There is little doubt that the cost of health care and universal coverage will be a major topic discussed at the upcoming presidential debates. A key debate will likely center on the Biden-Sanders Unity Task Force’s recommendations[1] released earlier this year proposing a public option to compete against existing private insurers. The recommendations only outline a public option framework, so the details, both logistical and financial, will be key to moving forward. While recent articles have assessed the state-level public options in Washington State[2][3] and New Mexico[3], we look internationally to Germany and Australia to evaluate how their health care systems have achieved universal coverage by delivering public health insurance. Both countries have a private component in the health insurance system: Germany allows individuals to purchase substitutive private insurance based on income, and Australia takes it a step further by creating incentives for all citizens to enroll in supplemental private insurance. We examine the framework of each system, how the public-private insurance dichotomy is organized, and some key takeaways for the United States.

Two-Tier Public-Private Insurance in Germany and Australia

Germany

The German health care system, often referred to as the Bismarck Model, mandates health insurance for the entire population. The system is split into statutory health insurance (SHI) and private health insurance (PHI). Hospitals and providers treat all patients regardless of the type of insurance they have, with roughly 88% of the population having SHI and 11% having PHI.[4] The “public” SHI is provided through approximately 110 nonprofit “sickness funds” that compete for patients through deductibles, bonuses, and issues of efficiency.⁴ The sickness funds’ costs are controlled by prohibiting physicians from charging above a set price for services in the SHI benefit catalog, and by allowing the sickness funds to negotiate drug prices with pharmaceutical manufacturers.[5]

While the sickness funds may use various cost-control methods, their financing mechanisms are uniform, all through wage contributions that are set at 14.6% of wages, with employers and employees splitting the cost. The contributions, along with general tax revenues, are pooled and distributed to individual sickness funds using morbidity-based risk-adjustment in order to prevent adverse selection. Additionally, all individuals must pay an income-dependent supplementary contribution (approximately 1% of wages) directly to their respective sickness fund.[6] Together, the 14.6% wage contribution and 1% supplementary contribution are used to finance each fund.

Private health insurance has separate requirements and financing. Those eligible for private health insurance include high-income individuals meeting a specific income requirement, civil servants, and the self-employed. Out of all eligible individuals, only 25% opt into private insurance.[4] Additionally, risk is assessed on entry, so insurance contracts are based on lifetime underwriting. Therefore, private health insurance is most appealing for young, healthy individuals with high incomes.

Australia

The health care system in Australia is mixed centrally and regionally administered, universal public health insurance. All citizens are automatically enrolled and guaranteed free public hospital care. The states own and control the delivery of services for public hospitals and community health. On the financial side, the states provide a majority of the funding for their hospitals through general tax revenue. There is also a national Medicare Levy: a mandatory 2% payment of personal taxable income for all individuals making more than approximately AUS$22 thousand.[5] Finally, there is a Medicare Levy Surcharge that applies only to individuals making above AUS$90 thousand who do not have private health insurance.

In Australia, private health insurance is supplemental and generally used to pay for hospital care, dental care, and other services not covered under the public health insurance program. Roughly 46% of individuals purchase private insurance for hospital care and 55% purchase insurance for dental care and other services. Overall, private health insurance provides broader and faster access to hospitals, providers, and nonemergency services. While enrollment in PHI has been trending down in what some are calling a “death spiral,” the Australian government has created multiple enrollment policies in an attempt to keep the industry alive.[6] Besides the Medicare Levy Surcharge, the Lifetime Health Cover encourages early enrollment in PHI since the base premium increases annually each year after age 30. Still, enrollment has been falling, particularly in young, healthy individuals, due to rapidly increasing premiums.[7] The role of private health insurance, as well as the government’s role in preserving it, constantly changes as the major political parties advocate on opposite sides.

