73 Figure 4.2: Value per Prescription (1981 - 2005). 0 5 10 15 20 25 30 35 40 1981 1984 1987 1990 1993 1996 1999 2002 2005 Eu ro year Source: Nink and Schröder (2007), p. 191. Although RP failed to obtain its goal of cost-containment, it has achieved signi? cant improvements compared to simple proportional co-payment arrangements. Pavcnic (2002) identi? es a strong price decrease for generic and even more intense one for referenced brand-name drugs in Germany. Similar results were shown by Aronsson et al. (2001) for Sweden. Thus RP seems to be an appropriate instrument for overcoming the “generic paradox” (see FN 54) which claims that generic entry may lead to an increase of brand-name drugs’ prices. To recapitulate, RP suffers from three main shortcomings: ? rstly, it can only be applied to drugs for which generic alternatives with comparable therapeutics ef? cacies exist and thus can cover only some portion of the drug market. As a natural consequence, producers may compensate for decreasing prices in the reference groups by increasing prices for non-referenced drugs. Secondly, de? ning the reference groups is dif? cult and remains, to some extent, discretionary. This may discriminate against individuals who have ongoing adverse health effects and may bias manufacturers’ investment decisions. And ? nally, RP does not face consumers with the real prices of drugs, but only with an arti? cial difference between market price and the patients reimbursement ceiling; it is only an inferior surrogate for free market competition. Nevertheless RP overcomes the “generic paradox” and improves price competition compared to simple deductibles. 4.4. More Competition via Medical Savings Accounts The absence of free market competition in health care systems usually consists of two lines of arguments: market failure and social justice. For health economists it is widely accepted that market failure in the provision of health care services and health in- 74 surances causes public interventions.63 But the commonly known aspects of its partial market failure hardly justify the comprehensive public interferences of highly regulated and subsidised social insurance systems such as the tax-run Beveridgean schemes in Great Britain and Scandinavia or the Bismarckian social contribution systems in most countries of Continental Europe. Therefore, it is apparent that it is not economic, but social deliberations which have incited the development of health insurance systems where competition is, to a great extent, prohibited. Social policy tries to insure an all-embracing health care provision for all people independent of their individual ? nancial situation.64 From this perspective, co-payments are limited, e.g. to a speci? c proportion; or avoidable, e.g. in a reference price scheme, in preventing people from overstressing their ? nances. The main problem which arises from the exclusion of market prices is moral hazard behaviour. The term moral hazard was ? rst used by Arrow (1963). He points out that moral hazard due to health insurance leads to excess consumption in the sense that insured individuals will consume medical insurance services up to the point where the marginal utility of an additional service is equal to his individual co-payment and not to its marginal costs.65 Figure 4.3 shows the impact of health insurance on the demand for health care.66 Figure 4.3: Demand for Health Care and Moral Hazard. Source: Following Folland et al. (2001), p. 154. 63 For analysis of market failure and political consequences see e.g. Breyer et al. 2003, Folland et al. 2001, Phelps 2003. 64 “In Germany it is essential that every man and woman receive the necessary provision for health care services at the best quality standard available – and independent of age and income. This is what the Statutory Health Insurance System promises.” (Ministry of Health 2005b, p. 5, author’s translation). 65 The concept of moral hazard has been widely discussed in the literature: besides Arrow (1963), Pauly (1968), Feldstein (1973) and Arnott and Stiglitz (1991) are particularly notable. 66 See Folland et al. (2001), pp. 152 - 159. 75 We compare two situations: in panel A, patients’ demand for medical services is supposed to be perfectly inelastic, i.e. it does not react to price changes; in panel B we assume that the quantity demanded varies inversely with price. Without insurance, in both cases the optimal choice of the individual is Q?, where price, P?, correspond to the cost of bringing the entire health care package on the market. Thus, consumer’s marginal bene? t, as represented by the demand curve, equals marginal cost. Referring to economic terminology, this is an ef? cient allocation. Supposing, instead, the patient has insurance, which covers 90 % of accruing costs:67 in this case, from the perspective of the patient, price has fallen to P?. In panel A nothing happens with quantity, but in panel B a new equilibrium is reached with quantity Q?. Rectangle ABQ?Q? displays the incremental expenditure. The incremental bene? t can be measured by triangle ACD, the area under the original demand curve less coinsurance expenses. Subtracting the incremental bene? t and the coinsurance expenses from the incremental costs reveals the loss in well-being, represented by triangle ABC, which has occurred due to moral hazard. Health services are demanded, although marginal utility lies below marginal costs. This is not the result of