prescribed a lipid-lowering agent without first trying to control the
condition through diet.  Also falling into this first category are
mineral preparations and vitamins prescribed absent some specific
condition, such as pregnancy or osteoporosis, which would justify
them.  Finally, the antihypotensive drugs fall into this category. 
Many of these drugs are used to treat asymptomatic low blood
pressure.  A German pharmaceutical expert told us that this usually
would not be considered a disease outside Germany.

The second category includes pharmaceuticals not shown to be
effective for the conditions for which they are prescribed.  Some
vein and vascularity improving preparations fall into this category. 
It should be noted that not all pharmaceuticals in the groups fall
into these questionable categories. 


      HOSPITAL ADMISSION PATTERNS
---------------------------------------------------------- Letter :5.2

Hospital admission patterns suggest that the fears that physicians
and hospitals would unnecessarily hospitalize or transfer costly
patients did not materialize.  The Ministry of Health found no
statistical evidence that would support these allegations, such as
significant increases in the numbers of hospitalizations or of
transfers among hospitals.  Furthermore, even when allegations of
patient dumping were investigated, few cases could be confirmed. 

The Ministry noted that in Bavaria, for example, the number of cases
in the university clinics, tertiary care hospitals that often receive
transferred patients from lower-level hospitals, fell about 2
percent, while cases in hospitals offering only basic care rose about
2 percent, and cases in hospitals offering intermediate levels of
care rose 3 percent.  Also, the Ministry found that in the state of
Rhineland-Palatinate there were 215,000 fewer billable bed days than
had been budgeted for in 1993.  Furthermore, when surveyed by the
Hesse Association of Sickness Fund Physicians, 82 percent of
hospital-based physicians in that state responded that they had
observed "no admissions or transfers because of cost," and 17 percent
responded that they "very seldom observed such transfers."

According to the Ministry of Health, many university clinics did not
reach their budgeted level of bed days.  For example, the Bonn
University Clinic was some 27,000 bed days and the Mï¿½nster university
clinic about 7,000 bed days below budgeted levels.  This means that
both clinics will receive more payments per patient than they
otherwise would have during 1994 because under the fixed budget, if
hospitals do not bill up to their budget, they are paid the
difference between their billed amounts and their budgeted amounts
during the following year. 

While most experts we talked to agreed that unnecessary referrals to
hospitals by ambulatory care physicians had not been a significant
problem, some believed that transfers of costly patients among
hospitals had occurred but the extent was not yet known. 


         BED CLOSURES IN Mï¿½NSTER
-------------------------------------------------------- Letter :5.2.1

One potential reaction of hospitals to the fixed budgets would be to
eliminate types of services, especially those serving costly
patients.  The only reported case of such closures was at the Mï¿½nster
University Clinic, a tertiary care center, which closed some acquired
immunodeficiency syndrome (AIDS) and pediatric oncology beds.  The
clinic management stated that because of a rise in the number of
cases in these areas the clinic's budget was too low. 

The German Federal Ministry of Health was critical of this decision
to close beds because the Mï¿½nster clinic ended the year with fewer
bed days than they were budgeted for.  A representative of the Local
Sickness Funds told us that the AIDS and pediatric oncology patients
were probably admitted despite the closed beds but into other
departments.  She viewed this episode as an attempt on the part of
the clinic to obtain additional money from the sickness funds. 


   WILL GERMAN REFORMS CONTROL
   COST GROWTH IN 1994? 
------------------------------------------------------------ Letter :6

Data available at the time of our work were too scant to permit any
firm predictions regarding the future success of the budgets and
reforms in controlling cost growth in 1994 and future years.  But the
second year of imposed budgets will not likely be as dramatically
successful in controlling costs as the first.  Rates of decrease in
expenditures experienced by pharmaceuticals and dentures are probably
unsustainable at the 1993 rates. 

One expert told us that the cost of pharmaceuticals and dentures had
also fallen dramatically in response to earlier cost control efforts,
and had resumed their rate of growth in 1994.  Also, some of the 1993
decrease in expenditures may have been due to increased spending on
pharmaceuticals and dentures in December 1992 in anticipation of
implementation of the Health Care Structure Reform Act.  Moreover,
since pharmaceutical expenditures for 1993 were well under the budget
limits, the disincentive for drug prescribing by physicians is less
threatening and may not have as constraining an effect on physicians. 
In addition, few of the structural reforms intended for long-term
cost control are yet in place, and those that are have not had time
to exert much effect. 

