Comparing Health Care Systems

What makes sense for the US?

One of the articles in Good Medicine (IC#39)
Originally published in Fall 1994 on page 35
Copyright (c)1994, 1997 by Context Institute

Delivering high quality health care to all citizens for a reasonable cost should be a simple thing. Unfortunately, it is not. From the health care debates, we know that a host of complex and competing issues are involved – as are special interests working to preserve the status quo.

What makes a health care system "good"? What would such a system look like if applied to the United States? To answer these questions, we analyzed the health care delivery and financing systems of several countries and individual states. Not one, we concluded, has a perfect system; however, many operate significantly better than ours.

To help you sort out these issues, we have provided below an analysis of our findings, comparing the strengths and weaknesses of the current US system, with plans in Canada, Japan, Germany and Hawaii, and then with what is known about the new darling of reform, "managed care."


America does not have a purposeful "system" of health care as much as a tradition of laissez-faire practices that have developed over time. The central element is a financial arrangement that pays for health care services through employer-purchased insurance. Historically, patients have had the right to choose any physician, and physicians have been free to choose among specialties and to practice where and how they like. New managed care plans increasingly restrict both of these choices. Market incentives encourage the development of new drugs and high-tech treatments.

Group health insurance purchased by employers emerged during World War II, when wage freezes caused employers to offer benefits as a way to compete for workers. Nearly every reform since the early ’70s has sought to expand this concept. There are now more than 1200 private insurance companies in the nation.

For some of the uninsured, the government pays for health care through Medicare, Medicaid, the military, Native Americans, the Veterans Administration, and other programs. This leads to great complexity, since all of these plans follow different eligibility, underwriting, benefit, and reimbursement policies.

The System’s Strengths:

  • High-quality services are available for those with good insurance.
  • The US is at the forefront of clinical research.
  • Major technological breakthroughs have occurred in treating numerous diseases.
  • There are large numbers of physicians, especially specialists, in certain parts of the country.

The System’s Weaknesses:.

  • Fifteen percent of the population, or 37 million persons, have no health insurance or coverage (the highest in the industrialized world), one-third are children under 18.
  • The cost of health care in the US is the highest per person in the industrialized world and growing the fastest.
  • Administrative overhead is high – 19 to 24 percent of all health care costs, versus 11 percent in Canada.
  • US health outcomes compare poorly with those of other developed countries – 20th in the world in infant mortality, 29th in low-birth-weight babies, and 6th in life expectancy.
  • Many individuals and small groups are denied insurance, primarily because of pre-existing conditions or prohibitively high premiums.
  • To shift costs, hospitals charge smaller payers more in order to make up for uncompensated costs from the uninsured and reduced fees by larger payers (large insurance plans).
  • Hospital marketing jobs in the US increased 71 percent, and administrative jobs 20 percent (1983-89), but the clinical work force expanded very little.
  • The US has more physicians per capita than most other industrialized nations, but they are distributed unevenly both geographically and by speciality. Office-based primary care physicians have nearly disappeared in low-income areas.
  • Some hospitals are able to "cream" the wealthiest and privately funded patients, while those that care for the poor are suffering significant financial losses and closing.
  • Financial incentives encourage expensive high-tech diagnosis, treatment, and specialization; there is not enough primary care.


The Canadian health care system expresses the fundamental equality of Canadian citizens. The plan’s coverage is comprehensive, universal, and accessible. Known as a "single payer" system, funding for medically necessary care is provided by the provincial governments through taxes (with guidance and some funds from the federal government). Patients are free to choose among providers, and physicians serve primarily in private practice on a fee-for-service basis. Hospitals are independent, nonprofit institutions overseen by boards of trustees.

Canada’s health care system began as a grass roots action in Saskatchewan in the late ’50s; by 1966 all provinces offered such plans.

The Plan’s Strengths:

  • The plan is simple and very easy to use.
  • All citizens have access to care; no one may be denied services on the basis of income, age, or health status. Coverage is "portable," meaning residents retain their health benefits wherever they move. Health care has no relationship to employment.
  • Benefits are the same for all citizens.
  • The plan relies extensively on primary care physicians; 63 percent of all active physicians in Canada are in primary care, versus one-third in the US.
  • Canada achieves substantial administrative cost savings, since providers and insurers do not need to market themselves or employ vast staffs to process paperwork. Physicians bill the provinces directly and avoid the expense of verifying coverage, seeking approval to provide services, completing paperwork for multiple private insurers, or coping with double-billing and uninsured patients.
  • Under a single payer, the provincial governments are able to set and enforce overall budgetary limits. Physician fee schedules are negotiated with the local medical associations and are binding; no additional billing is permitted.
  • Private insurance for covered care is not permitted because this would defeat the purpose of spreading the risk over the entire population. However, insurance is allowed to fill available niches, such as for dentistry, pharmaceutical drugs, and certain hospital services (i.e., private room charges).
  • A 1990 Harris poll shows that, of 10 developed nations, Canadians are the most satisfied with their health care.