Lessons from Germany and Australia for the United States

While the majority of OECD countries have universal health insurance, the United States continues to fall behind. As we’ve seen with the past few presidential elections, health care coverage and health care spending are key issues that arise time and again. Presidential candidate Joe Biden’s proposal for a public option[1] is likely to be a contentious topic in the upcoming debates in which he will certainly be asked to clarify the details of his proposal and how it will bring us closer to universal coverage. While the proposal could be a useful step toward health care reform, there are several lessons from Germany and Australia that can provide insight on how a successful two-tier public-private health care system can work.

Ensuring Universal Coverage: The Individual Mandate

Individual participation is fundamentally necessary in building a strong, universal health care system. In Germany, health insurance is mandatory, and non-earning dependents are insured free of charge. In Australia, all citizens are automatically enrolled in the public health insurance program, with the option to add supplementary private insurance. However, the private insurance market is now facing a potential “death spiral.” Without mandatory individual participation, the US could face a similar death spiral. These systems only achieve universal coverage because everyone is enrolled in their respective public health insurance systems.

The individual mandate in the United States has had a turbulent history but is necessary to ensure a balanced national risk pool.[8] While a recent Kaiser Family Foundation report found that the repeal of the individual mandate didn’t make the insurance pool significantly less healthy in 2019,[9] the current COVID-19 pandemic is likely to throw the entire system into disarray. A major reason why people are uninsured is the high cost of premiums, and as the pandemic impacts millions of jobs across the country, it is likely that the number of uninsured will continue to rise. If the young and healthy were to begin opting out in large numbers, it could disrupt risk pools, causing insurance companies to raise premiums. An individual mandate, set high enough to encourage total participation, will ultimately help drive down costs.

With a public option, the government can provide individuals with high-quality affordable insurance rather than pushing them toward unaffordable private insurance. In Germany, SHI is of high enough caliber to act as an appreciable competitor with private insurance. The German system is essentially the inverse of the current US system, with public insurance as the default, and the potential for some to opt into private health insurance. If the United States can pose the public option as a viable alternative to private insurance, achieving universal coverage under an individual mandate will be significantly more feasible.

The Value and Complication of Choice: Risk-Selection

In both the German and Australian systems of public-private health insurance, choice plays an integral role. A US public option could similarly encourage choice within the market while pushing for greater competition and innovation. However, the United States will need to find ways to combat the risk selection that may arise from a public option. Germany currently uses morbidity-based risk-adjustment calculations to distribute finances equitably, meaning that sickness funds with higher-risk patients will receive greater financial support, thereby disincentivizing cherry picking. In Australia, risk-selection is less of an issue in public insurance because all individuals are enrolled in the same system. Fundamentally, a successful health care system needs an effective way to limit biased risk selection.

In the United States, a potential method to minimize risk-selection between the public option and private insurance is through competition. If the public option is comparable to private plans with regard to cost-sharing and quality, the risk of healthy individuals dominating the private market while leaving the sick in the public option is minimized. To ensure these low premiums and high quality, it is necessary to mandate provider participation. Without such a mandate, providers can opt out of the public program because of its generally lower reimbursement rates. We have already seen provider pushback against Medicare prices in Washington State’s public option, so voluntary enrollment in a national public option would only amplify the negotiation power of the providers.[2] If reimbursement rates are too low, providers will opt out and shrink the provider participation pool. If reimbursement rates are too high, there may not be substantial cost savings for consumers. Placing the power of participation into the hands of providers will inevitably result in the second scenario. Therefore, mandatory provider participation will guarantee both an expansive provider network and considerable premium reductions.

In Germany, hospitals and providers do not cherry pick profitable patients, they must treat all patients regardless of their insurance, public or private. In doing so, they create equally attractive provider networks, levelling the playing field between public and private insurance. A level playing field allows for greater competition and greater choice. In any reform scheme, whether it be a public option or a Medicare buy-in, provider participation must be mandatory in order to minimize risk-selection.

