A combination of demographic changes and
rising medical costs are placing a huge and growing burden on
Europe’s primarily state-funded health care system. Many countries
may yet be forced to follow the example set by the Netherlands,
which has placed private insurers in the forefront of providing a
solution.

Health care expenditure in Europe is rising inexorably, in the
process placing an increasing burden on government finances. It is
also creating a situation that numerous studies have stressed will
ultimately require radical reform, which in turn will almost
certainly demand greater participation by private insurers.

Indicative of the problem, a new study by the Comité Européen des
Assurances (CEA), the European Federation of Insurers and
Reinsurers, reveals that in the 23 countries covered by its
membership the average share of GDP dedicated to health care was
8.6 percent in 2006. Based on data from the Organisation for
Economic Co-operation and Development (OECD) this compared to about
4 percent of GDP four decades earlier.

It is a trend that threatens even more problems ahead as Europe
contends with a stagnant yet aging population. Indicatively,
according to the European Commission, the total population of the
European Union (EU) as it is now constituted will remain at about
500 million for the next four decades while the number of
inhabitants aged 65 and over will double to almost 60 million by
2050.

Another factor placing upward pressure on health care spending is
increasing longevity. The impact on health care costs of increasing
longevity was illustrated by a study conducted by independent
Milan-based EU policy research organisation Fondazione Rodolfo
DeBenedetti (FRD). Using French data for 2000, FRD noted that
average annual health care expenditure for a 30 year-old person was
about €1,110. This increased to €1,500 at 50 year-old, €2,800 at 65
and €3,600 at 70.

Many estimates have been made as to what portion of European GDP
health care costs will absorb in future. Though there are wide
variances all point one way: up.

As a reliable indication, an OECD forecast estimates health and
long-term care will absorb between 10.6 percent and 13.2 percent of
the GDPs of Europe’s 10 largest economies by 2050. The variance
depends on the effectiveness – or otherwise – of health care cost
containment strategies.

Growing off a huge base

The anticipated rising trend in health care spending in absolute
terms and as a portion of GDP is off an already substantial
base.

According to the CEA, health care spending in the 23 countries
covered by its membership totalled €961 billion ($1.32 trillion) in
2006. Average health care spending per capita was nearly
€2,400.

Based on the trend in recent years for health care expenditure in
Europe to rise at about 2.5 percent annually in real terms and the
2.2 percent inflation rate recorded in the EU in 2007, total
expenditure in 2007 would have reached the €1 trillion level.

The EU’s annual inflation rate of 3.6 percent in September 2008
indicates that total health care expenditure will reach about €1.07
trillion this year. This again assumes a 2.5 percent increasing
expenditure in real terms – an assumption that could prove
conservative.

According to the CEA, between 1996 and 2006 health care expenditure
increased at a CAGR of 3.6 percent and it is only since 2001 that a
slight slowdown in the growth has been observed. The slowdown may
reflect measures taken by some

governments to control costs, noted the CEA.

Of total health care expenditure the vast proportion is funded by
the public sector. In 2006, for example, the public share of
health spending was 77.5 percent, down from 80 percent in
2005.

The decline in 2006 was, however, caused by the privatisation of
the health care system in the Netherlands. Excluding this change,
the CEA estimates that the public sector’s share of health care
expenditure was 80.2 percent in 2006.

In total private health insurers paid benefits of €74.1 billion in
2006, 53 percent more than in 2005. This substantial increase was
again because of the privatisation of the Netherlands’ health care
system, and excluding the influence this had the rise in benefits
paid by insurers was a far more modest 1.4 percent. The CEA noted
that the 1.4 percent increase was in line with the growth rate
evident since 2002.

In total, there were 674 insurers in the CEA’s member countries in
2006. Of these 162 were specialist health insurers which the CEA
defines as those whose health insurance business accounts for more
than half of their total business.

According to the CEA, in 2006 the 674 insurers generated €85.649
billion in gross written premium income, up 41.4 percent (38.9
percent in real terms) compared with 2005. Excluding the
Netherlands the CEA calculated the increase in premium income in
real terms at 3.6 percent which, noted the CEA, is in line with the
trend observed in previous years.

Diversity abounds

The CEA stressed that the size and composition of private funding
for health services differ significantly between countries. With
the privatisation of its health care system in 2006 the Netherlands
shot into the lead in terms of private sector funding, which in
that year accounted for 56 percent of the country’s total health
care expenditure of €65.68 billion.

