Introduction¹

Robert E. Moffit: We Americans may enjoy unprecedented prosperity and undisputed military power, but we have no monopoly on wisdom, and we can certainly learn from the rich, practical, day-to-day experience of other nations. This is especially true in the complex and difficult area of health care policy.

Meeting America's Challenge
President George W. Bush and leading Members of Congress from both political parties have declared their intention to reform Medicare, the huge government health insurance program that covers 40 million senior and disabled citizens. They also have proposed to improve substantially the functioning of the broader private health insurance market with a view to reducing the large number of Americans who are without private insurance coverage while expanding consumer choice of health care plans and personal control of health care decisions.

The "Single Payer" Response
However, a significant group of public officials, in Congress and in the states, as well as several prominent American health policy experts, are suggesting a very different approach. In contrast to the President's bipartisan approach, they would prefer that the United States adopt a health care system based on the European, or Canadian, model: government management of the financing and delivery of health care services. Under such a scheme, perhaps most often described as a "single payer" system, the government is the universal insurer of health care for all citizens, and the government insurance is financed by general taxation.

Proponents of the "single payer" model or European variations of government management of the health care system often argue that changing to such a system would solve America's major health care problems. They say it would guarantee a superior performance from providers for Americans who are currently benighted by private insurance arrangements run by crass, insensitive, and overpaid health insurance profiteers. They say such a change would ensure a far more equitable, fair, and rational delivery of medical services to the American people.

The Big Question
But do we want the government to control the financing and delivery of health care? From the congressional debate on the "patients' bill of rights" for private insurance to the reform of the Medicare and Medicaid systems, this is, at bottom, the fundamental policy question. We know well the weaknesses and the distortions that afflict the private employment-based health insurance market. Government management of the health care system on a universal basis is another matter.

For Americans, the good news is that we do not have to rely on the noble intentions of public officials, the promises of superior performance by government officials, or the abstract formulas of public administration theory. On the crucial issue of how government institutions behave in practice in the management of health care systems, we have access to a more than ample body of experience.

The European Experience
Recently, The Heritage Foundation, in conjunction with the Centre for the New Europe (CNE), a prominent European public policy institution based in Brussels, Belgium, ² held an international conference in Washington on precisely what Americans can learn from the European experience in health care and pension policy. With the kind assistance of Hardy Bouillon, President of the Centre, the presentations at the Heritage-CNE forum offer American policy experts a keen idea of:

• What works and doesn't work in practice,
• What steps are being taken to improve European health care systems, and
• What key lessons the European experience holds for Congress, state legislators, and the American people with respect to the reform of public health care programs.

The advice comes from an impressive array of European health care policy experts: Philippe Manière of France, David Green of Great Britain, Paul Belien of Belgium, Johan Hjertqvist of Sweden, and Friedrich Breyer of Germany.

Some Surprises
Americans will probably be surprised to learn from the remarks that follow that Switzerland's health care system relies almost entirely on a system of private insurance. They might be surprised to learn that there is a growing reliance on the private sector in the financing and delivery of health care in Europe, particularly in the Netherlands, Germany, and Sweden. Even the labor government in Britain has entered into an agreement with representatives of the private health care industry to improve health care delivery in certain vital areas.

Reforms in Europe, where they are diligently pursued, have taken on a certain urgency. A major factor affecting recent health care policy making in Europe, including Privatization efforts, is the rapid aging of the European population. Continental Europe is comprised largely of countries that have rapidly aging populations. Although life expectancy has increased, fertility rates have decreased, and much of Europe faces demographic stagnation. This unfavorable ratio of old to young persons is far worse in major European nations than in either Canada or the United States.

The unfavorable shift in the demographic balance is particularly rapid in France and Germany, and will impose tremendous financial pressures on their existing health care-social security arrangements. America's Medicare and Social Security reformers should take note.

Some Lessons
For Members of Congress and state legislators, there are some valuable lessons from the European experience that should be less surprising.