Equity in the Nanny State

Of British origin, the term “nanny state” has been used to describe overbearing and often unwelcome government policies that dictate how people should behave. In addition to past policies, such as requiring seat belts and prohibiting smoking in certain areas, the public option may be considered a “nanny state” solution. Many consider government provision of its own competing health insurance to be an overreach of what government can and should dictate. However, in this long-standing debate on the role of government, it is important to remember the issue of equity. The market is not designed to be equitable; it is designed to be efficient. While efficiency is the best model for delivering inessential commodities, equity is what we should strive toward when delivering basic human rights.

Ensuring that all individuals, regardless of age, race/ethnicity, income, gender, and pre-existing conditions, have access to health care is essential in building up this country. If the market is unable to deliver this, a nanny state public option can by bringing us closer to health care equity while simultaneously preserving choice.

Conclusion

The full implementation of either the German or Australian system in the United States is implausible because we would need to overhaul the entire public insurance sector. However, these two systems have several components that can be adopted in any reform plan. First, universal coverage can be achieved with a robust two-tier public-private health care system. Second, though maintaining choice is integral to the US system, we will need ways to minimize the potential for biased risk-selection between the public and private sectors. Last, we need to highlight the necessity for equity when delivering a basic human right. Though each component will face considerable difficulty in implementation, all are integral to developing a successful public-private system committed to affordable, high-quality health care coverage.

Authors’ Note

We thank Dr. Reinhard Busse (Technische Universität Berlin) and Dr. Stephen Duckett (Grattan Institute) for their guidance in understanding the German and Australian health care systems, respectively.

Disclaimer

The views and opinions expressed in this article are those of the authors and do not reflect the official policy or position of the Healthy California for All Commission on which Richard Scheffler serves.[10]

References

[1] Biden-Sanders Unity Task Force. Biden-Sanders Unity Task Force Recommendations. https://joebiden.com/wp-content/uploads/2020/07/UNITY-TASK-FORCE-RECOMMENDATIONS.pdf. Published July 8, 2020. Accessed September 21. 2020.
[2] Capretta JC. Washington State’s quasi‐public option. Milbank Q. 2020;98(1):14-17.
[3] Sparer MS. Redefining the “Public Option”: Lessons from Washington State and New Mexico. Milbank Q. 2020;98(2):260-278.
[4] Busse R, Blümel M, Knieps F, and Bärnighausen T. Statutory health insurance in Germany: A health system shaped by 135 years of solidarity, self-governance, and competition. Lancet. 2017;390(10097):882-897.
[5] Mossialos E, Djordjevic A, Osborn R, Sarnak D. International Profiles of Health Care Systems. The Commonwealth Fund. https://www.commonwealthfund.org/publications/fund-reports/2017/may/international-profiles-health-care-systems. Published May 31, 2017. Accessed September 21, 2020.
[6] Duckett S, Nemet K. The history and purposes of private health insurance. Grattan Institute Working Paper No. 2019-05, July 2019.  https://grattan.edu.au/report/the-history-of-private-health-insurance/. Accessed September 21, 2020.
[7] Duckett S, Cowgill M. Saving private health 2: Making private health insurance viable. Grattan Institute. Report No.2019-13; December 2019.  https://grattan.edu.au/wp-content/uploads/2019/12/926-Saving-Health-2.pdf. Accessed September 21, 2020.
[8] Jost T. The Supreme Court on the individual mandate’s constitutionality: An overview. Health Affairs Blog. June 28, 2012. https://www.healthaffairs.org/do/10.1377/hblog20120628.020762/full/. Accessed September 21, 2020.
[9] Fehr R, McDermott D, Cox C. Individual insurance market performance in 2019. Kaiser Family Foundation. https://www.kff.org/private-insurance/issue-brief/individual-insurance-market-performance-in-2019/. Published May 13, 2020. Accessed September 21, 2020.
[10] Office of Governor Gavin Newsom. Governor Newsom announces healthy California for all commission. December 18, 2019. https://www.gov.ca.gov/2019/12/18/governor-newsom-announces-healthy-california-for-all-commission/. Accessed September 21, 2020.

About the Authors