German Healthcare Cost Controls – Global Competitive Advantage

By | May 21, 2023

There is an interesting article in the February, 2010 issue of the McKinsey Quarterly, the on-line journal of McKinsey & Company. The article entitled “How Germany is reining in health care costs: An Interview with Franz Knieps” provides an interesting comparison to our own struggle to control rising health care costs. Franz. Knieps is the director general for public health care, health insurance and long term care in the German Federal Ministry of Health.

Germany, one of our major international competitors, spends 10.4 percent of its Gross National Product on health care costs, while providing near universal coverage (10 percent of Germans are covered by private health insurance). Contrast that with the USA where we are paying 17.2 percent of our GNP without universal coverage.

Most of Germany’s health care coverage is provided by 180 statutorily created insurance funds which receive their money mostly from private citizens and employers. Tax subsidies support about 10 percent of the costs of the funds. There is a liberal use of co-pays and other incentives. The insurance funds are designed to compete with each other to keep costs down and quality up.

New drugs and treatment modalities are added to the benefit package when approved, but they are also reviewed by the Institute for Quality and Efficiency in Healthcare to determine whether they bring significantly new value to the table. If not their pricing is restricted by a reference price system that aggregates therapeutic classes of modalities and limits the pricing. Truly innovative drugs and treatment modalities are rewarded with additional pricing opportunities.

The Germans have borrowed a system of “polyclinics,” clusters of specialized primary care centers from the old German Democratic Republic under the new name of “medical centers” that have been successful in providing cost efficient medical care to large numbers of people. The German system, because of its centralized structure also operates on a a program of annual budgets to which there is rigid adherence.

Physicians are paid more to enroll their patients in disease management programs (borrowed conceptually from the USA) in which patients and their physicians are required to follow evidence based guidelines and protocols. Both positive and negative incentives for physicians and their patients are widely in play. Electronic data aggregation plays a major role in the identification of behavior driven opportunities to save costs and improve quality. One factor that Herr Knieps does not mention in his interview is the relentless pressure the German government places on controlling the compensation of health care providers, who while mostly private, are substantially less well paid than their counterparts here. The Germans don’t believe in public payment without public control and accountability, but the cost of their cars and other competitive products start out of the gate with close to a 7 percent cost advantage. That makes for a lot of hard running and heavy lifting for American industry to compete. What is wrong with this picture??