Private Health Insurance Contracts: Better than Their Reputation

The design of German private long-term health insurance contracts comes very close to the ideal economic dynamic life cycle contract: Even when using various model assumptions, the deadweight loss compared to a theoretically optimal health insurance contract does not exceed four per cent over the entire life cycle. These are the findings of a new study conducted by ZEW Mannheim together with Cornell University, the University of Pennsylvania and the University of Duisburg-Essen. The study has just been published in the renowned Journal of Political Economy, one of the world's top five economics journals.

“Germany’s private health insurance system is unique worldwide. It has been a stable market for decades and, from a certain economic perspective, it is better than its reputation. Individuals who, ideally, obtain lifetime health insurance while they are young and in good health are generally granted lifetime contracts with stable premiums that are actuarially fair,” explains Professor Nicolas Ziebarth, head of the ZEW Research Unit “Labour Markets and Social Insurance” and co-author of the study. “In theory and largely in practice, as well as according to the regulatory provisions, premiums remain relatively stable throughout life and do not increase significantly in old age, despite the strong rise in age-related health care spending. This means, among other things, that policyholders can balance their expenses relatively well across different phases of life. German private health insurance contracts therefore come unexpectedly close to the ideal proposed by economic theory – especially if the income remains relatively stable over the course of a lifetime.”