German government data from the first quarter of 1994 suggest that
the reforms were still controlling cost growth at that time. 
Although spending for dentures, and to a lesser degree
pharmaceuticals, was well above levels for the first quarter of 1993,
overall spending was only 5 percent above 1993 levels.  Furthermore,
comparison with the first quarter of 1993 may be somewhat misleading
because spending in that quarter was depressed due to anticipation of
the effects of the Health Care Structure Reform Act.  Compared with
the first quarter of 1992, 2 years previously, first quarter spending
was up only about 4 percent, and it was down about 3 percent from the
last quarter of 1993, the quarter immediately previous.  However,
these data are inadequate to permit drawing conclusions for 1994. 


   LONG-TERM COST CONTROL THROUGH
   STRUCTURAL REFORMS
------------------------------------------------------------ Letter :7

The Health Care Reform Act of 1993 set up the temporary global
budgets to control health care expenditures while structural reforms
intended to control costs over the longer term could be worked out
and put into place.  The act contains structural reform measures for
most sectors of the German Statutory Health Care System.  These
reform measures include

  risk-adjustment among the sickness funds;

  broadened choice of sickness fund for members of the statutory
     system;

  lowering barriers between the ambulatory and inpatient sectors of
     the health care system;

  a complete restructuring of the inpatient hospital reimbursement
     system; and

  a system for auditing physicians' pharmaceutical prescribing
     practices. 

Some of these reforms are yet to be implemented.  Others have not
been in place long enough to have a significant impact.  These
reforms are discussed in detail in appendix I. 


---------------------------------------------------------- Letter :7.1

We plan to send copies of this report to the appropriate
congressional committees and interested parties.  We also will make
copies available to others on request. 

This report was prepared under the direction of Mark V.  Nadel,
Associate Director, and Michael Gutowski, Assistant Director, Health
Financing and Policy Issues.  If you or your staff have any questions
about this report, please contact me at (202) 512-7115.  Other major
contributors to this report are listed in appendix III. 

Sincerely yours,

Sarah F.  Jaggar
Director, Health Financing
 and Policy Issues


MAJOR STRUCTURAL REFORMS
=========================================================== Appendix I

The Health Care Structure Reform Act of 1993 contains a series of
reform measures intended to control costs in most major sectors of
the health care system that will be implemented over the remainder of
the decade.  The current status of selected reforms, primarily those
that have been or will soon be implemented, are discussed below. 


   RISK-STRUCTURE EQUALIZATION AND
   FREEDOM OF CHOICE
--------------------------------------------------------- Appendix I:1

On January 1, 1993, the German Statutory Health Insurance System
implemented the first phase of the so-called risk-structure
equalization.  This risk-adjustment process is intended to compensate
for the differing demographic and income compositions of sickness
funds, and so reduce the wide differences among the contribution
rates of the funds.  This is being done partly to increase equity
among the funds and partly as a necessary preparation for the
extension of the right of blue-collar workers to choose among
sickness funds, due to become effective January 1, 1997. 

The German risk-adjustment process is somewhat different from others
because it includes an adjustment for sickness fund income as well as
for risk of health care expenditures.  This is both possible and
necessary because of Germany's income-based premium structure.\8 If a
sickness fund has a disproportionate percentage of low-income
members, its income will be low (or its contribution rate high)
relative to a fund with a large percentage of high-income members. 

The adjustment on the expenditure side is relatively simple, covering
only age and sex.  In this adjustment process, all persons insured by
the sickness fund (including co-insured family members, but excluding
pensioners for the time being) were divided into 1-year groups by age
and sex.  A national average expenditure amount for each year and sex
group was computed.  For example, the average expenditure was
computed for 20-year-old females and 60-year-old males.  These
amounts were then multiplied by the number of persons in each group
in each sickness fund and added together to obtain the risk-adjusted
financial requirements for each sickness fund.  The same calculation
was done to develop the risk-adjusted financial requirement for all
sickness funds. 

On the income side, the total income subject to the contribution rate
was determined for each sickness fund and for all sickness funds
together.  The ratio between the risk-adjusted financial requirements
and the total income subject to the contribution rate of all sickness
funds together constitutes the uniform equalization rate.  The same
ratio is then calculated for each sickness fund individually, and
compared with the uniform equalization rate.  If the fund's
equalization rate is lower than the uniform equalization rate, it
must pay into the equalization fund.  If higher, it receives payment
from the fund. 

