The Swiss Healthcare System

Today it is the Swiss healthcare system that is being critiqued.

The article is from the CATO institute; The Grass Is Not Always Greener: A Look at National Health Care Systems Around the World Michael D. Tanner Cato Institute: Policy Analysis


Switzerland

Of all the countries with universal health care, Switzerland has one of the most market- oriented systems. Indeed, the Swiss government actually pays for a smaller amount of total health care expenditures than the U.S. government, 24.9 percent versus 44.7 percent. (250) (See Figure 3.)

The Swiss system is based on the idea of managed competition, the same concept that underlay the 1993 Clinton health care plan and Mitt Romney’s reforms in Massachusetts. (251) Managed competition leaves the provision of health care and health insurance in private hands but creates a highly regulated artificial marketplace as a framework within which the health care industry operates.(252)

Swiss law requires all citizens to purchase a basic package of health insurance, an individual mandate. Coverage is close to universal, estimated at 99.5 percent.(253) This level of compliance is due in part to the Swiss national character and may not be replicable in the United States where the record of complying with mandates is much more mixed (even if such a mandate were desirable). (254) For example, nearly 100 percent of Swiss drivers comply with their country’s mandate for automobile insurance, compared with only 83 percent of U.S. drivers. (255)

The term “basic benefits package” is somewhat misleading since the required benefits are quite extensive, including inpatient and outpatient care, care for the elderly and the physically and mentally handicapped, long-term nursing home care, diagnostic tests, prescription drugs, and even complementary and alternative therapies.(256)

Insurance is generally purchased on an individual basis. Few employers contribute to the purchase or provide insurance. (257) The policies are provided by private insurers. Currently, some 93 insurers operate in Switzerland, although not every insurer operates in every canton, or region.(258) Originally, insurers were required to be nonprofit entities, but that restriction was eliminated in 2002.

Insurers cannot reject an applicant on the basis of health status, and all policies are community rated within a geographic area, meaning that the healthier pay higher premiums to subsidize the less healthy. One exception to community rating is for nonsmokers, who can receive premiums as much as 20 percent lower than smokers. A formula adjusts premiums based on sex and age. (259) The geographic variation can be significant, with premiums differing as much as 50 percent between cantons. (260)

Unable to compete on the basis of managing and pricing risk, and required to offer nearly identical basic benefits packages, insurers compete primarily on price. Since they cannot reduce costs by risk management or benefit design, they generally manage prices by varying the level of deductibles and co-payments. Individuals can purchase expensive policies with very low deductibles and co-payments, or far less expensive policies with high deductibles or extensive co-payments. Thus, premiums vary according to their cost-sharing attributes and plan type, running from $1,428 per year for a plan with a deductible of approximately $2,000 to $2,388 for a plan with a $250 deductible. (261)

Because employers do not pay for workers’ health insurance, the Swiss are exposed to the full cost of their insurance purchases. As a result, many Swiss have opted for high-deductible insurance. Thus, with high deductibles and extensive co-payments, the Swiss pay out of pocket for 31.5 percent of health care, twice as much as in the United States.(262) (See Figure 4.)

Recently, there has also been a growing market in managed care plans that, like those in the United States, offer lower premiums in exchange for limitations on access to specialists and other services. Premiums for such plans run around $1,900 per year. (263)

The Swiss government offers subsidies to low-income citizens to help them purchase a policy. Subsidies are based on both income and assets, and the maximum available subsidy covers the cost of an average premium in the individual’s canton. These subsidies are designed to prevent any individual from having to pay more than 10 percent of income on insurance. They do not, however, pay the entire cost of insurance because the Swiss do not want to create an incentive for subsidized individuals to choose the most expensive plan with the lowest deductibles and co-payments. (264) Roughly one-third of Swiss citizens receive some form of subsidy, and approximately 19 percent of all health insurance premiums are paid with government funds. (265)

Swiss insurers operate as cartels to negotiate provider reimbursements on a cantonal basis. Providers must accept the negotiated payment, and balance-billing is prohibited. If insurers and providers are unable to reach agreement on a fee schedule, canton governments are empowered to step in and impose an agreement. There are no restrictions on where physicians may set up practice, so to some degree providers can vote with their feet, moving to cantons that offer higher reimbursements, a practice that has led to physician shortages in some areas. (267)

The system includes both public and private hospitals. (268) Private hospitals negotiate reimbursement with insurance cartels and physicians in the same manner. Public hospitals are operated by cantons, which negotiate reimbursement rates with insurers and provide subsidies to the hospitals. In some cantons, individuals with only the basic insurance plan must use public hospitals; supplementary insurance (see below) is required for admission to private hospitals.