The Plan’s Weaknesses:

  • Financing of Canada’s health plan has been generous during periods of growth and tight when government must control its deficits – a major problem recently, since payments have been frozen for the last several years.
  • Access to some high-tech procedures has been limited by a shortage of some equipment and hospital beds.
  • Benefits are basic – only procedures deemed "medically necessary," are covered (e.g. optometrists and dentists may not be covered.)
  • Cost over-runs – primarily in physician services – prompt provincial governments to increase cost controls, resulting in outcries of "rationing" by providers and, on several occasions, political uproars.


Japan’s health care system is designed to make medical services available to all citizens via employer-purchased insurance and to control health care expenditures. This has resulted in one of the healthiest nations in the world at one of the lowest costs.

Various insurance plans are involved, financed by compulsory payroll deductions, taxes, and patient co-payments. Patients freely choose their providers, and providers are paid by a nationally uniform method and rate, negotiated by a council made up of insurers, providers, and citizens. Price increases are limited by a ceiling set by the government. A uniform fee schedule has helped to control costs and to ensure equitable access.

Japan’s system came into being for manual workers in 1922 as part of management’s belief that maintaining a healthy, productive work force contributes to the nation’s wealth. Later, coverage was extended to workers’ dependents and white-collar workers. Following World War II, Japan’s new constitution made health care a right for all citizens. By 1961, Japan had achieved universal health coverage, the first non-Western nation to do so.

The Plan’s Strengths:

  • Coverage is universal.
  • Costs are controlled by a government-imposed national fee schedule with implicit limits on overall expenditure increases.
  • Patients have freedom of choice among physicians and hospitals; there is no wait for needed care.
  • Each physician is paid the same fee for a given procedure.
  • Prescription drugs and dental care are covered.

The Plan’s Weaknesses:

  • Coverage excludes preventive health exams and normal deliveries (although preventive health measures are concentrated in mass screenings, and most people are screened once a year; in addition, medical exams for all pregnant women, infants, and young children are free and unlimited).
  • Financial incentives encourage an excess use of lab tests, high-tech equipment, and prescription drugs – the highest per capita use in the world.
  • Long hospital stays (40 days on average) are due in part to a lack of nursing homes for chronically ill elders, who are cared for in regular hospitals.
  • Medical services are fragmented, and, in the absence of expenditure controls, both clinics and hospitals suffer from significant duplication of services and excess capacity.


In 1883 trade guilds created the first health care plan in Germany. The government was so impressed that it used this as the model for the nation’s "sickness funds," which finance, deliver, and pay for care. The system combines decentralized power and decision-making with an effective negotiating system that takes place at federal, state, and local levels. There is a sense of solidarity among Germans that everyone should have access to medical services, regardless of employment, income, or ability to pay.

The Plan’s Strengths:

  • Coverage is universal.
  • Benefits include dental care and drugs, as well as cash payments for eyeglasses, grants for young mothers, wages while ill, and convalescent therapy ("cures").
  • Physician payments are fee-for-service, negotiated between the sickness funds and the medical associations within a global state budget. This guarantees cost containment and maximizes clinical freedom. There are no cost over-runs because fees are pro-rated downward when budget ceilings are approached.
  • Patients can freely choose among physicians.
  • Care is financed through a payroll tax based on income (averaging 12.6 percent in 1992), half paid by employers, half by employees.
  • Germany is the first nation to mandate that health care expenditures not rise faster than wages.
  • Health care costs within each fund are redistributed from the young and healthy to the elderly and ill. Because people stay with the same fund for life, these costs even out over a person’s lifetime.
  • Only the very rich are permitted to opt out of the statutory funds and buy private insurance. Once they do so, however, they can never again return to the state’s funds.
  • Government’s primary role is policy-making and assuring compliance. It also provides a stipend (usually 25 percent of the health care budget) to supplement private payroll tax contributions and cover the unemployed.
  • Individuals are free to purchase private insurance to cover what is not covered by the plan.

The Plan’s Weaknesses:

  • Contributions by employers and employees vary by fund.
  • Ambulatory care and hospital care are structured separately, and there is no coordination between them. This results in long hospital stays because hospital physicians do all the follow up before patients are released. There are also no incentives in the fee schedules to shorten lengths of stay.
  • Health care is administratively complex in Germany. Some of the savings are derived by paying health care workers (but not physicians) much less, and employing fewer workers, than the US or Canada.
  • Physicians prescribe almost three times more drugs in Germany than in the US; drug prices are higher than in other countries.
  • More nursing homes are needed. Typically hospitals now care for the chronically disabled.
  • Integration with East Germany is creating turmoil because of the large numbers of new people entering the system, the need to modernize severely outdated hospitals and equipment, and the lack of East German know-how among professionals to deal with private enterprise.
  • The future demand for geriatric health services will strain the sickness funds, since they are financed on a pay-as-you-go basis. Contribution rates are estimated to increase from an average of 12.6 percent of wages now to 21.6 percent by 2030.


