In 1995, after 20 years of debate, Germany introduced the final pillar of its state welfare system ...
In 1995, after 20 years of debate, Germany introduced the final pillar of its state welfare system a compulsory long term care scheme. The country has a tradition of comprehensive public provision in all areas of welfare. With long term care costs becoming an increasing burden on both taxpayers and families, the decision to introduce a funded scheme was a natural one.
The aim of the public long term care insurance scheme in Germany is not to provide comprehensive cover for all care needs. Instead, it looks to assist people in need of care and to enable them to stay at home as long as possible. Emphasis is placed on facilitating home healthcare rather than providing healthcare in nursing homes although both aspects are covered. During the introductory phase from April 1995 onwards, benefits were only provided for home healthcare. Premiums were charged for this cover with effect from January 1995. Nursing home care cover was introduced in July 1996.
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Benefit amounts.
In assessing the care to be provided, those in need are grouped into three levels of dependency, which are measured against the need for assistance with the activities of daily living and running a household. The amount of benefit varies according to the level of care.
l Level 1: Daily help with two ADLs at least once a day and for at least one and a half hours per day.
l Level 2: Daily help with two ADLs at least three times a day and for at least three hours per day.
l Level 3: Permanent help for at least five hours per day.
People in need of care at home can choose between a cash benefit and cost reimbursement. A mixture is also possible. Where the costs of professional care providers are reimbursed, the limits are contingent upon the care level.
l DM750 per month (£670) for Level 1.
l DM1,800 (£600) for Level 2.
l DM2,800 (£30) for Level 3.
l In exceptional cases, a benefit of DM3,750 (£1,250) may be paid.
Cash benefit levels are also contingent on the care level. Here the benefits are DM400, DM800 and DM1,300 respectively. Where the cash benefit is paid, there are regular visits by a professional care provider to check the quality of the care provided. Nursing home care is provided only if home healthcare is no longer possible. Reimbursement of care costs is only provided in respect of the provision of personal care services. Disabled people are required to pay for accommodation and food themselves. The parallels with the UK Royal Commission (which recommended free personal care but not 'hotel' costs) are obvious.
The compulsory scheme also offers additional benefits such as respite care, pension funding for voluntary care providers, the reimbursement of the costs of home renovations and care seminars for family members.
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Pay-as-you-go.
The state scheme is financed using a pay-as-you-go approach. The contributions paid in are used to pay for the benefits then being paid out. No fund to pay for future long term costs will be built up. The current contribution is 1.7% of an employee's salary (up to a monthly maximum amount of DM108 roughly £36). Retired persons also have to contribute. Employees and their employers each pay half of this amount. As compensation for the contributions made by the employers, one public holiday was abolished. Non-income earning spouses and children are not required to pay an extra contribution.
Under the German health insurance system, state funds cover medical costs for employees and their families with incomes that lie below a certain limit at present DM6,375 per month. Employees with incomes that exceed this threshold, and the self-employed can choose to opt out of the state system and purchase private medical insurance. Those who out opt for medical insurance must also opt out for long term care and purchase compulsory private insurance. Around 90% of all people are currently covered under the state scheme and 10% have private compulsory cover.
The rates for compulsory private insurance are calculated on of a pre-funded basis, although with certain restrictions. What we find is.
l Insured people pay a premium depending on their age at the inception of cover.
l Men and women pay the same amount.
l Children are included at no additional cost but spouses are required to pay the full premium.
l The premiums (including profit loading) may not exceed the 1.7% maximum rate for the state system.
When the system was introduced, a pool of private insurers were required to give cover, at ordinary rates, to those who were already in need of care or who constituted sub-standard risks.
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Covering the gap.
The compulsory scheme does not cover all the costs associated with long term care. The gap between the care costs that are incurred and the benefit provided by compulsory cover can exceed £1,000 per month and this provides an opportunity for the market to provide top-up cover.
Both life insurers and private medical insurers have responded. The life insurers offer both stand alone long term care insurance policies and rider products with around 75,000 policies in force. The claims eligibility criteria used are different to the criteria of compulsory cover. Care levels are generally measured by reference only to the number of activities of daily living that an insured is unable to perform without considerable assistance. A number of overseas insurers have entered the market.
The private medical insurers offer products that are a close match, in terms of claims triggers, to the compulsory scheme. Top-up products that provide supplementary daily cash benefits are mainly offered. Cost reimbursement products that cover a percentage of the care costs which remain after state benefit has been paid are also available. Typically, the maximum age at entry is restricted to 55-70 years. At the end of 1997 there were 410,000 policies in force.
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Experience of the state scheme.
In the second half of 1998 around 1.8 million people in Germany were receiving benefits, approximately 70% of whom were female. The percentage of people classified as requiring care Level 3, the most severe level, is fairly small. At Level 1 there are 45% of all people in need of care, 40% at Level 2 and 15% at Level 3; 70% receive home healthcare. Cash benefit is more popular than cost reimbursement benefit 80% of those receiving home healthcare have opted for cash benefit.
According to a survey conducted by the University of Hamburg, people in need of care choose cash benefit because they wish to decide freely for themselves how to spend the money. They also dislike having strangers caring for them at home. Those who opt for cost reimbursement wish to relieve their relatives of the care burden.
To date, the state compulsory scheme has generated a surplus. However, the bulk of this arose in 1995 when premiums were paid for 12 months whereas benefit was only paid for nine. This produced a surplus of £2.2bn in 1995, of which £400m was placed at the disposal of the state as a loan.
According to the Federal Ministry for Labour and Social Affairs, the present contribution of 1.7% will be too low in the future and an increased contribution of 2.4% will be required by 2030. However, this represents an increase of only 40% over 35 years. In comparison, in the previous 35 years contribution rates for medical cover rose by 60.
While sales of private LTC cover rose during the early 1990s, in 1994 the number of policies sold levelled off. When the state scheme was introduced, policyholders were given the option of changing their current cover into a compulsory policy. This again reduced the number of sales.
During the last few years, sales have continued to drop. One possible reason is a reduction in the benefits of German state health system. It seems that the need to replace these benefits has prompted people to divert their funds. In Germany as in the UK, long term care insurance is not top priority.
Are there lessons in the German experience for us in the UK? When considering the broad questions of funding, the answer is "probably not". The German tradition of comprehensive state welfare benefits is fundamentally different to our own system where self-reliance and means testing have great weight. It would be unwise to conclude that because the Germans have done it, then so can we.
Ross Ainslie is product actuary at General & Cologne Re.