It is too early to tell how effective the system will be in reducing
the variation in contribution rates among sickness funds.  However, a
ministry official noted that after 4 months experience, the range of
contribution rates had declined from between about 8 percent and 16
percent to between 9 percent and less than 15 percent.  He noted that
the intention of this reform was not to make all price differences
among the funds disappear.  While Germany does not want the funds to
compete by excluding sick persons from coverage, he said that the
government does want some price competition to force the sickness
funds to become more efficient. 


--------------------
\8 Risk adjustment in insurance programs that utilize flat rate or
risk-adjusted premiums, as is customary in the United States, need
only adjust for health risk factors in the insured population because
the insurers' incomes are unrelated to the incomes of the insured. 


   HOSPITAL REFORMS
--------------------------------------------------------- Appendix I:2

The German Health Care Structure Reform Act contains two important
structural changes for hospitals.  First, it partially lowered the
barrier between ambulatory care and hospital physicians by permitting
the latter to perform ambulatory surgery and to care for patients for
short periods before and after inpatient admissions.  Second, it
provided for a major reform of hospital reimbursement for inpatient
services to be fully implemented by 1996.  These are long-term
structural reforms intended to give hospitals incentives to reduce
lengths of stay and operate more efficiently. 


      LOWERING BARRIERS
------------------------------------------------------- Appendix I:2.1

The German health care system has long had a barrier between
inpatient hospital care and ambulatory care.  For the most part,
hospital physicians have not been allowed to see ambulatory patients,
and ambulatory physicians have not been allowed to practice in
hospitals.  This has created some perverse incentives for hospitals. 
Hospital physicians often had to admit patients early because they
could not have medical tests done on an outpatient basis and keep
their patients in hospital longer than necessary to oversee their
recovery.  In addition, patients who would be treated as outpatients
in the United States were often admitted to the hospital in Germany
because the hospital physicians were not allowed to treat them on an
outpatient basis.  The Health Care Structure Reform Act began to
break down this barrier between the inpatient and ambulatory sectors. 


         AMBULATORY SURGERY
----------------------------------------------------- Appendix I:2.1.1

The act permits hospitals to open ambulatory surgery departments. 
The government expects this change to reduce the amount of
unnecessary inpatient care and improve cooperation between the
ambulatory and hospital sectors, for example, with ambulatory care
surgeons using hospital surgical facilities. 

Despite an implementation agreement of March 22, 1993, among the
sickness fund associations, the German Hospital Association, and the
Association of Sickness Fund Physicians, the provisions of the Health
Care Structure Reform Act of 1993 for ambulatory surgery in hospitals
remained largely unused.  Thus, these provisions had little effect on
German hospital costs in 1993. 

According to the hospitals, the major reason for the lack of
implementation of this agreement is that any income will be counted
against the fixed hospital budget.  In addition, they feared that
increased provision of ambulatory surgery would lead to reduction in
the fixed budget because of decreased need for inpatient care
resources. 

New hospital payment regulations, which the hospitals will have to
adopt by 1996, provide that the income from ambulatory surgery will
no longer be included in the hospital budget.  Rather, the ambulatory
surgery area will form an independent income source for the
hospitals.  The Ministry of Health believes that this change will
encourage the hospitals to realize the possibilities for cost
reduction related to ambulatory surgery. 


         PREADMISSION AND
         POSTDISCHARGE CARE
----------------------------------------------------- Appendix I:2.1.2

Previously, for the most part, hospital physicians could not see
patients before admission or after discharge.  This frequently led to
early admissions for tests and to retaining patients in the hospital
after they could be safely discharged so that hospital physicians
could oversee their convalescence.  The Health Care Structure Reform
Act of 1993 set out to change this pattern by permitting
hospital-based physicians to see patients for as many as 3 days
within the 5-day period before an admission and up to 7 days within a
14-day period after discharge.  The act specified that reimbursement
was to be agreed upon between the hospitals and the sickness funds on
the state level.  The government expected that this change would
shorten length of stay and, thus, increase the efficiency and lower
the costs of hospitals. 

The National Associations of Sickness Funds and the German Hospital
Association developed an advisory agreement on reimbursement, which
was made retroactive to July 1, 1993.  Under this agreement,
preadmission care would be paid a lump sum amount of 1.8 times the
hospital's general daily rate.  Postdischarge care would be
reimbursed at a rate of 0.6 times the general daily rate per visit. 
However, these amounts would be payable only if the services were not
already covered by other payments to the hospital. 

