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Are premium allowances at risk of downsizing?

Country: 
Switzerland
Partner Institute: 
Universit della Svizzera Italiana, Lugano
Survey no: 
(11)2008
Author(s): 
Crivelli, Luca
Health Policy Issues: 
Political Context, Funding / Pooling
Reform formerly reported in: 
A drop of solidarity in a sea of inequity
Current Process Stages
Idea Pilot Policy Paper Legislation Implementation Evaluation Change
Implemented in this survey? no no no no yes no no

Abstract

From 1st January 2008 Switzerland has adopted a new system for financial equalization between the Confederation and the Cantons, which provides for a clearer attribution of the tasks and the financial resources associated with each governmental level activity. The financing of health insurance subsidies is one of the fields touched on by the reform. Although it remains a joint task of federal and cantonal governments, the sector is subject to deregulation with possible repercussions on equity.

Recent developments

A wide-reaching draft bill leading to a more rational definition of federal and cantonal competences

In 2001 Switzerland started a process of rethinking the role and the tasks of the state, where the main objective was to consolidate federalism, giving intergovernmental relations a more modern, transparent and efficent structure.

For some years in Switzerland we have seen a progressive centralization of certain competences, with the result that the cantons' leeway has been gradually reduced, also within the ambit of spheres of activity which the Federal Constitution attributes to cantonal authorities. One of the reasons for this evolution is to be found in the method of providing intergovernmental grants. In fact, 75% of the federal grants are paid to the cantons in the form of matching grants, which have two joint aims: (1) encouraging certain activities and (2) realizing a redistribution of resources between the strong cantons and weak ones.

In November 2001 the Federal Council presented a draft bill [see ref. 1], which was finally approved by Parliament in October 2003 [see ref. 2] and which involves a series of changes to the Federal Constitution [see ref. 3].  The amendments, which were subject to compulsory referendum, were approved by the population in November 2004. The objectives of this wide-reaching reform bill can be summarized as follows:

  • To clarify the competences of the cantons and Confederation within the ambits where there are overlaps, with the intention of strengthening the cantons' autonomy and the subsidiaritiy typical of federalism again. In order to realize this objective the principle of tax equivalence is relied on; according to this there should be a correspondence between the group of the beneficiaries of a given public expenditure and that of the citizens-taxpayers (who accordingly become responsible for every decision regarding the contents of public expenditure). In this perspective a more rational structure of the expenditure tasks and relative competences of the various levels of government is necessary.
  • For special activities for which an exclusive cantonal competence is not justified, or when it is appropriate to avoid cantonal solutions which are too diverse the following two implementation methods seem suitable: (1) giving the Confederation and cantons joint responsibility for a particular task; this can be done by means of a global budget allocated by the Confederation and of the adoption of a controlling system no longer oriented to input but to output; (2) promoting coordinated solutions among the cantons, encouraging intercantonal cooperation through correct allocation of burdens and the necessary compensation of the spillover effects.
  • To make the financial equalization mechanism more transparent and effective by means of a clear separation of its two main components: the equal distribution of resources among the cantons and the equal distribution of the burdens. In particular the equal distribution of resources is intensified if the Confederation and richer cantons transfer means to the poorer cantons with free end-use. The equal distribution of resources will be carried out on the base of a new instrument called resource index, which is decidely more objective, and no longer with reference to the index of financial strength (politically easier to manipulate) as was the case until 2007.

Once the general framework of the reform bill had been approved, the Federal Council set out a second draft bill in September 2005, which concretely establishes the methods for carrying out the new philosophy of financial equalization, defining all the legislative amendments necessary to implement the new system [see ref. 4]. The final version of the document [see 5] was approved by the two houses of Parliament in October 2006. The various amendments came into force on 1st January 2008.

