A Brief History of the Origin of the German National Health Care System

First Published: 2008-10-03

Article reprinted with the kind permission of the author, Dr. Richard Ebeling, Senior Fellow, with the American Institute for Economic Research.

Government-managed national health care began in Imperial Germany. Its history in the late 19th and early 20th centuries offers valuable lessons for the current American debate on national health insurance.

As the American people contemplate the future of their health care system during this election year it is, perhaps, useful to look backward and briefly recall the origin and early history of government-managed national health care in the country where it all began: Imperial Germany in the late 19th century.

In the 1870s, the Social Democratic Party had been increasing its share of the vote among the German electorate and winning a growing number of seats in the Reichstag, the German Parliament.

The triumph of Germany’s socialist party seemed very likely in the near future. The German monarch, Kaiser Wilhelm, and the conservative parties sensed that something needed to be done to deflect voter support away from the socialists and their radical vision for nationalization and a centrally planned economy.

The “Iron Chancellor,” Otto von Bismarck, persuaded the Kaiser to sponsor welfare-statist legislation, including a program for national health care. Bismarck believed that the working class would shift its support from the radical program of the socialist movement to a renewed allegiance for the monarchy and the political status quo. Years later Bismarck explained his reasoning to William Dawson, an American admirer who quoted the Chancellor in his book, Bismarck and State Socialism (1890):

“My idea was to bribe the working classes, or shall I say, to win them over, to regard the state as a social institution existing for their sake and interested in their welfare.”

But the philosophy behind national health insurance and other government welfare programs was not merely cynical political manipulation. German political scientists and economists, who were known as members of the German Historical School, argued that what was being implemented was a new era of political paternalism that would free people from the uncertainties of everyday life. For the German Historical School, “state socialism,” as they called it, offered the middle ground between a radical individualism that desired the state to do nothing and a radical Marxian socialism that desired the state to do everything. The guiding principles, they said, about what the government should regulate and control were to be “pragmatism,” “expediency,” and “opportunism.”

Frederic C. Howe (an American intellectual who played a leading role in the Progressive movement and later served in Franklin Roosevelt’s New Deal) explained this new German thinking about social welfare in his book Socialized Germany (1915):

“The [German] state has its finger on the pulse of the worker from the cradle to the grave. His education, his health, and his working efficiency are matters of constant concern. . . . First in the list of such [distributive] activities are the social insurance schemes which distribute to the community the burdens of sickness, old age, accident, and invalidity.”

Dawson also summarized the political philosophy behind the expansion of the role of government in society:

"In the mind of the Germans the functions of the state are not susceptible of abstract, a priori deductions. Each proposal must be decided by the time and the conditions. If it seems advisable for the state to own an industry it should proceed to own it; if it is wise to curb any class or interest it should be curbed. Expediency or opportunism is the rule of statesmanship, not abstraction as to the philosophic nature of the state. . . . There is almost no dissent to the assumption of state supremacy, of subordination of the individual, of the necessity for personal and class sacrifice to the Fatherland. . . . The individual exists for the state, not the state for the individual."

Howe insisted, “This paternalism does not necessarily mean less freedom to the individual than that which prevails in America or England. It is rather a different kind of freedom,” under which the government relieved people of having to personally plan much of their own lives and those of their families.

Introducing German National Health Insurance

State-mandated health insurance began in Germany in January 1884 and initially covered workers in factories, mines, foundries, banks, dockyards, railroads and inland shipping. The blanket of coverage was extended over increasing portions of the work force in 1885 and 1892, with family members of workers included after 1892. In 1911, workers in agricultural and forestry occupations were added, and by 1928, practically every trade, occupation, and craft in Germany was enveloped in the system.

Before the First World War, anyone making less than 2,000 marks in the covered occupations was required by law to participate in the insurance scheme. By 1928, all those earning less than 3,600 marks were forced to par-ticipate. The insurance funds mandated by the German state were organized on the basis of trades and occupations. But the state continually consolidated them, with the result that, while in 1909 there were 23,000 of such funds, by 1914 they had been reduced to 10,000, and to about 7,400 in 1929.

The insurance funds were managed by representatives of employers and labor unions in an industry. The government required that at least a sum equal to 1.5 percent of the average wage in an occupation be contributed to the fund by each firm, with the contribution split on the basis of two-thirds being paid by the employee and one-third by the employer. And as a result, worker representatives made up two thirds of the members on the board of each fund.

Benefits first included 13 weeks of free medical care and a cash payment equal to 50 percent of the prevailing wage in the pertinent occupation, with the cash benefit starting on the fourth day of an illness. After 1903, free medical care and cash payments were expanded to a period of 26 weeks. In case of hospitalization, the cash payment was cut in half. Besides these basic benefits, the compulsory-insurance funds often provided cash benefits equal to 75 percent of the worker’s pay (depending upon family size), and by the 1920s, these cash payments often started only one day after an illness began. Financial coverage was also extended to include nursing services and convalescent treatment for up to a year after the end of cash benefits. Maternity benefits were mandatory as well.