• If you insist on government management of the health care system, do not expect freedom from waste, inefficiency, or inequity in the delivery of care (look at France).
• If you want to promise citizens a national or state program of universal insurance coverage, don't expect that you will be able to deliver universal access to high-quality health care. You won't and you can't (look at Britain).
• If you want to fix prices for medical services, prescription drugs, or other medical devices, don't expect demand for these goods and services to be met or investment in research and development to continue apace. It won't (look anywhere).
• If you insist, with a straight face, that in a government-run health care system, all of your fellow citizens will be treated equally -- regardless of their class, station in life, or disease condition -- you are not merely enthusiastic or well intentioned. You are lying.

Health care policy is complex and difficult. In the reform of America's public health programs, and in creating new opportunities for individuals and families in the private markets, policymakers at the state and federal levels should learn as much as they can about what works and what doesn't in every health care system. In that way, they can better determine what should and should not be done here. The experts assembled by the Centre for the New Europe who came here to speak are an excellent resource.

Robert E. Moffit, Ph.D., is Director of Domestic Policy Studies at The Heritage Foundation.

Hospital staffing brings an added fiscal burden. No tasks are outsourced, since outsourcing is something that unions strongly oppose. The staff of an average French hospital includes carpenters, electricians, cooks, and people in charge of laundry.

Rising Expenses
Nearly all of the doctors outside of hospitals are "chartered" -- that is to say, their fees and the cost of their prescriptions are systematically refunded to the "assuré sociaux" who have national health care coverage, i.e., virtually every person in France. Any doctor who has a diploma has a right to be chartered upon simple request: The government cannot legally refuse to charter him. In other words, a diploma guarantees a right to public expenditures.

Meanwhile, the French can consult with as many doctors as they wish, as often as they wish, receiving refunds for their medical expenses that are as high as 70 percent to 100 percent. Any unpaid balance is paid by the mutual companies that most employers subscribe to for their employees. A patient does not pay for his doctors, and there is no gatekeeping for doctors' visits, whether to general practitioners (GPs) or specialists.

As might be expected, under this system, there are people who consult with doctors as often as five times a week. This is especially true of older people because they have plenty of time and enjoy being able to talk about their problems with someone.

When the demand for doctor care is met by a guarantee of unlimited services, with no costs and no constraints, the result, of course, will be a boom in health care consumption, and that is what France is experiencing. There is currently a 5 percent to 8 percent increase in expenses per year in real terms, resulting in enormous deficits and even greater problems when the rate of unemployment rises. When employment rates improve, the deficits are eased because more taxes come in. But as soon as employment falls again (which is not so uncommon in France), deficits come back, and they are here to stay as long as the system is not changed. In a futile effort to deal with this imbalance, the government issues continual prorogations of temporary taxes to pay for the deficits.

Cultural Factors
France's health care system was created in 1946-1947, just at the end of World War II and a time when the people who were in charge of France were given unlimited legitimacy because they had opposed the Germans. As a result, the historical legitimacy of France's state-oriented system makes it very difficult to challenge or change today.

"Unblocking the Money"
The system is also immune from criticism, in spite of waste and mismanagement, because it is rooted in the economic culture of France, where there is a general belief that the government can always step in with needed funds when a problem arises. When people talk about addressing deficits, they talk about the state "unblocking" money. This phrase -- to "unblock" money -- is very common in the French political and media arena. There is an underlying assumption that there is some huge amount of money that is typically blocked by evil politicians and (thank God) can be unblocked during times of crises, such as a flood or hurricane. Most of the people I know in France cannot seem to understand that there is no money "blocked" anywhere and that the government needs to raise money before it can give it away.

In the United States, when funding is discussed, it is not uncommon to hear that "the taxpayer will pay" for it. In France, it is said that "the government will pay" for it. There is a broadly based misconception that there is a pool of money somewhere that can be tapped without limits. In such a cultural environment, it is very difficult to implement reforms and to convince people that, in funding a social system, it is crucial to balance accounts.

"Medicine Liberale"
In France, physicians and other medical professionals form a powerful lobbying bloc that opposes any restriction of medical consultation. They invoke a right to what has been called "medicine liberale" -- the belief that all people have a right to consult any doctor. There is, also, a widely held belief that any Privatization or entry of competition in the arena of health insurance would only promote the interests of insurers and health care providers at the expense of their clients' health.

This attitude is central to the problems faced by France and continental Europe as a whole, and it is a factor that should not be underestimated by scholars and researchers. Many choices made collectively by the European people cannot be understood from a U.S. perspective.

