In the Health Care System, “More Economics” Is the Solution, Not the Problem


Opinion by ZEW President Achim Wambach and ZEW Health Economist Simon Reif

The German health care system is heading for turbulent times, marked by premium hikes, a shortage of nursing staff, and a health care reform that German Health Minister Lauterbach says will “revolutionize the system.” According to Lauterbach, the reform is necessary because the “balance between medicine and economics has been lost.” In this case, however, “more economics” is the solution, not the problem.

Efficiently managing scarce resources poses a significant economic quandary and remains the primary challenge in the health care sector. Key indicators of this challenge include rising premiums in health insurance, a shortage of skilled professionals and nursing staff, as well as hospitals grappling with substantial financial losses. However, when we compare Germany to other countries, the situation appears different. Within the European Union, Germany boasts one of the highest numbers of doctors, nurses, and hospital beds per capita. Nevertheless, despite its notable resource allocation, the German health care system falls short in common benchmarks such as life expectancy and postoperative relapse rates, ranking merely average. Consequently, Germany excels in resource utilisation yet achieves only moderate outcomes in international comparisons.

In 2003, the implementation of reimbursement based on diagnosis-related groups (DRG) aimed to enhance efficiency within the hospital sector. Under this system, for each treatment case hospitals receive a fixed rate, which is contingent on factors like diagnosis, severity, and treatment modality. The assigned reimbursement approximates the average treatment costs of such a case. Hospitals that provide cost-effective care relative to the average can generate profits. The reimbursement scheme according to DRG thus incentivises cost reduction.

However, two design flaws have led to problems. Firstly, the German DRG system takes into account the type of treatment, resulting in operations being generally better reimbursed than conservative treatments. This creates an incentive for hospitals to perform as many surgeries as possible, which is not always in the best interest of the patients. Secondly, DRGs fall short when hospitals need to maintain certain capacities but are unable to bill enough cases. A prime example of this is maternity clinics. In order to be able to accommodate births at any time, capacities of midwives and delivery rooms must be maintained, even in regions with fewer births. However, the low number of billable DRG cases in these areas makes it difficult to cover the costs. As a result, many maternity clinics have been forced to close.

The proposed hospital reform aims to rectify these two design flaws. However, the stated objective – to reduce economic pressure on hospitals and enable a stronger focus on treatment quality – implies that there is a conflict between economic competition and quality. Yet, competition generally prompts providers to vie for customers by offering superior quality or lower prices. Behind the headlines surrounding the hospital reform, sensible economic arguments are obscured: To address the issue of excessive surgeries, particularly in less suitable hospitals, the plan is to improve patients’ access to information on hospitals’ treatment quality, thus fostering a stronger competition based on quality.

Nevertheless, there is limited empirical evidence to support the effectiveness of publicly available information on quality. Although existing platforms like the “Weisse Liste” are utilised, patients often opt for the nearest hospital rather than the most suitable one for their specific needs. To encourage that information about quality be taken into account in hospital selection, health insurance companies should also be authorised to suggest preferred hospitals, as recommended by the Monopolies Commission. Health insurance companies have a good empirical basis for assessing treatment quality. Moreover, they have clear incentives to ensure that their policyholders receive the best possible treatment in order to reduce follow-up costs such as post-treatment or sick pay.

The issue of underfunding for cases with high specific reserve costs is set to be resolved through so-called reserve budgets as part of the hospital reform. This approach aims to provide hospitals with a baseline funding for maintaining capacities for specific treatments. Initially, the budgets will be based on previous case volumes, and later adjusted according to regional health care needs, quality, and case load. While this offers hospitals improved planning certainty, there is a concern that it may perpetuate the current situation of overcapacity and underfunding. A more sensible approach would be to regularly distribute provision budgets among all hospitals in a given region that meet the quality requirements, based on which hospital demands the lowest provision budgets. Such an auction mechanism would ensure the same provision performance at lower costs. Furthermore, regular tenders could be used to respond to changing health care needs.

Enhancing quality and reserve financing are the two key areas of focus in the hospital reform, both of which have economic implications. A more in-depth discussion on the incentive effects of economic instruments would be beneficial. However, this requires access to more extensive data. Rather than making generalised criticisms of economics, policymakers should foster an intensified dialogue. Moreover, they should work towards providing the necessary data in order to achieve the shared goal of medicine and economics that is to improve both quality and cost-effectiveness.