The Results of German Health Insurance

The benefits paid out by the state mandated health insurance system continuously exceeded contributions received from member employees and employers and required government subsidization. Total contributions received by the health-insurance funds from employers and employees in 1929 were 375 percent larger than they had been in 1913. But health-insurance benefits paid out by the funds in 1929 were 406 percent larger than what was paid out in 1913. Costs of administering the mandatory insurance funds had increased 288 percent between 1913 and 1929. And the government subsidy to the system had increased by 270 percent between 1924 and 1929.

The extension of socialized health insurance also saw an increase in what the German literature called “malingering.” Walter Sulzbach explained this phenomenon in his study of the German Experience with Social Insurance (1947): “Over a period of fifty years [1880-1930], during which medical science scored one triumph after another, it took the average patient under compulsory health insurance an ever longer time to recover.”

In 1885, a year after socialized health insurance began, the average number of sick days taken by members of the system each year was 14.1. In 1900, the annual average number of sick days per member had gone up to 17.6; in 1925, it had increased to 24.4 days; and in 1930, it was an average of 29.9 days. People also were noticeably sicker around weekends and Christmas and New Year’s Day, particularly in those occupational insurance funds that waived the four-day rule before receiving cash benefits. (The cash benefits were also tax-exempt, so the take-home pay lost by not working was less than 50 percent.)

The ease with which an increasing number of insured workers were able to receive benefits from longer or more frequent periods of illness was not independent of the behavioral incentives at work on the physicians who were part of the system. Originally, the insurance funds set the fees for services rendered. But in 1913, a doctors’ strike almost occurred and was only averted at the last minute. After that, the fee schedules were determined by a joint committee comprised of representatives of the medical profession and the insurance funds. An essential ingredient of the fee system was that similar fees were paid for similar services, regardless of the patient’s ability to pay. In other words, the frequent practice of private physicians to charge higher fees to wealthier patients as a means to earn higher income and to subsidize voluntarily the treatment they provided to poorer patients was outlawed. Hence, the determination of income earned by doctors in the system was purely on the basis of “quantity,” i.e., the number of bodies examined at the fixed fee per period, as opposed to the quality of the service provided.

At the same time, the tendency of a conveyor-belt view of patients resulted in workers insured under the compulsory system demanding freedom of choice in selecting a physician, rather than being assigned to a doctor participating in the system. This was established as part of the agreement of 1913. But it also meant that a doctor now had an incentive for greater leniency in diagnosing an illness and prescribing sick leave. A less accommodative physician ran the risk of losing his steady patients and suffering a decline in his income as fewer patients entered his examination room.

According to some estimates, by the late 1920s, up to 80 percent of the medical profession in Germany was working for the mandatory health-insurance system, and 60 percent of all earnings in the medical profession came from payments from the compulsory-insurance funds. Pharmacies also were increasingly dependent upon the compulsory system, with as much as 50 percent of their business turnover coming from these insurance funds in 1928; by 1932, that figure was estimated to be as high as 85 percent.

Walter Sulzbach summarized the nature of the system by the end of the 1920s:

"The members of the German insurance funds were rarely satisfied with the medical help they received. There was little personal contact between the patients and their doctors. It was a system of mass treatment under which many doctors spent only a few minutes on each visitor during their office hours and made home calls as short as possible. Kassenarzt, meaning “sickness fund doctor,” was not a complimentary term. Kassenloewe, “sickness fund lion,” a term used to describe doctors who made big money from a huge number of insurance patients, was even less complimentary."

Under the Nazi regime after 1933, the compulsory health insurance system became even more centralized and controlled.

The insurance funds lost almost all autonomy and became subservient to the Fuehrer principle. And the employer share of health-insurance payments was increased from one-third to 50 percent.

Once the Nazis were in power, explained Melchior Palyi, in Compulsory Medical Care and the Welfare State (1949):

"The ill-famed Dr. Ley, boss of the Nazi labor front, did not fail to see that the social insurance system could be used for Nazi politics as a means of popular demagoguery; as a bastion of bureaucratic power; as an instrument of regimentation; and as a reservoir from which to draw jobs for political favorites and loanable funds for rearmament."

Begun by Bismarck as a tool of state policy to fight radical socialism through the implementation of Imperial State Socialism, it ended up as one of the cogs in the wheel of Hitler’s National Socialism. And in the post-World War II period, it has remained a part of the German “social market economy,” in which the government continues to view the citizens as medical wards of the state.

Few advocates of national health insurance in the United States today are probably aware that they are the intellectual great-grandchildren of Otto von Bismarck—but they are. Indeed, it is possibly the most enduring legacy of that famous German statesman of the late 19th century. As Sulzbach observed almost sixty years ago:

"Bismarck’s fame is mainly based on his diplomatic and military successes and on the founding of the German Empire under Prussian leadership. Of all that nothing remains: The Kaiser is gone, the Reich is gone. . . . In domestic policy he failed to stop the Social Democrats."

". . . But the idea of compulsory social insurance which neither he nor his contemporaries considered even remotely his principal achievement took roots and spread. It has been adopted by many countries, and its expansion continues."

Will America be the Iron Chancellor’s next victory in the political battle over health care? Or will Americans find a more market-oriented alternative to this extension of the Bismarckian paternalistic state?

—Richard M. Ebeling, Senior Fellow, AIER

The views expressed are those of the author, and not necessarily those of the Nassau Institute (which has no corporate view), or its Advisers or Directors.

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