moral per? dy, but of rational behaviour since, from the perspective of the consumer, the price has just declined and thus he expands his demand (Pauly 1968). Moral hazard arises in almost all kinds of insurances, but it is an especially serious problem in the health care sector. This is due to the fact that, ? rstly, the third-party payer is only nominally able to monitor insurants’ behaviour and, secondly, medical demand is characterised by a complex principal-agent relationship between patients and physicians.68 Some authors even guess that the loss of welfare due to moral hazard outweighs the gains in welfare resulting from risk-pooling.69 To break-up the dilemma between politically inspired social equity and economic ef? ciency, a control instrument is required which allows competition on market prices and individual cost responsibility without overstressing the ? nances of people. MSAs could deliver such a solution. The idea is quite simple:70 unlike traditional collective forms of social insurance schemes, under a system of MSAs the risk of illness is individually covered. Each insurant is obliged to frequently pay a ? xed amount or a percentage share of his gross income into a special individual account. In case of need, he must use this personal savings to pay for the accruing health care costs. Not until the MSA is exhausted are additional ? nancing arrangements necessary to guarantee continuing medical provision, e.g. supplementary ? nancial transfers for people with low incomes, private out-of-pocket payments etc. Should the account not be ex- 67 10 % is the simpli? ed pharmaceutical coinsurance rate in the SHI (§ 61 SGB V). 68 For detailed information about the principal-agent relationship and its effects on the dimension of moral hazard see e.g. Toepffer (1997) and Hellerstein (1998). 69 See Feldman and Dowd (1991) and Manning and Marquis (1996). 70 For comprehensive information about MSAs see: Schreyögg (2002 and 2004) and Nichols et al. (1997). Although the concept of MSAs is pretty novel, several countries have already adopted them or are concluding pilot studies, e.g. Singapore, China, South Africa and the United States. The positive experiences are encouraging. For more information see Schreyögg (2003). 76 hausted by the end of a speci? c period, the remaining funds will be accumulated to cover future medical expenses.71 Since health care costs can be so high that they exceed the ? nancial capacity of the individual, MSAs are usually offered in combination with high-risk health insurance. The bene? ts of the high-risk insurance is limited to the costs of speci? c treatments or takes effect only if a certain yearly deductible paid out of the MSA is exceeded (Nichols et al. 1997). MSAs directly address moral hazard behaviour. Since patients must ? nance parts of their health care expenses out from their own MSAs, i.e. from funds they themselves have saved, a higher degree of cost-consciousness is achieved (Schreyögg 2004, p. 8). Similar to out-of-pocket-payments, MSAs provide incentives for individuals to take responsibility for their own medical needs, resulting in a greater ef? ciency in allocating resources. MSAs seem to be appropriate for resolving, at least in part, the con? icting goals between social policy and economic rationality. From a political point of view, fundamentally transforming the pay-as-you-go oriented SHI into a funding medical care system based on MSAs would be seen as extremely unrealistic, but it can be used as a supplementary instrument, which targeted speci? c weaknesses of the SHI. The pharmaceutical sector in particular seems to be suitable for applying MSAs: ? rstly, out-patient pharmaceutical expenditure can be clearly distinguished from other disbursements for health care services. Secondly, the existence of homogeneous generics and interchangeable analoga enables more extensive price competition than in the market of general medical treatments. Thirdly, several studies show that preventive care and pharmacy are the most price elastic types among health care services.72 Danzon and Pauly (2002) ? nd that the direct moral hazard effect of insurance growth in the United States accounts for between one-fourth and one-half of the increase in drug spending. Hence it can be supposed that increasing the cost-consciousness of patients results in more price competition between pharmaceutical manufacturers. 4.5. Economic Analysis I: Price Equilibrium To my knowledge, as of this writing there has never been an attempt to model MSAs in a theoretical framework. In the same way, most of the literature on RP in pharmaceutical markets is descriptive; but there are a few noteworthy exceptions: Zweifel and Crivelli (1996) used a Bertrand duopoly model to analyse the pricing policy of pharmaceutical companies in Germany before and after the introduction of RP. Danzon and Liu (1997) applied a monopolistic competition model to consider imperfect physician agency. Using a vertical differentiation model with two ? rms, Merino-Castello (2003) 71 Depending on the institutional organization of the insurance system, savings can also be used as old age reserves, e.g. retired people can be liberated from paying the obligatory contribution when their MSA exceeds a speci? c amount. Another possibility would be to give the account holder the right to bequeath savings to his descendants (Schreyögg 2004, p. 5). 72 An overview is given in Ringel et al. (2002).