Despite this agreement, Ministry and other experts we talked to said
that hospitals had not adopted this preadmission and postdischarge
care to a significant extent.  They generally agreed that the
hospitals did not have a sufficient incentive to change their
long-standing practices. 


      HOSPITAL PAYMENT REFORMS
------------------------------------------------------- Appendix I:2.2

Under the Health Care Structure Reform Act, the predominant existing
German hospital reimbursement system of a single negotiated daily
rate for each hospital, supplemented by special payments for a few
categories of costly procedures, will be replaced by a system
comprising three types of payment.  First, approximately 60
procedures (as of Jan.  1, 1995) will be paid using a prospective
case payment system similar to the U.S.  Medicare diagnosis related
group (DRG) payment system.  Payment for these 60 procedures will
cover all hospital care. 

Second, another approximately 155 procedures (also as of Jan.  1,
1995) will be paid using a system of special payments.\9 Under this
type of payment, the principal medical services for the admission
will be paid by a prospectively fixed lump-sum amount.  Other costs,
such as administrative overhead and room and board, will be covered
by the hospital-specific basic daily rate and a reduced departmental
daily rate, both discussed below. 

All other types of cases will be reimbursed by a combination of two
hospital-specific daily rates.  Medical costs will be covered by a
departmental daily rate, which will vary depending on the medical
department that admits the patient.  That is, a cardiac patient may
be reimbursed by a daily rate different from that of a general
internal medicine patient.  Nonmedical services, including food and
housekeeping, will be reimbursed by a basic daily rate common to all
departments. 

Reimbursement rates for both case payments and special payments will
be set using a combination of national relative value scales and
conversion factors negotiated on a statewide basis.  Thus, all
hospitals in a German state will receive the same prospective lump
sum payment for a given procedure under these two types of
payment.\10 If the costs for the services covered by the payment type
are lower than the payment rate, they may keep the difference.  If
higher, they are at risk. 

One group of experts told us that the method of determining the
special payment rates resulted in more generous rates than that for
the case payment system.  They noted that over time it is expected
that the rates will be made consistent. 

German hospitals have the option of choosing to be reimbursed under
the new system beginning January 1, 1995.  All hospitals must be
reimbursed using this system beginning January 1, 1996.  Hospitals
choosing the new reimbursement system for 1995 will be released from
the strict budget limits of the Health Care Structure Reform Act. 

The Ministry of Health expects that this new reimbursement system
will give hospitals effective incentives for improved efficiency and
for reducing lengths of stay.  However, health care experts at the
Research Institute of the Local Sickness Funds (Wissenschaftliches
Institut der Allgemeine Ortskrankenkassen) believe that the case
payments were set too high because of problems with data on length of
stay.  They believe that correcting for the length-of-stay problem
would save about DM 450 million annually. 


--------------------
\9 This system of special payments--Sonderentgelte--has been in use
for some time in some hospitals for a few high-cost procedures. 

\10 In a few cases, the same procedure is payable under both the case
payment and special payment systems.  In these cases, the special
payment, of course, is lower.  We were told that in these cases, the
special payment amount would only be used to cover treatment for a
secondary diagnosis. 


         THE NEW GERMAN CASE
         PAYMENT SYSTEM
----------------------------------------------------- Appendix I:2.2.1

The new German case payment system is conceptually similar to the
prospective payment system used for most U.S.  Medicare hospital
payments.  However, the categories used to separate patients into
payment classes in the German System are not DRGs, as in the U.S. 
Medicare system, but patient management categories (PMC).  This
system was developed during the early 1980s by Wanda Young of the
Pittsburgh Research Institute, the research institute of Blue Cross
of Western Pennsylvania. 

In contrast to DRGs, which are mainly defined in terms of principal
diagnosis and procedure, each PMC has an associated patient
management path, which is the expected clinical strategy, defined in
terms of a bundle of related tests, procedures, and other
interventions, that physicians typically utilize to diagnose and
treat that type of case.  The Germans used this bundle of related
services associated with each PMC to develop related cost weights for
each PMC corresponding to the 60 procedures initially to be covered
by the full case payment system. 

The PMC system also differs from DRGs in two other important
respects.  First, PMCs are tightly defined around a specific illness,
whereas DRGs group patients whose treatments are expected to consume
similar levels of hospital resources.  As a result, the number of
PMCs is nearly twice as large as the number of DRGs (848 vs.  494). 
Second, the PMC system permits assigning more than one PMC to a
patient, based on unrelated comorbid conditions.  The DRG system, in
contrast, permits assignment of a patient to only one DRG.\11 These
two differences may permit the PMC system to better adjust for
severity of illness than the DRG system.  On the other hand, one
group of experts with whom we spoke indicated that they believed that
PMCs are easier for providers to manipulate to maximize reimbursement
than are DRGs. 

