42 2.6. Political Implications According to our estimates, the SHI’s pharmaceutical expenditure will increase by around 75 % by 2050. As measured by the long projection period of 46 years, this outlook displays a moderate development of the expenditure situation and refutes concerns of any “cost explosion“ in the pharmaceutical sector. Nevertheless, the burden for individuals will sharply increase since the forecasted cost increase will take place, although the absolute number of the SHI’s members will decline. Looking at the per capita expenditure, which will increase by more than 92 %, makes this fact more obvious. But expenditure on its own possesses limited explanatory power. As long as the SHI is ? nanced by the pay-as-you-go principle, the ageing population causes two problems for the ? nancial sustainability: apart from pressure on the expenditure side, the ageing population leads to changes in the contributors’ structure. Assuming that the quota of retired and employable SHI members changes proportionally to the development of the whole population, the ratio of retired SHI members to non-retired contributors will increase from 0.5 in 2004 to 0.86 in 2050. This will necessitate higher redistribution between younger and older people in the future. How much this development will affect the contribution rates is dif? cult to predict because a wider set of unveri? able assumptions must be made. In 2004 around 2.25 percentage points of the average SHI contribution rate was needed to ? nance pharmaceutical expenditure. This share could reach approximately 3.5 percentage points in 2050, i.e. an increase of more than 55 %.24 Even under the hypothesis that pharmaceutical consumption accelerates more than total health care expenditure, SHI contribution rates of more than 20 % must be expected. With the objective of reducing or at least stabilising non-wage labour costs and to guarantee the ? nancial sustainability of the pay-as-you-go system, political adjustments to the SHI’s regulatory framework usually aim towards cost-containment. But so far the various reform acts have failed to limit the almost linear trend of increasing drug expenditure. However, the analysis of the age-related consumption and expenditure pro? les delivers insights into the causes of the predicted development and should enable more purposeful regulation. We have seen that the purely demographic effect has only a minor in? uence on future expenditure development. With respect to age-independent, acute diseases even a declining impact from the ageing population can be observed. Thus more important than the absolute increase in the number of older people are variances of the age-re- 24 Assumptions: constant share of retired SHI members of all people beyond 60 years as well as of employable SHI members of all people between 20 and 60 years; constant bene? t level of 50 %; annual real growth of gross income according to the development between 1991 and 2004 (0.5 %). All other variables are presumed to be constant. Monetary values have been de? ated with the cost-of-living index (2000 = 100 %). Sources: Ministry of Health (2005a) and German Pension Insurance (2006). 43 lated pro? les, which are expressed by the total pro? le effect. In general, two main explanations for the pro? les’ alterations are conceivable: modi? cations in consumption and prescription behaviour due to the changing attitude of consumers and suppliers of health care services and medical technological progress. From a political point of view, therefore, the market behaviour of the health care actors and technological progress are the crucial starting points for effective regulatory intervention.25 Regarding market behaviour, the relationship between the protagonists of the health care sector suffers from two de? ciencies: asymmetric information and lack of cost consciousness (e.g. Oberender et al. 2006). The information problem directly results from the attributes of the market for health care services and is usually used as evidence of market failure. But how far asymmetric information justi? es state-run control is controversial. Many markets are characterised by an unequal information distribution, but function well without the need for public interventions.26 The SHI’s incentive system, however, not only does not improve, but reinforces the information problem. This is due to the lack of cost consciousness of insurants and physicians in the wake of limited competition within the SHI. On the one hand, the obligatory comprehensive insurance coverage associated with insuf? cient deductibles eliminates the price mechanism and leads to exaggerated demand for reimbursable drugs. On the other hand, physicians have almost no incentive to impede demand-sided moral hazard welfare losses. Hence the decisive governor to ensure an appropriate level of drug provision is to overcome the costs insensitivity of insurants and physicians. Therefore ? nancing schemes must be found which are applicable for reconstituting the price mechanism. Not until patients participate in proportion to the real costs of drug consumption, will incentives to gather information about ef? ciency and cost-effectiveness of physicians’ prescription decisions accrue.27 But even though moral hazard welfare losses can be reduced, there will always be a threat of increasing expenditure due to medical technological progress. Advancements in the science are hardly predictable and cost increases caused by introduction of new, innovative drugs can only be controlled a limited amount. Thus, applying a pay-as-you-go principle in an ageing society combined with the political doctrine which ensures comprehensive medical provisions for 25 Most of health economics literature identi? es technological change as a primary driver of increasing medical costs. E.g. Newhouse (1992) suggested that more than 50 % of the total rise in real health care expenditure is attributable to technological advancements (see also Weisbrod 1991, Cutler and McClellan 1998). This ? nding “appears to contradict conventional wisdom. Outside of medicine, technological change is identi? ed as the primary driving force behind improved productivity” (Gelijns and Rosenberg 1994, p. 29). But in medical care technological progress entails two basic mechanisms: ? rstly, the substitution of old treatments by new ones. The substitution effect often lowers unit costs. More important, however, is the second effect: technological change leads to the extension of new treatments. It increases the demand for expensive new goods and services without regard for its costs and bene? ts. 26 Oberender et al. (2006) refer to market institutions such as guarantees, standards and reputation. Furthermore they highlight the role of sickness funds or health insurances to act as information agents. 27 An appropriate ? nancing mechanism is presented in chapter 4. 44 everyone28 is always risky and jeopardises the long-term ? nancial sustainability of the SHI. 2.7. Conclusion To my knowledge this chapter delivers the most comprehensive approach to ? nding evidence for the impact of population ageing on the development of SHI’s drug expenditure in literature. By means of principal components and cluster analysis it has been shown that it is possible to identify groups of pharmaceuticals whose members possess similar demand characteristics which are related to the variables “age-dependency“ and “acuteness“ of diseases. Analysing the trends of the per capita age-related drug consumption pro? les, a strong indication can be found for the validity of the compression thesis for drugs against acute, age-dependent diseases. On the contrary, the more chronic the diseases, the more indices for the medicalisation thesis can be found. Thus, consumption of drugs against chronic diseases will be the main cost driver in future. Based on these observations, an outlook on the future development of drug expenditure has been accomplished. As opposed to forecasts which use aggregated data, the separate consideration of diverse disease patterns should deliver more robust predictions. Accordingly, by 2050 pharmaceutical disbursements will increase by 75 % in total and 92 % per capita. As measured by the long projection period of 46 years, this outlook displays a moderate development of the expenditure situation and stays below the results of most surveys about the SHI’s total health care expenditure development. But the ageing population causes two problems for the ? nancial sustainability of the SHI, since the decreasing number of employable people lowers the contribution assessment basis and necessitates higher inter-generational redistribution. Under the assumption that future developments will follow recent trends and under the exclusion of key cost-reducing innovations, it can be stated that the stability of the SHI’s pay-asyou-go system is highly jeopardised. The political aim to ensure long-ranging contribution rate stability is only achievable when institutional arrangements can be found which are appropriate to absorb the imminent cost pressure. 28 “All citizens, irrespective of their ? nancial situation, place in society or place of residence, must have access to the resources that allow them to maintain or regain their health.” (Ministry of Health, http://www.bmg.bund.de, Dec. 2006).