Free choice of sickness funds in social health insurance - theoretical foundation and empirical findings in Germany

Problem/Question to be Addressed: During the 1990s, government has introduced free choice of sickness funds and a new risk-adjustment scheme in the social health insurance scheme of Germany. Price competition is supposed to increase incentives for sickness funds to act as prudent buyers of health services on behalf of their enrollees. A crucial precondition for effective price competition is that consumers are inclined to search for lower-priced substitutes. We examined whether this precondition is fulfilled in Germany. Therefore, we estimated to what extent consumers are sensitive to contribution rate differences among sickness funds. Data and Methods Used: We estimated price elasticities of choice for individual funds as well as for types of funds (over the period 1996-2001). Five different types of sickness funds can be distinguished: regional funds (AOK), company-based funds (BKK), guild-based funds (IKK) and two types of substitute funds (EAN and EAR)). We constructed a set of panel data from the 5 types of German sickness funds (including aggregated data of all sickness funds per type) and from 46 individual German sickness funds. Basically we estimated price elasticities using the following parameters: Number of subscribers per individual or type of fund, contribution rate, dummy per individual or type of fund, dummy per year. Results: Price elasticity of sickness fund choice in Germany is quite high and rapidly increasing over time. Several exit surveys of enrolees support this result. Enrolees state that difference in contribution rates are their primary reason to switch to another fund. Conclusions: Contribution rate differences are very high in Germany and consumers are used to switching because some freedom of choice existed prior to the reforms. Furthermore, employers play an important role in facilitating and encouraging consumer choice since they pay half of contribution rates. Price competition among German sickness funds is strong but motivates German sickness funds to focus on selecting favorable risks rather than on improving efficiency, because of an inadequate risk-adjustment methods and very limited tools to manage care.