Of the Netherlands’ total private sector health care expenditure of
€36.9 billion in 2006, health insurers were responsible for €31.88
billion, or 48 percent, of total expenditure compared with 14
percent in 2005. The balance of private sector expenditure – 8
percent of the total – represented out-of-pocket expenses paid by
households.

The emergence of private insurers as a key factor in the
Netherlands’ health care system ousted Germany from its leading
position in terms of health insurance premium income.

In 2006, according to the CEA, the Netherlands’ health insurers
generated gross premium income of €31.37 billion or 36.6 percent of
the total industry. In Germany premium income totalled €26.57
billion, representing a market share of 31 percent.

Germany ranks as the largest spender on health care – €205.6
billion in 2006, ahead of France (€156.6 billion), the UK (€156.4
billion), Italy (€124 billion) and Spain (€69.1 billion).

Private insurers have a significant role in France and Germany
where they accounted for 13 percent and 11 percent, respectively,
of total health care expenditure in 2006.

In Slovenia, though a far smaller market, private insurers also
accounted for 13 percent of total expenditure of €1.85 billion in
2006.

Denmark also ranks high among countries in which private insurance
plays a notable role. In 2006 private health insurers contributed
about 10 percent of total health care expenditure of €12.9
billion.

The CEA noted that in 2006 private insurance accounted for 8.1
percent and out-of-pocket expenditure 12.5 percent of total health
care expenditure in its member countries in 2006. If the
Netherlands is excluded, private insurance covered 4.8 percent of
total expenditure in 2006 compared with 4.9 percent in 2005.

Notably, the country with the lowest contribution by the private
sector towards health care expenditure is the UK – a mere 2.4
percent in 2006. However, private health insurance is still a
significant premium generator in the UK – €4.78 billion in
2006.

Also of note is Switzerland where the private sector contribution
was 39.4 percent of total expenditure of €34.96 billion in 2006.
However, private Swiss insurers – which act exclusively to
supplement social security cover – contributed only 8.6 percent of
the total, leaving households with out-of-pocket expenses of about
€12 billion.

Switzerland also ranks as the European country with the highest per
capita annual expenditure on health care – €4,700 in 2006. This
compares with what the CEA noted was a range of between €2,000 and
€3,000 per capita in most European countries although at average
expenditure of €4,021 per capita in 2006 the Netherlands also
stands out as an exceptionally high-cost country.

The Netherlands’ model

Undoubtedly the most innovative move yet made in Europe to
restructure a health care service came in January 2006 when the
Netherlands introduced its new Zorgverzekeringswet, or health
insurance law (HIL). The new HIL and a number of new, related laws
resulted in the merger of the former state sickness fund scheme
with the private health insurance industry into a single, mandatory
scheme for all residents of the Netherlands.

In a study, independent research body the Bertelsmann Stiftung’s
Health Policy Monitor (HPM) outlined the objectives of the new
health care regime. Among the most important is to make health care
more consumer-driven, increase market competition and enhance
consumer choice.

In addition, the new laws heralded a new era of competition in the
country’s health care insurance market by making it easier for new
entities to enter the health care insurance market.

“If they meet the criteria laid down in legislation they will be
licensed,” noted the HPM. According to the CEA, in 2006 there were
33 insurers providing health insurance, 18 of which are specialist
health insurers.

“One may say that there is now significant market competition in
health insurance,” concluded the HPM.

At the heart of the Netherlands’ new system is a health insurance
basic package, a minimum health insurance plan covering all
essential health care that must be offered by insurers and must be
purchased by all individuals. Failure to purchase the basic package
renders individuals liable for a fine equal to about 130 percent of
an annual premium.

According to the CEA insured parties pay a fixed premium – the
nominal premium – which is based on a government guideline of
€1,050 per year. An insurer determines the level of the nominal
premium, which may vary up to €25 above or below the government
guideline. Insurers are also obliged to provide the same care to
everyone for this premium and cannot refuse to insure any
individual for reasons such as age, gender or health profile.