This element of French culture is what I call an assumption of a "disjunction of interest." In the United States, most people do not think of it as impossible that what is in John's interest may also be in Peter's interest, but in Europe, there is a broad belief that there can be no common interest with the exception of the unifying entity of the state. As a result, any private agent who strives to reform a state-owned or socialized system (even one that clearly does not work) is treated with suspicion. The worst offense is to pursue private interest. This explains the French people's acquiescence with high taxation and their resistance to reform -- the fear that reform would be in the interest of some particular category of the people.

Wide-Ranging Effects
The devastating effects of such a system are far-reaching. Pharmaceutical companies and hospitals, for example, are becoming more and more constrained. Rather than addressing the need to reform the system, the government opts for a quick fix -- imposing homothetic price cuts. According to this lazy solution, the organization in charge of managing the health care simply tells all the producers of pharmaceuticals that, because expenditures are too high, they must cut all their prices, for example, by 5 percent.

This blanket policy is irresponsible. In certain fields of medicine, more investment is needed to support research and development. In other fields, there may be so much waste that prices should be cut not only by 5 percent, but by 30 to 50 percent. But to develop a well-targeted policy would require investigation and reform, which seems to be unthinkable to those who are currently managing the system.

As a result of failed policies, certain hospitals are now experiencing labor shortages. Recently, a hospital in Lyon was so desperate for nurses that there was consideration of importing nurses from Greece and Portugal. Fortunately, just in time, the hospital recognized that this would have been a recipe for disaster, given that nurses in Greece speak Greek and nurses in Portugal speak Portuguese while, typically, the people who are in French hospitals are French and speak only French.

The research and development area of pharmaceuticals has suffered from the cash-strapped health care system. Whenever a new drug arrives on the market, negotiations are made to determine the rate of refund that the health care body will accept. In comparison with other European countries, France's rate of refund for prescription drugs is very low. As a result, research and development is not funded and France's pharmaceutical industries, which ranked third in the world in 1975, have not produced a cutting-edge product within the last 20 or 25 years.

On the other hand, there are some companies that have learned to play the system to their advantage. In order to help the small laboratories (that never invent a thing) to make a profit and keep their people employed, the state has agreed to offer refunds for products that would be considered ineffective in any other country. There is, for example, a very popular drug in France that women use for "jambes lourdes" (heavy legs). This product is used in no other country because it has virtually no effect. Yet the people in France who use it have their costs refunded by the state. This is nothing less than a "gift" from the French state to the small pharmaceutical company that produces that product. In other instances, it has been reported that some pharmaceutical industries have made arrangements with the state to purchase official authorizations to market a product.

Another perverse effect of a system that promotes irresponsibility is that people abuse medicine and drugs simply because they are "free". people who visit their doctor, or multiple doctors, five times a week receive many prescriptions, which they often use together. Honest doctors would warn their patients of the dangers of mixing medicines. When two or three drugs are combined, it is difficult to predict what may happen, but when five to seven drugs are taken together, it is impossible. The only certainty is that the person's health will not be improved. In many cases, people suffer serious disorders only because they are taking too many drugs. Were they to quit taking all but the one or two drugs that were truly necessary, many of them would recover.

Finally, the system's waste of massive amounts of money and energy is having a very negative effect, not only economically but sociologically as well. Everyone is aware that the system cannot be sustained, but there is no reform. Therefore, French people tend to feel less confident and more reluctant to spend, invest, or create; they know a crisis in the health care system is inevitable.

Stubborn Allegiance
In spite of all that has been said about the flaws and failures of France's health care system, France miraculously appears to thrive. It is still a very wealthy country with quite robust economic growth and -- if one makes the reasonable assumption that half of the officially unemployed are happy not to work -- even its unemployment rate is acceptable. France ranks first, before Japan, in terms of per-capita exports, and it is the fifth richest country in the world in terms of GDP. It seems that a situation that should be hell is almost paradise.

Before governments took responsibility for the poor, it was generally accepted that health care was not exactly like other consumer goods. The provision of medical care has always had a moral dimension. Just as decent human beings would not let someone else starve, neither would they let someone die or suffer because of a lack of health care.

