Timothy T. Taylor Home Page
Journal of Economic Perspectives
Articles and Writing
Economics Textbook
Classroom Teaching
The Teaching Company
High School Pedagogy

Articles and Writing

October 28, 1992
"Tinkering with Health Care Isn't Enough - Germany and Japan have Decent Systems, But No One in the United States is Paying Attention"
San Jose Mercury News

By Timothy Taylor
<< Back to 1992 menu

AMERICA'S English-speaking heritage may be a major obstacle to reform of the health care system. It means that discussions of reform tend to focus on the systems of Britain and Canada, rather than the more useful examples of Germany and (to a lesser extent) Japan.

Britain created its National Health Service in the aftermath of World War II. Citizens pay for health care through their taxes, and register with a general practitioner. The doctor is paid partly according to the number of patients registered, and partly for the number of basic health care measures offered (like immunization). Hospitals receive an annual budget, which they must determine how best to spend throughout the year.

Britain's spending on health care, as a share of gross national product, is the lowest of any highly developed country. The methods for controlling cost include letting physical plant run down; having long waiting lists for elective surgery (like hip replacement); and simply denying some care. For example, men over the age of 55 cannot usually receive kidney dialysis.

If you believe in cutting health care spending in half, mainly through severe spending limits that lead to sharp limits on the availability of sophisticated care, the British system is a fine model. But even the British aren't very enthusiastic about the current state of their system.

Canada switched from U.S.-style health insurance to a national health system during the late 1960s, and completed the changeover in 1971. The Canadian system is administered province by province, and funded by a mix of federal and provincial tax dollars. Doctors are paid on a fee-for-service system, while hospitals receive funds in an overall annual budget. Private insurance that competes with the government program is illegal.

But although Canadians seem to have a deep affection for their system, several facts should be of concern to Americans.

Canada has been relatively unsuccessful in controlling the rise in health care spending. Canadian spending on medical care is well below U.S. levels -- 9 percent of gross domestic product vs. 12.4 percent in 1990 -- but health care spending in Canada is higher than in Japan, or any country in Europe.
Canadian health care costs have risen at about the same rate as U.S. costs for the last two decades; in other words, Canada spends less today only because it started from a lower base, and continues to have a younger population.

Some analysts claim that Canada's administrative costs for health care are lower than the United States', but two studies in the spring 1992 issue of the journal Health Affairs argue that such savings are probably low or non-existent.

Finally, Canada's health care system has the United States for an outlet. Those unable to have a procedure done in Canada often manage to find their way across the border. But if the United States were to adopt a Canadian-style system, it would have no similar outlet.

Germany's health care system dates back to late in the 19th century; Japan took the German health system as a rough model during the early 1960s. Germany has been relatively successful at holding down medical care spending -- it spent 8.1 percent of gross domestic product on health care in 1990 -- while providing universal health coverage.

Unlike Canada and Britain, the German health care system is heavily decentralized. More than 90 percent of citizens belong to one of 1,100 privately run "sickness funds," which collect money from employers and employees (like a payroll tax), and then negotiate with doctors and hospitals over the cost of care. Thus, those who work for the same company would usually belong to a number of different sickness funds.

For those below a certain income level, membership in a sickness fund is compulsory, and once you have chosen a certain sickness fund, you are not generally allowed to switch. If you have sufficient income and wish to leave the sickness fund system, you can buy private insurance and receive private care. But once you have left the sickness fund system, you are not permitted to return.

Although the level of health spending is not a government decision in Germany, as in Britain and Canada, the rate of increase in health care spending is publicly debated between the sickness funds and health care providers each year, and voluntary guidelines are set.

No country is completely satisfied with its health care system. For example, Britain and Canada are trying to introduce "internal markets," and to offer incentives for innovative, higher quality care. Germany is shifting away from reimbursing hospitals based on the number of days that patients stay, and is trying to hold down pharmaceutical prices.

Everywhere, the trick seems to be to use a combination of government guidelines and private incentives in balancing a variety of goals: providing economical primary and preventive care to all; rewarding those who find innovative new drugs or treatments; offering personalized care to patients; holding down the overall cost.

But in the United States, tinkering with the parameters of the system is no longer enough. Far too many people have no insurance; spending on health care is far too high. Surveys show that 90 percent of U.S. citizens think that major reform of the health care system is needed. They're right.

Americans, compared with citizens of other developed nations, are much less satisfied with health care and pay substantially more for it.


change needed

change needed

rebuild system

Health spending
as a % of GDP

Canada 56%



Netherlands 47% 46% 5% 8.0%
W. Germany


35% 13% 8.1%


42% 10% 8.9%
Australia 34%


17% 7.7%
Sweden 32% 58% 6% 8.8%
Japan 29% 47% 6% 6.5%
Britain 27% 52% 17% 6.2%
Italy 12% 46% 40% 7.7%
U.S. 10% 60% 29% 12.4%

Source: Opinion figures are from "Harvard-Harris-ITF, 1990 Ten-Nation Survey"; spending figures are from "OECD in Figures," 1992 edition, published by the Organization for Economic Cooperation and Development.

<< Back to 1992 menu