The CEA noted that the Netherlands’ system gives the insured a
large degree of choice, since he or she can choose:

• Between any health care insurers and switch insurers
annually;

• The level of the nominal premium;

• The type of policy (care in kind or refund of costs) and the
service provided by the insurer;

• The level of the voluntary excess from €100 to €500; and

• The option to take out supplementary insurance for care that is
not included in the basic package.

As an incentive to limit spending, individuals who incur low health
care costs receive a rebate of up to €255 directly from their
insurer at the end of each year.

Almost half the funding of the Netherlands’ health system is
covered by the nominal premiums, according to the CEA. To
compensate low-income earners unable to afford the nominal premium,
the CEA explained that the government provides a health care
allowance in the form of monthly tax credits paid into their bank
accounts.

In addition to nominal premiums, the CEA noted that individuals
must also pay a contribution of 6.5 percent of their income. This
contribution is levied up to the first €30,015 and therefore
amounts to a maximum of nearly €2,000 per year. Employers are
obliged to reimburse this contribution to their employees.
Self-employed persons and pensioners pay an average of 4.4 percent
of income.

Income related contributions and nominal premiums received by
insurers are put into a fund managed by the College voor
Zorgverzekeringens (CvZ) – or Health Care Insurance Board.

The CvZ manages the pooled funds by employing a variety of criteria
such as age, gender and region to enable it to distribute the funds
in a manner which equalises financial risks borne by
insurers.

Growing popularity

In addition to the Netherlands, private insurers are making headway
in other European countries with a notable driving factor being the
need to retain key staff, reveals a survey undertaken by
consultancy Mercer. Mercer’s survey conducted between May and June
2008 covered nearly 800 companies in 24 European countries.

“Over two-thirds of respondents said they would struggle to retain
top-performing employees if they did not offer good health
benefits,” said Steve Clements, a principal at Mercer. “These
programmes are particularly valued as a staff attraction tool by
companies in emerging Eastern European countries where migration to
western economies has produced a scarcity of talent. There is also
evidence that health benefits often rank as the most highly-valued
company benefit in those countries where employees perceive
national health provision as relatively poor.”

However, Mercer noted that health care benefits are costly, and
according to its research European employers are spending an
average of 5.3 percent of their total payroll costs on health
benefit provision. In countries with a general taxation financing
model for their public health system rather than a social
welfare-based model costs tend to be higher, added Mercer.

An example of the former model is the UK, where health benefits
account for an average of 7 percent of company payrolls. This is,
however, still low compared with the US – where employers spend
15.4 percent of payroll on health benefits, said Mercer.

Mercer noted the high cost to employers in the US is despite
employees commonly paying about a quarter of the cost of their
health benefits. By contrast Mercer’s research indicated that 57
percent of European employees do not pay towards their
employer-provided health benefits.

“European employers still have some room to manoeuvre to balance
the scope of cost and benefit,” commented Clements.

And indeed, European companies are facing rising health benefit
costs. Mercer’s research indicated that the cost of health benefits
in 2007 increased by an average of 5 percent per employee.

UK employers face an even stiffer challenge, with Mercer’s
proprietary data indicating that medical inflation is currently
running at 10 percent per year. If this rate of inflation
continues, a medical plan costing an employer £1 million in 2008
will cost around £1.6 million in 5 years time.

Not surprisingly Mercer’s survey revealed that 59 percent of
employers across Europe were likely to make changes to their
programmes to contain cost increases. In response to what these are
likely to be 38 percent said they would restrict the scope of
coverage while 34 percent would shift the cost to employees.

However, Mercer’s survey left
no doubt that employers were determined to retain health benefits.
While 40 percent of respondents stated that they were most
concerned with the cost of their employee health programme, 52
percent said they were more concerned about the impact of employee
health on productivity and 46 percent said they were more concerned
about remaining competitive in the area of health benefits.

European employers also seem to be coming to terms with the
probability that their responsibility for providing health benefits
is likely to increase.

Of respondents to Mercer’s survey, 72 percent stated that the
varied social welfare reforms taking place in the EU will increase
the pressure on them to provide private health care benefits.
Mercer noted that these sentiments were particularly prevalent in
countries with strong social insurance models. This includes
France, Belgium, the Czech Republic, Germany, Finland and
Sweden.

However, Mercer added that employers in countries with general
taxation-financed health care also anticipate increased pressure to
provide private health care benefits. In the UK for example, of
companies surveyed 70 percent believe that they will face increased
pressure.