The amendments to the Federal Health Insurance Act (FHIA)

Among the laws subject to amendment we also find the FHIA . To reduce the social impact of per capita payments, the FHIA of 1996 had decided to eliminate the historical generalized subsidy to health insurance, granted as per capita subsidy to the sickness funds within the ambit of the previous legislation, in favor of a subsidy earmarked to the individuals in need. The latter was realized by means of individual subsidies, the beneficiaries of which were the insured in modest economic situations; as clearly stated in the Federal Council's bill in 1991 the aim was to correct the inequity of a system of fixing premiums, which does not consider the citizens' ability to pay, although it is within the ambit of a social insurance. Since it was considered necessary to allocate this task jointly to the Confederation and the cantons, the financing of these subsidies was ensured to the extent of two-thirds by the Confederation and one third by the cantons, through general taxation. The Confederation's funds were distributed as a specific matching grant, mixing the objective of an equal distribution of resources with that of equitable burdens. Each canton's financial participation was established in consideration of its financial strength. For these reasons the marginal cantonal price for one CHF of distributed subsidy ranged between 7 cents in Obwalden and 65 cents in Zug in 2006.  Moreover, the cantons had the authority not to use all the federal grant (and to reduce their own contribution), but were obliged to use at least 50% of the federal grant (and to provide at least 50% of the corrisponding amount of their own financial resources). Finally, the task of implementing the subsidy distribution system lies solely with the single cantons. In other words, since 1996 the Confederation has not promoted a comparable vertical equity within the cantons, indicating e.g. what should be the maximum threshold of incidence of premiums and on what principles the household income should be assessed by the cantonal authorities. The federal law limited itself (1) to regulating the total amount of federal contributions destined to this goal and the distribution key among the single cantons; (2) to establishing the minimum expenditure limit for each canton (equal to 50% of the sum paid by the Confederation to the canton and of the compulsory contribution from its own resources).

Since 2008 the law in force has been subject to important amendments. Article 66 of the FHIA was greatly changed.

  1. In the first place the amount which the Confederation allocated by means of a simple federal decree until 2007 (intergovernmental grants with end-use tied to the objective of premium allowances) will in future be linked to the evolution of health insurance expenditure by an automatic mechanism. More precisely the federal contribution will have to correspond to 7.5% of the gross expenditure of compulsory health insurance. Applying this percentage to the 2006 data (gross FHIA expenditures equal to 20.595 billion) a tied federal amount of 1.545 billion would be obtained compared to 2.52 billion allocated by Parliament in the same year (2.66 billion is the budget for 2007). When the new financial equalization comes into force there will therefore be a drastic reduction in the federal grants earmarked specifically to premium allowances. In exchange, the cantons will find they have more financial means available for free end-use or they have relief regarding expenses which will be taken over by the Confederation in future.  
  2. Secondly the cantons will no longer be obliged to contribute to premium reduction with a sum at least half of the total amount of federal subsidies. The cantonal authorities wil be able to decide freely if and how many cantonal financial resources they wish to earmark for premium reduction. In a future perspective the means allocated to premium allowances might therefore be subject to substantial downsizing or in any case might lead to even more marked differences with respect to the present situation among the single cantons, with the risk of an insidious race to the bottom.

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Characteristics of this policy

Degree of Innovation traditional neutral innovative
Degree of Controversy consensual rather consensual highly controversial
Structural or Systemic Impact marginal rather fundamental fundamental
Public Visibility very low very low very high
Transferability strongly system-dependent strongly system-dependent system-neutral
current current   previous previous

Purpose and process analysis

Current Process Stages

Idea Pilot Policy Paper Legislation Implementation Evaluation Change
Implemented in this survey? no no no no yes no no

Initiators of idea/main actors

  • Government: Attitudes toward the specific FHIA amendment
  • Parliament: Attitudes toward the specific FHIA amendment
  • Civil Society: Attitudes toward the general project of financial equalization

Actors and positions

Description of actors and their positions
Government
Federal Department of Financevery supportivevery supportive strongly opposed
Parliament
National Councilvery supportivesupportive strongly opposed
Council of Statesvery supportivevery supportive strongly opposed
Parliamentary left-wingvery supportiveopposed strongly opposed
Civil Society
Voting majorityvery supportivesupportive strongly opposed
current current   previous previous

Influences in policy making and legislation

The debate in Parliament did not make history [see ref. 6]. Some left-wing exponents, mindful of the recent increase in financial resources intended for the financing of at least 50% of the premiums for the children of middle-class households (this happened in 2006, see survey (5)2005), tried to introduce a provisional ruling which would oblige the Confederation and the cantons to maintain the level of grants achieved in 2007 for three years. But the proposal was rejected by the majority, as it was contrary to the spirit of the new financial equalization sanctioning cantonal autonomy. Constitutionally the Confederation is responsible for the functioning of the national social insurance mechanisms, while the cantons' task is to guarantee the social security of individuals.