Recently some providers have begun operating outside the negotiated fee schedules. A separate supplemental insurance market is starting to develop to cover the cost of these providers, which are presumed to offer higher quality or more advanced services. Supplementary insurance also allows access to private hospitals in those cantons that do not permit access under the basic insurance plan. Even within public hospitals, supplementary insurance can be used to pay for services such as private rooms that are not covered under the basic plan. By some estimates as many as 40 percent of Swiss citizens have purchased supplemental insurance. (269)

The Swiss do not impose a global budget on their health care system and have therefore avoided the waiting lists common in other systems. In addition, the Swiss have a high degree of access to modern medical technology, but it has come at a cost. The Swiss spend 11.5 percent of GDP on health care, second only to the United States. (270)

Since Swiss health care consumers are exposed to the cost consequences of their health care decisions, this trade-off between access and cost can be presumed to reflect the desires of Swiss patients. They have chosen high quality care even though it costs them more. Given that economists consider health care to be a “normal good”—that is, consumption rises along with income—and Switzerland is a wealthy nation, such a decision seems entirely reasonable.(271)

At the same time, it is notable that Swiss health care spending remains below that of the United States for nearly comparable care. Strong evidence suggests that the exposure of Swiss consumers to the cost consequences of their health care decisions has made them more conscious consumers and helped limit overall health care costs. As Regina Herzlinger and Ramin Parsa-Parsi of Harvard have concluded, “Cost control may be attributed to the Swiss consumer’s significant role in health care payments and the resulting cost transparency.”(272)

The transparency of the system also makes it responsive to consumer preferences. The WHO survey ranked Switzerland second only to the United States in terms of responsiveness to patients’ needs for choice of provider, dignity, autonomy, timely care, and confidentiality. (273)

The Swiss generally seem pleased with their system. Earlier this year, Swiss voters overwhelmingly rejected a proposal to replace the current system with a single-payer plan; more than 71 percent of Swiss voters turned down the proposal in a nationwide referendum. (274)

Nonetheless, the Swiss system has its own problems, most of them predictable outgrowths of the individual mandate and the regulation inherent in managed competition. In most markets, consumers impose a certain discipline on prices because they can refuse to buy a product if it costs too much. The individual mandate removes this power since consumers must purchase the product (in this case, insurance) even if they believe the cost outweighs the value. Moreover, the establishment of a government defined benefits package is an open-ended invitation to special interests representing various health care providers and disease constituencies, who can certainly be expected to lobby for the inclusion of additional services or coverage. (275)

Public choice dynamics are such that providers (who would make money from the increased demand for their services) and disease constituencies (whose members naturally have an urgent desire for coverage of their illness or condition) will always have a strong incentive to lobby legislators for inclusion under any minimum benefits package. The public at large will likely be unaware of the debate or see resisting the small premium increase caused by any particular additional benefit as unworthy of a similar effort—a simple case of concentrated benefits and diffused costs.(276)

That is exactly what has happened in Switzerland, leading to a growing expansion of the basic benefits package. In particular, a powerful hospital and physician lobbying coalition known as the “Blue Front” was able to demand a significant expansion in covered benefits in exchange for a relaxation of “any willing provider” laws so as to permit managed- care contracts. (277)

The expansion of benefits has driven up the cost of insurance, a cost only partially offset by larger deductibles. Although the proportion of health expenditures paid out of pocket remains high, it has decreased by roughly 10 percent in the past decade. (278)

Moreover, the growth in covered benefits has helped drive up costs for the system as a whole, as the Swiss become more insulated from the costs of their health care purchasing decisions. If that trend continues, it could undermine the cost transparency that is at the heart of the Swiss system.” As Uwe Reinhardt has noted, “Over time, the growth in compulsory benefits has absorbed an increasing fraction of the consumers’ payment, thus compromising the consumer-driven aspects of the Swiss system.”(279)

Evidence shows that the community rating requirements are creating distortions within the Swiss market, leading to the over provision of care to the healthy and the under provision of care to the sick. (280) In addition, the prohibition on risk management discourages the development of new and innovative products. Peter Zweifel of the University of Zurich, a member of the Swiss Competitive Committee which oversees insurance regulation, believes that a return to some degree of risk-rating is essential to the long-term success of the Swiss system. (281) As Zweifel puts it, “Let competition work its magic. Let those who are bad risks get the message that they need to become better risks, if possible. If not possible, [they would] still get a subsidy which [keeps their costs] down to little more than 8–10 percent of taxable income.”(282)

Third, the cartel structure for negotiating reimbursement schedules can create a number of distortions. Effectively monopsony purchasers, the cartels have enormous leverage when it comes to negotiations. Not surprisingly, physicians have tended to set up practice in cantons with the highest levels of reimbursement, leading to shortages in other areas. Reimbursement rates have reportedly created wasteful incentives—for example, hospitals shifting patients from outpatient to inpatient care. (283) And the combination of increased demand and low reimbursement has led to the first signs of queues for the most complex surgeries. (284)

In addition, the negotiations freeze in place a pricing structure that inhibits the development of innovative approaches that do not tie payments to specific benefits. This includes both managed care approaches and health services integration. (285)

Finally, Switzerland has some of Europe’s strongest regulation of nonphysician health care professionals. (286) As a result, patients are often forced to use more expensive providers where a less expensive professional would do.

All of the above combine to undermine the consumer-driven nature of Switzerland’s health system. Despite these problems, the Swiss system provides a useful lesson for the United States about the value of consumer directed health care. In particular, we can see that when the cost of insurance becomes more transparent, consumers shift their purchasing preferences toward true insurance (spreading catastrophic risk), rather than purchasing prepayment for routine, low-cost services. That gives consumers an overall incentive to make cost-versus-value decisions when purchasing health care, resulting in reduced costs while maintaining individual choice and quality care.