Experts told us that the ultimate intent of the German government is
to bring most hospital inpatient care under the case payment system. 
However, they indicated that further implementation of the system
would probably not take place until Germany had some experience with
the new system. 


--------------------
\11 A number of DRGs are specifically designed for patients with
comorbid conditions.  However, they only exceptionally provide
additional payments specifically for treatment provided for these
comorbid conditions. 


   PHARMACEUTICAL REFORMS
--------------------------------------------------------- Appendix I:3

The Health Care Structure Reform Act provided that the fixed budget
for pharmaceuticals would be lifted in 1994 and 1995 if the sickness
funds and physicians agreed on a system of auditing physicians'
prescribing practices on the basis of pharmaceutical guidelines. 
Physicians who exceeded the guidelines by more than 15 percent were
to be audited, while payments to physicians exceeding the guidelines
by more than 25 percent were to be automatically reduced. 

However, this system has not yet been implemented, at least in part
because the sickness funds and the Associations of Pharmacists could
not agree on prescription reporting requirements necessary for
setting and administering the guidelines.  Thus, the strict global
pharmaceutical budget remains in effect for 1994 and possibly beyond. 

Meanwhile, the Federal Association of Sickness Fund Physicians and
the National Associations of Sickness Funds have reached an advisory
agreement that the total 1994 outlays for pharmaceuticals, dressings,
and remedies in former West Germany should be set at about DM 27.7
billion ($14.9 billion), which corresponds to the sum of these
budgets for 1993. 


OUTLAYS OF THE GERMAN STATUTORY
HEALTH INSURANCE SYSTEM (1989-93)
========================================================== Appendix II



                          Table II.1
           
                 Outlays by Sector (1989-93)

                       (DM in billions)


Secto       1989       1990       1991       1992       1993
r       (37,229)   (37,939)   (38,704)   (39,246)   (39,459)
-----  ---------  ---------  ---------  ---------  ---------
Physi    DM 22.7    DM 24.4    DM 26.7    DM 28.9    DM 30.1
 cians
Denti        7.6        8.2        9.1       10.2       10.3
 sts
Dentu        4.9        4.8        5.6        6.8        5.0
 res
Pharm       20.2       21.8       24.5       27.1       21.9
 aceu
 tica
 ls
Remed        7.8        8.4        9.7       10.8       11.1
 ies
 and
 aids
Hospi       40.8       44.6       49.1       53.9       57.0
 tals
Sick         7.8        9.8       11.4       12.3       12.2
 pay
Home          --         --        1.8        2.3        2.5
 nurs
 ing
 care
Admin        6.6        7.3        7.9        8.7        8.8
 istr
 atio
 n
Other       11.5       12.4       14.0       15.9       16.1
============================================================
Total   DM 129.9   DM 141.7   DM 159.8   DM 176.9   DM 175.0
------------------------------------------------------------
\a Excludes co-insured family members. 

Source:  The German Federal Ministry of Health. 



                          Table II.2
           
                 Outlays per Member (1989-93)

                           (In DM)


                        1989    1990    1991    1992    1993
                      (37,22  (37,93  (38,70  (39,24  (39,45
Sector                    9)      9)      4)      6)      9)
--------------------  ------  ------  ------  ------  ------
Dentists              DM 204  DM 216  DM 235  DM 260  DM 261
Dentures                 132     127     145     173     127
Pharmaceuticals          543     575     633     691     555
Remedies and aids        210     221     251     275     281
Hospitals              1,096   1,176   1,269   1,373   1,445
Sick pay                 210     258     295     313     309
Home nursing care         --      --      47      59      63
Administration           177     192     204     222     223
Other                    309     327     362     405     408
============================================================
Average per member        DM      DM      DM      DM      DM
                       3,489   3,735   4,129   4,508   4,435
------------------------------------------------------------
\a Excludes co-insured family members. 

Source:  The German Federal Ministry of Health. 

   Figure II.1:  Income and
   Outlays per Member (1989-93)

   (See figure in printed
   edition.)

Source:  The German Federal Ministry of Health. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

Peter Schmidt, Project Manager, (410) 965-5587
Christopher Hess
Thomas Laetz
James Perez