In the parliamentary debate an amendment to the text of the bill proposed by the Federal Council was recorded, on the suggestion of the National Council's commission for social security and health. The September 2005 bill still spoke about 25% of the expenditure for 30% of the population. This wording could have given rise to misunderstandings, leaving open to interpretation that there was a constraint for the cantons to define the circle of beneficiaries of the cantonal subsidies so as to reach 30% of the population (in 2006 the differences between cantons were huge; in canton Vaud the circle of beneficiaries corresponded to 21.1% of the population and was as high as 56% in Obwalden); so in order to avoid judicial controversies in the final text in October 2006 they preferred to speak more simply of 7.5% (the product of 0.3 and 0.25) of gross expenditure. Thus the full freedom of the cantons to realize the social policy they consider appropriate is confirmed. The majority of Parliament in fact opted for this simplification.

Finally the left-wing put forward the proposal to increase the federal contribution to 9% (30% for 30% of the population), instead of limiting itself to 7.5%. But also in this case Parliament's response was to confirm that the sense of financial equalization was to provide the cantons with more financial means for free end-use in order to be able to increase the leeway of their own policies. The increase hoped for by the left-wing in federal funds tied to premium reduction would have worked in the opposite direction, and it was therefore rejected.

Legislative outcome

Enactment

Actors and influence

Description of actors and their influence

Government
Federal Department of Financevery strongstrong none
Parliament
National Councilvery strongvery strong none
Council of Statesvery strongvery strong none
Parliamentary left-wingvery strongneutral none
Civil Society
Voting majorityvery strongvery strong none
current current   previous previous
Federal Department of FinanceCouncil of StatesNational Council, Voting majorityParliamentary left-wing

Positions and Influences at a glance

Graphical actors vs. influence map representing the above actors vs. influences table.

Adoption and implementation

The next figure is related to the section "monitoring and evaluation"

Change in net premiums as a % of disposable income for three household types

Change in net premiums as a % of disposable income for three typologies of household in the cantons having the minimum and maximum incidence of net premium and the Swiss average (1998-2004)

Monitoring and evaluation

Every two years an independent institute is commissioned with a study on the efficacy of premium reduction in the 26 cantons by the Federal Office for Public Health (the study is called "Monitoring der sozial- und familienpolitischen Wirksamkeit der Prämienverbilligung"). At present the study published in 2005 is available for data relative to 2004 (see ref. 7). One should have been realized on 2006 data. However, in order to be able to ascertain the changes in the system in premium reduction decided on by Parliament in 2005 (see again survey (5)2005), which were to come into force in 2007, the Federal Office decided to put off the study for a year, commissioning it with reference to the 2007 situation. Malicious tongues raised doubts, however, that the main reason for the postponement was political in nature; if the usual biennial rhythm had been respected, the study data would have been made known in the weeks preceding the ballot on the single sickness fund in March 2007, so it was feared that these data might influence the citizens' voting decisions. Now the publication of the report relating to 2007 is to be at the beginning of May 2008. The Federal Office for Public Health has a project to present and up-date this information, which in future should be displayed in graphic form, on its internet site, with the aim of strengthening the political impact of this comparison among the cantons.