Before it became a government responsibility, doctors provided free care for the poor, or charities paid the doctors. Some hospitals and doctors charged according to income. Provident associations were created for people on low incomes: They paid what they could afford, and donors paid the rest. Friendly societies organized pre-payment schemes along mutual lines.

Today, government assumes the responsibility to provide health care, and the policy conundrum has been made more complex by political involvement. I will focus on one issue of overwhelming importance: how to decide what standard of care should be guaranteed to everyone. The standard will be lower than can be afforded by the rich, but it should not be obviously inferior to the standard generally available.

Health Coverage in Britain
One approach is to argue that all health care should be equal so that there is no difference between the standard of care enjoyed by the rich and the poor. Britain's National Health Service puts equality first, and successive governments have argued that ensuring equality requires public-sector payment and provision. NHS coverage is touted as being equal (uniform across the country and uniform between rich and poor), comprehensive, of the highest standard, and free at the time of use. Its aims are all superlatives, and part of the political problem is that if you criticize the NHS, it is very easy to come under attack for being against "the best."

In fact, the NHS achieves none of its aims, with the exception of being largely free of charges. Ironically, it is this determination of successive governments to avoid charges that has made it impossible to achieve the other aims.

The social insurance systems of France and Germany are also based on solidarity across social classes, but in these countries, it was accepted from the outset that personal responsibility should be encouraged and that free care would lead to irresponsible demands.

Health Coverage in France
To qualify for health coverage in France, it is necessary to have paid a social insurance contribution. In addition, fees are payable at the time of use and can be claimed back from the insurer or waived for the poor. The outcome in France has been that a very high standard of care is available to everyone without the waiting lists that characterize the NHS.

France has a reputation for central direction, but French health care is based on a compromise between egalitarianism and liberalism. All citizens are said to be equal, yet choice and competition are fiercely protected.

In France, individuals can identify on their pay slips how much they are paying for coverage and thus can form a view about whether the cost is justified. Consequently, the standard of care guaranteed by the state reflects the personal preferences of people who are self-sufficient through work. It is this high standard of care that is made available to all. France performs well on nearly all health status measures; when the World Health Organization ranked the world's health care systems in 2000, France was at the top of the league.

Compulsory health insurance covers the whole population, and contributions are charged as a percentage of income. Until recently, employers paid 12.8 percent of salary and employees 6.8 percent; but complaints by employers that they were meeting too much of the burden led to reform. Employers still pay 12.8 percent, but employees pay 0.75 percent of their salary toward health insurance plus an additional general social contribution of 7.5 percent of their whole income, including interest, dividends, and other earnings. Most, but not all, of this general social contribution goes toward health insurance.

Altogether, this means that the total cost of health insurance is about 20 percent of payroll, including the employer's and employee's contributions. The insurers are non-government, nonprofit agencies, which owe their allegiance to employers and employees. In addition to their compulsory contributions, most employees pay an additional voluntary 2.5 percent of their salary to a mutual insurer.

The French have complete freedom to choose their doctor, whether a general practitioner (GP) or specialist. They typically pay their doctor's fee and then file a claim for 75 percent to 80 percent of the payment. Because requiring payment up front might deter the poorest people from seeking care, about 6 million people are not required to pay.

All patients, whether they are exempt from co-payments or not, may go directly to a specialist either outside or within a hospital. The French dislike GP gatekeepers. French national insurance makes no distinction between public and private hospitals, and patients have unrestricted freedom of choice. Public hospitals provide about 65 percent of the available beds.

No doubt, it will be said that the French government has been trying to control costs. It has, but it has done so under a system that deliberately encourages responsible consumer demand by requiring modest consumer payments. It also has a built-in safety valve of supplementary insurance, in case the wishes of the French government are out of sync with the preferences of the French people.

The result has been that, as the government has tried to lower expenditures since the 1970s, the French people have taken up the slack. In the 1960s, about 30 percent of the French people paid privately for supplemental health insurance. The proportion increased to 50 percent in the 1970s, and today about 85 percent of the people purchase private supplemental insurance.