Hawaii’s health care plan makes a basic package of health benefits available to all residents through employer-mandated insurance, supports health promotion and disease prevention, and controls health care expenditures.

The plan began in 1974 with passage of the Prepaid Health Care Act, which required employers to provide health insurance to employees. Legislation in 1989 added those not covered by Medicare, Medicaid, or private insurance and emphasized comprehensive, preventive care. In 1994, health care programs for Medicaid and other low-income groups were converted into managed care plans.

The Plan’s Strengths:

  • Hawaii was the first state to mandate universal coverage.
  • Community rating (premiums the same for everyone in the state) has kept insurance rates affordable because costs and risks are shared equally.
  • No employed person can be denied coverage.
  • Health care costs have increased more slowly than elsewhere (8.1 percent of gross state product versus 14 percent of US Gross Domestic Product). This is due to several reasons:
    1. emphasis is on primary, preventive care, and outpatient care, rather than hospitalization;
    2. there are limits on construction to prevent overbuilding of hospitals
    3. competition exists within clearly defined boundaries, forcing insurers and providers to hold costs down.

  • Basic benefits include mental health visits, alcohol and substance abuse treatments, and preventive care.
  • Increasing use of 20 percent co-pays has reduced over-utilization.
  • Administrative costs are low.
  • Mandating insurance through employment has had little apparent effect on small businesses. In all but one year since insurance has been required, the state has gained more jobs than have been lost.
  • Hawaii ranks near the top compared to other states in life expectancy and low infant mortality.

The Plan’s Weaknesses:

  • As an attractive place to practice, Hawaii’s ratio of physicians to population is among the highest in the nation (and the world), with 80 percent classified as specialists.
  • Insurance rates have increased 14-18 percent over the past several years. Despite cost controls, costs continue to rise – primarily due to demand, especially for high-tech care.


anaged care plans are financing systems that control health care costs in two ways. First, they lock-in consumers to specific lists of providers (physicians, hospitals, nursing homes, etc.) who agree to accept reduced fees. Second, many require the insurance company’s approval before providing benefits.

The first managed care plans were started in the 1940s, with the development of several Health Maintenance Organizations (HMOs), such as Group Health Cooperative of Puget Sound. Their purpose was to provide comprehensive health care for a set monthly fee, rather than fee-for-service. Considered radical at the time, HMOs and other managed care products are now mainstream. Many have demonstrated cost savings and quality outcomes by emphasizing preventive care and conservative use of treatments.

Today, several health reform proposals, including President Clinton’s, have hopped on the "managed care" bandwagon, promising cost containment based on the notion that insurance companies can best control the health care purse strings. This appears questionable, however. The financial incentives in some managed care plans favor the payer’s interests over the patient’s. Moreover, managed care is likely to increase the already bloated administrative costs now associated with insurance bureaucracies.

"Managed care" and "managed competition" now encompass such a wide variety of organizations and plans, each with its own strengths and weaknesses, that predicting the impact of this financing mechanism is not yet possible.

The Plans’ Strengths:

  • The philosophy of some plans is holistic, emphasizing preventive and primary care.
  • By limiting access to certain services, managed care plans and their physicians may ultimately determine how care is rationed, rather than the government.
  • In some plans, financial incentives operate on what is best for patients, not providers, thus reducing the likelihood of over-treatment (also see below).

The Plans’ Weaknesses:

  • Under Clinton’s plan, most managed care options would be available from only the largest, for-profit insurance companies. Small insurers and fee-for-service practices would likely be forced out of business. Today, 10 insurers control 70 percent of the HMOs in the nation
  • Most plans limit consumers to certain doctors, hospitals and other providers.
  • A patient’s choice of care, including whether they receive any care, depends on what is covered in a particular policy, and the insurance company’s opinion about whether treatment is appropriate and cost-effective.
  • Employers choosing plans for their employees may opt, not for the best, but for those with the lowest cost premiums.
  • Managed care may not control costs. One-third of all Californians are enrolled in HMOs, and more than 80 percent of all employed Californians are covered by some form of managed care. Yet costs there are 19 percent above the national average and rising more rapidly. Massachusetts and Minnesota, the second and third highest HMO-penetration states, have similar cost records.
  • Nationwide, premiums for HMOs have risen at virtually the same rate as Blue Cross and other traditional indemnity insurance.

William Glaser, a noted health expert, calls managed care a "mirage," a uniquely American solution that will ultimately fail. Health systems in all other developed countries, he says, allow patients a free choice among licensed providers (at least for primary care) and enhance competition by permitting any provider to participate.


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