In today’s Wall Street Journal, Harvard Business School professor Regina Herzlinger offers an upside-down account of what’s right and what’s wrong with Switzerland’s health care system. A leading advocate of “consumer driven” health care, Herzlinger assumes that because the Swiss pay for so much of their care out of their own pockets, consumer choice drives their system.
But the truth is that Swiss patients have relatively little say over either the cost or the quality of the care they receive. Prices are regulated by the government, which also tries to make sure that consumers are getting value for their health care dollars by selecting which drugs, devices and tests insurance will cover. In fact, it is the very visible hand of a smart, largely efficient government that accounts for Switzerland’s relative success.
Before explaining how Herzlinger gets so much so wrong, let’s look at what she gets right. “The Swiss have achieved universal coverage,” Herzlinger points out “at a far lower cost than the U.S.” In 2003 Switzerland spent 12 percent of GDP on health care while we laid out “a staggering 15 percent of GDP” while leaving roughly 14 percent of our population uncovered. Switzerland also has “far better health outcomes than the U.S., even when Switzerland is compared to socio-demographically similar U.S. states such as Connecticut and Massachusetts,” Herzlinger acknowledges. Moreover, while U.S. insurers in most states can shun sick customers, either by refusing to cover them—or by charging them astronomical premiums—in Switzerland you are not penalized for having cancer. The sick “can afford health insurance and pay the same price” as everyone else.
Finally, while the cost of care continues to snowball in both countries, the Swiss seem to have a better handle on health care inflation. From 1996 to 2003 health care spending in Switzerland rose by an average of 2.8 percent a year, Herzlinger says, versus 4.1 percent in the U.S. Meanwhile “Switzerland boasts substantially more in the way of health-care resources and . . . tops the world in most measures of user satisfaction.”
Herzlinger attributes the good news to the fact that Swiss consumers
are spending their own money to pay for health care. In the U.S. she
points out, the government picks up roughly 50 percent of the nation’s
health care bill; and in 2003, employers laid out roughly $8,000 toward
the average $11,000 premium for a family of four.
In Switzerland, by contrast, the government pays just 25 percent of
the bill; employers make no contribution, and individual households
cover 65 percent of the country’s health care bills themselves. Thus,
to repeat the cliché that market enthusiasts favor, they have “skin in
the game.” The government provides subsidies for the poorest third of
Switzerland’s 7.5 million residents, but those who can afford insurance
are required to pay 100 percent of the cost themselves.
For those who try to evade the mandate, penalties are stiff: the
government can tack on fines equally 30 percent to 50 percent of the
price of the insurance. Misrepresenting whether you are covered is
punishable by fines and prison terms.
This may all sound rather draconian, but it’s worth noting that nearly
all Swiss citizens had insurance before the law went into effect.
Moreover, if Switzerland is going to guarantee universal coverage by
insisting that private sector carriers enroll ailing patients, without
penalty, it must make insurance compulsory. Otherwise, no one under 40
would sign up until they were sick, knowing that when they needed
coverage, insurers would be forced to take them.
But Herzlinger misrepresents Switzerland’s program by suggesting that
Swiss consumers have enough choice about how much health care they
purchase, or how much they pay for it to drive the system. The truth is
that Switzerland’s 1994 Health Insurance Law mandates a fairly
comprehensive minimum package of health benefits that insurers must
offer and households must purchase. Granted, customers can choose from
more than 90 private insurance carriers who vie for their business, but
when it comes to differentiating their products, insurers have
relatively little wriggle room.
First, as Princeton economist Uwe Reinhardt points out in a 2004 article
in the Journal of the American Medical Association, the premiums a
Swiss insurer charges are subject to audit by the Federal Office of
Social Insurance, which has the power to reduce the proposed premiums
Secondly, an insurer cannot charge an 80-year old more than it bills a
25-year old for the same policy. (Premiums for children up to age 18
and students up to age 25 are somewhat lower.)
Finally, insurers are not allowed to make a profit on the mandated
benefit. Switzerland’s private sector insurers are “not-for-profit”
though they can profit from the sale of supplemental benefits—“mainly
superior amenities,” Reinhardt explains.
Because insurers are so strictly regulated, consumers have fewer
options. They can’t pick a bargain-basement plan that is less than
comprehensive; it doesn’t exist. Cheap plans with a $10,000 deductible
per family member also are not available; the government sets a
mandated minimum and ceiling for deductibles. And households cannot
choose between plans that offer high co-pays or no co-pays. In 2004,
everyone paid the same 10 percent co-pay, up to an annual maximum of
700 SFr per year.
Moreover, although the Swiss do have the option of paying significantly
lower premiums if they are willing to shoulder a higher deductible,
Reinhardt cites a survey which reveals that only a "minority, mostly
younger population groups, have taken advantage of the ability to
switch among insurers. "
Furthermore, only about half of the respondents to the survey could
remember how much they currently pay for their health insurance, “which
does not point to the alert, price-conscious consumer of
consumer-choice theory,” Reinhardt observes dryly.
Yet even if the Swiss are not the world’s most conscientious health
care shoppers, individuals in Switzerland spend about a third less on
health care than the average American. How can that be? Time and
again, Herzlinger repeats the meme that consumer choice accounts for
Switzerland’s lower costs. And if she says it often enough, without
citing evidence, no doubt many Americans will believe her. But it just
Even a cursory glance at Switzerland’s system reveals that
government-enforced price controls on virtually everything from drugs
to doctors keeps a lid on health care inflation. The fees that
providers charge “are negotiated by the cartel-like associations of
insurers and clinicians under the watchful eye and heavy hand of
government” Reinhardt observes. And “since all insurers are bound to
the same prices for ambulatory care, and prices are negotiated between
insurers and individual hospitals for inpatient care,” there is little
room for the consumer to affect prices by comparison-shopping.
Finally, when it comes to ensuring that the Swiss are receiving
effective care, Switzerland’s Federal Department of Home Affairs
establishes the formulary for prescription drugs that it believes give
good value, while the Federal Department of Home Affairs decides which
lab tests and medical devices are to be covered by compulsory
In the end, Reinhardt suggests that “what is most impressive about the
Swiss health system is the role tight government regulation plays . .
. . One can plausibly argue that this regulation is chiefly responsible
for both the high quality and (relative to the United States) low cost
of Swiss health care.” Determined to make the case for consumer-driven care, Herzlinger takes
the opposite view arguing, in today’s WSJ that the Swiss government’s
web of regulations, requiring “an extensive minimum benefit package,”
while “micromanaging” both prices and products is precisely what keeps
Switzerland from becoming the unfettered consumer’s paradise that she
would like to see.
Herzlinger ends her Op-ed by warning that we shouldn’t “latch onto” the
Swiss model. After all, consider how much damage a government can do
when it interferes with market forces: “Imagine a car market in which
the government designs the vehicles and stringently oversees
distributors’ prices. Pretty soon,” Herzlinger speculates, “all the
cars would come with features we do not necessarily want—heated
seats—at a price we do not want to pay.”
Heated seats?? It’s hard to imagine even the most open-handed
progressive arguing that Congress should mandate heated seats.
Fuel-efficiency, on the other hand, along with safety features which
would make a fiery explosion less likely . . . that’s something wise
lawmakers might suggest. But don’t hold your breath.
Remember how long it took us to get seat belts?