To a central planner, the French system may look like a chaotic mess, but in reality it is a pragmatic blend of consumer choice, professional autonomy, central regulation, and a government-backed guarantee for the poor that exceeds the NHS standard by far. Like the Belgians, the Dutch, and the Germans, the French, in their own way, have discovered how to universalize the benefits of a competitive market. The NHS, in contrast, has universalized the drawbacks of the public sector.

Regulating Pharmaceuticals
I have argued that the French system of social insurance -- competition combined with supplementary insurance and out-of-pocket payment -- is better than the NHS. The French system of regulating pharmaceuticals is, however, one of the worst in the world.

Problems arise when the number of young people in a society declines. Then there are only two ways to keep the system intact -- either by drastically increasing the financial burden on those at the paying end or by limiting the quality and the availability of health care for those at the receiving end.

When Costs Override Care
As the financial burden on the young has become intolerable, European governments have chosen the option of cutting back the quality of health care. Certain medical treatments or drugs are no longer available to persons above a certain age or to persons who are considered to be too sick, or they are not made available at all, at least for a certain period.

Today's patient is far from yesterday's stereotype, who was docile, uninformed, and in a relatively weak position compared to that of the doctor. The characteristics of the new consumer are dramatically different. Today's patients are well-informed and demanding. They think critically, and they are building powerful networks.

It would not be unusual for a young person today who is first meeting his or her doctor regarding a particular illness to begin by saying, "Before I came to this meeting, I had a chat with a user group on the Internet, and we discussed relevant therapies. A couple of my friends who live in Australia and Germany told me that they were treated with a certain kind of very efficient drug. Now you are offering me another drug, which is second-class and is not even in use in those countries any longer. Why?"

From a doctor's point of view, a confrontation with this kind of patient activism would be a nightmare, but that is the direction of change in values and perceptions. Well-informed and articulate patients-consumers will be far more demanding. They will, of course, ask for a variety of services. They will demand freedom of choice and won't accept gatekeeper mechanisms. They will demand the right to a second opinion and will be members of powerful health care consumer groups.

Throughout Europe, changing values have also had an impact on health care employees. Health care institutions are meeting ever-growing complications when they try to recruit employees -- not only doctors and nurses, but all levels of personnel. Not very many young people are attracted by a sector that is often described in the mass media and public debate as being plagued with problems. Patients are waiting in the corridors for days, nurses have suffered mental breakdowns, doctors have committed suicide because of heavy stress, and the pay is generally poor.

This is exactly what would be expected from an old-fashioned crisis sector that tells the world it is (or at least wants to be) run like a competent business when, in fact, daily evidence shows just the opposite. Today's employees ask for modern organization in the workplace and reasonable, individually assigned wages that are related to their competence.

Demographic Changes Affecting Health Care
There has been talk about an "aging" or "dying" Continental Europe. Of course, somebody will have to survive -- or there will have to be an enormous immigration to this part of the world -- if our patients and senior citizens are going to receive the care they need.

Demographic changes have had a powerful impact with regard to recruiting employees as well as the demand for services. A rapidly increasing number of very old patients suffering from severe illness will dramatically increase the complexity of care. Today, doctors can successfully perform coronary operations on people who are as old as 85. This medical capacity, coupled with a change in values in which patients are demanding their rights, makes it more and more difficult to deny treatment to anybody with critical needs.

At the same time, a demographic shift will result in strong restrictions with regard to financing health care. When every man and woman in the European workforce is expected to carry two senior citizens on his or her shoulders, things will get tough. Tax competition is on a global playing field, and overburdened taxpayers can emigrate -- even from Sweden, the home of high-tax addicts.

Changing Mindsets in Europe
All of the above factors will influence the future of health care in Sweden and many other countries in Europe. It can safely be said that the old welfare state is on the run. There is word from all sides that confusion reigns. Conflicts have emerged with trade unions as signs of future changes and present realities confront old thinking about pensions, health care, and the labor market. A new brand of welfare society is emerging, leaving the traditional European welfare state behind. In Sweden, the Social Democrat government is beginning to accept this development as a tool to engender public efficiency, improve the quality of services, and meet the expectations of the middle class -- if not officially in party manifestos, in reality in its response to changes.

Last year, the Swedish Parliament passed a bill welcoming private providers in primary care and nearly all other kinds of health care services with the exception of emergency care.

What's most important is for Europe to change its perspective regarding the economics of health care. Traditionally, European politicians frown on any move toward the free market and declare that health care must be strictly rationed. They are afraid of over-consumption. They're afraid of new expensive drug therapies.

From the perspective of most European governments, a successful year is one in which there was a zero increase in health care costs. Very seldom do these politicians relate costs with outcome, as any business would.

From a rational business point of view, every cost increase should be accompanied by progress achieved. But within the health care system, that kind of expectation is seldom met. A "square-minded" perspective rules. A change of mindset with regard to costs and quality of service is a condition for the new system of health care to take shape, opening the gate for a more consumer-related approach within the welfare industry. The old-style point of view cannot address value-driven demand.

Individual well-being and quality of life are the number one priorities of more and more people. A clear demarcation between being sick or being well is being replaced by another, more relative view. Today, many people expect that, in spite of a chronic disease, an individual should still enjoy a high quality of life, with access to the kinds of therapies and medications he needs.

It is a bit early to predict where these changes will lead. In terms of pensions, a number of countries have entered a period of reform, but others have a lot of mental homework to do before they are ready to engage in that kind of "reinventing process." The situation is the same with regard to health care. Some nations will be able to move relatively easily in the right direction. For others, this process will involve a lot of pain and effort. Because health care is influenced by culture and local traditions, change will occur in different ways and at a different pace in different countries.

Recently, the political leadership of the European Union declared that Europe will be the number one arena for economic growth in the near future. That assumes that, in just a couple of years, Europe will outrank Asia and the United States -- an awesome challenge. It's rather hard for that kind of declaration to be trusted if such massive service industries as pension and health care are bound by a barrage of regulations. If European Union leaders such as Lionel Jospin and Gerhard Schröder are serious about the target they set for economic growth, they are going to have to confront this fact.

New Perceptions About Service
The primary problems facing the European health care system are economic restrictions, a shortage of workers, and an aging population. But an untapped solution may already exist.

Thirty years ago, every large company had one person who was appointed as a computer manager -- a technician in a white coat who was supposed to solve all computer problems of the entire company. Today, that position exists in very few companies. Instead, everybody has his or her own personal computer, and employees are expected to handle most computer questions on their own.

This development illustrates what might be called the "democratization of competence." This is an integral part of service production strategy. The machinery is simplified, and the potential of the workers is maximized. This means allowing people to grow in competence and to take on more complex work.

In any modern car factory, a number of workers, male and female, will be working on very complex assignments. These employees have not graduated from institutions like the Massachusetts Institute of Technology. They have basic training. Yet they have proven their competence to perform the entire gamut of the company's operations, such as planning the production, communicating with subcontractors abroad, and checking the quality of the goods. These are tasks that, just a few years ago, were within the domain of "experts in white coats."

This shows that people have enormous potential to develop their skills. It also tells us that procedures can be simplified and that various support systems can be utilized. This paradigm has important significance for the arena of health care, which is still a very bureaucratic and hierarchic operation. Employees are categorized not according to their individual competence, but with regard to their designated position.

Much of the strain on the health care system can be reduced if the competence of individual employees is maximized and their potential for growth and development is realized. Nurses can take care of many of the tasks of that doctors now perform. Within other categories of personnel, there are people who can take on many of the tasks that nurses do today. Even patients can take a much more active role in addressing their health needs through self-treatment, self-medication, and patient networks.

Reforming the System
The key to reforming and salvaging the health care system is to focus on results and outcomes rather than on budgets or procedures. New methods of service delivery and innovative assessments of the roles of patients and personnel could dramatically increase the overall efficiency and capacity of the system. A health care organization that is truly based on competence could serve its clients without having to recruit between 20 and 30 million new employees (the number that was considered necessary to meet the health care needs of Western Europe in the next generation).

Options for Reform
Given the projections for the future, two options are possible for meeting the health care needs of Europe:

1. Organizing the entire system according to a competency-based paradigm, or
2. Eliciting a massive immigration of a largely unskilled workforce from the Third World.

There is also the possibility of a mix of these two strategies. Within the next 10 to 15 years, most European countries will adopt an approach that involves some form of individual savings accounts, voucher systems, or another mechanism that gives the consumer the final purchasing power over health care services and elderly care. There is no reason why those decisions should be entrusted to HMOs and other entities when consumers are capable of making their own choices.

The Stockholm Approach
Stockholm has adopted an interesting approach to health care reform. Two million people live in the Stockholm region where the Greater Stockholm Council serves as the regional health care authority. In Sweden, health care is almost completely paid for by taxes. Patients pay a minimal out-of-pocket fee that is little more than $10. Everybody has access to all services, regardless of where they live and whether or not they are employed.

In the first step, it looked at present age-expenditure profiles. On average, the sickness funds will spend a different amount of deutsche marks per year on health care for a typical 20-year-old than it will for the typical 60-year-old, and so on.

In the second step, PROGNOS extrapolated the age-expenditure profiles with the assumption that the rate of increase per year is the same as the rate of increase of productivity. This means that it excluded this as a cause of tax increase because productivity means wage growth, and if expenditures grow as fast as wages, then it can't be a factor in the increase in the payroll tax.

In the third step, PROGNOS multiplied this new age-expenditure profile by the age distribution forecast for the future and came up with a projected payroll tax of 16 percent for 2030.

There is, however, a systematic error in this method as well, although it is a downside error: Insofar as the future age distribution reflects lower death rates in older ages, you cannot use today's expenditure patterns because this exaggerates health care costs, since a large portion of expenditures occur in the last year of life. Everybody is in the last year of life only once, and if people die later, this means that fewer 70-year-olds are in their last year of life, so the standard expenditure for a 70-year-old in 2030 will probably be lower than it is now.

This is a "downside" error, but its impact is small compared with the error in the other direction that results from nullifying the impact of increased expenditures and thus nullifying medical progress.

Projections Using a Regression Analysis
The method used by us to forecast future health expenditures is based on a regression analysis. Basically, we are predicting the future increase by looking at what factors explain the development of health care expenditures in the past three decades. Our dependent variable -- the variable that we wanted to explain -- was total health care expenditure of sickness funds per capita in real terms. The explanatory variables were the following:

Column 1 shows the 1996 rate at which women are having daughters who live to their 15th birthday, the beginning of reproduction age. In essence, this rate measures to what extent a generation of women replaces itself. A value of 1.0 indicates that the population will be fully replaced. A value of 0.5 indicates that the succeeding generation will be half as large as the parenting generation.

As the table shows, all the countries in the European Union (EU) have net reproduction rates below 1.0 in 1996 -- even Ireland, a Catholic country that had above-replacement fertility rates throughout the 1970s and 1980s. The countries with the most extreme drop in fertility have been Germany, Greece, Italy, and Spain. These countries have a net reproduction rate that is not below 0.6, which means that the next generation will be only 60 percent of the size of the previous generation.

Columns 2 and 3 show what this net reproduction rate implies for the old-age dependency ratio -- the number of people over age 65 for every 100 people aged 20 to 65 in 2030 and 2050.

There is concern in the United States that there will be a demographic crisis when the baby-boom generation retires. As the table shows, in 2030 there will be 36.8 people over age 65 per 100 people of working age in the United States. The average dependency ratio for all EU countries in 2030 is 43.8, while Italy's will be 49 and Germany's 46.7.

Similarly, in 2050 the situation will be most extreme in Italy, Spain, and Greece, nations that have the lowest fertility rates today. So what I have described about Germany, demographically, appears to apply to Italy and Spain as well.

Another factor in evaluating the viability of a country's health care system is its "generosity," indicated in the last column of Table 2 as health expenditures in 1997 as a percentage of the country's gross domestic product (GDP). Germany again is at the top, with France and Italy trailing only slightly behind.

If I am asked to summarize the problems health care financing in Europe faces in the next decades, I will likely conclude from this analysis that the problems will be most severe in countries that already have very generous health care expenditures and increasingly high dependency ratios by 2050. As the table indicates in bold, these countries, especially Germany and Italy, have both a health care expenditure problem and a demographic problem.

Friedrich Breyer, Ph.D., is a Professor of economics at the University of Konstanz in Germany. He is the coauthor of Health economics (Oxford, 1997), an in-depth look at the economics of health care.