Expected outcome

From 1996 to 2007 the budget allocated to premium allowances by the Confederation and the cantons increased at an average annual rate of 4.4%, whereas premiums increased at an average annual rate of 5.5%. But since the cantons could decide not to use all the budget allocated by the Confederation, if the subsidies really distributed are taken into consideration, the amount grew at an average annual rate of 5.8% between 1997 and 2006, therefore slightly more than the growth in premiums. On the other hand, in the same period income in Switzerland rose at decidedly lower rates (equal at the most to one third of the premium increase). For this reason, the additional allowances distributed could not completely offset the rise in health insurance premiums, leading to an increasing burden also for households with modest income.This result can easily be illustrated with a numeric example. Let's assume that in year 0 the sum earmarked for subsidies is 15% of the premiums and that the incidence of the net premium is equal to 8% of disposable income. Now let's envisage a 100% premium increase over a decade, a 100% adjustment of the subsidies distributed also and an increase of "only" 30% in the disposable household incomes (in nominal terms);  in this case we would have a significant increase in the incidence of the net premium, coeteris paribus, which would rise from 8% to 12.3%.

Already in previous years, subsidies were administered and distributed by the cantonal authorities, according to local legislation. Despite the federal constraint which committed each canton to the distribution of a minimum amount of subsidies, the different legislations were the source of considerable inequalities; indeed, for the same type of household the burden of compulsory health insurance premiums on disposable income varied significantly depending on the canton in which the household lived.

The scale of this problem is highlighted in the previous figure, which shows the incidence of premiums on disposable income for three types of household after the deduction of earmarked subsidies. From the figure we can observe that

  1. the variability of net premium incidence across the cantons ranges from six to eleven percentage points, depending on the type of household. As time passes there is no convergence process; 
  2. almost everywhere there is a worsening of the incidence between 1998 and 2004;
  3. for two types of households out of three, the retired person and family with two children, the average incidence already exceeds the historic threshold of 8%, illustrating the fact that a growing number of cantons no longer respect the social objective defined by the Federal Council in 1991. 

Finally from the first information on the 2007 monitoring, which will soon be published, the trends shown in the figure would seem to be confirmed in 2007 too.

Impact of this policy

Quality of Health Care Services marginal marginal fundamental
Level of Equity system less equitable system less equitable system more equitable
Cost Efficiency very low very low very high
current current   previous previous

The amendments introduced to the FHIA in relation to the new financial equalization will only further increase the gap existing among the single cantons. The minor constraints put on the single cantons by the Confederation in the field of premium reduction and the decrease in federal resources earmarked specifically for this aim might push some cantons to use part of the funds for free end-use and part of their own means for other purposes, for example to face the increased need for public expenditure sanctioned by the reform of hospital financing. However, this measure would have significant repercussions of a redistributive nature, with unpleasant results above all for the middle class. In fact, one franc of public money spent for example to co-finance hospital care has a less redistributive impact with respect to one franc spent in premium reduction and will therefore decrease equity of financing.

References

Sources of Information

  1. The Federal Council, Botschaft zur Neugestaltung des Finanzausgleichs und der Aufgaben zwischen Bund und Kantonen (NFA) vom 14. November 2001 (http://www.admin.ch/ch/d/ff/2002/2291.pdf)
  2. The Federal Assembly, Bundesgesetz über den Finanz- und Lastenausgleich (FiLaG) vom 3. Oktober 2003 (http://www.admin.ch/ch/d/ff/2004/6953.pdf)
  3. The Federal Assembly,Bundesbeschluss zur Neugestaltung des Finanzausgleichs und der Aufgabenteilung zwischen Bund und Kantonen (NFA) vom 3. Oktober 2003 (http://www.admin.ch/ch/d/ff/2003/6591.pdf)
  4. The Federal Council, Botschaft zur Ausführungsgesetzgebung zur Neugestaltung des Finanzausgleichs und der Aufgabenteilung zwischen Bund und Kantonen (NFA) vom 7. September 2005 (http://www.admin.ch/ch/d/ff/2005/6029.pdf).
  5. The Federal Assembly, Bundesgesetz über die Schaffung und die Änderung von Erlassen zur Neugestaltung des Finanzausgleichs und der Aufgabenteilung zwischen Bund und Kantonen (NFA) vom 6. Oktober 2006 (http://www.admin.ch/ch/d/ff/2006/8341.pdf) .
  6. Amtliches Bulletin (2006), NFA. Ausführungsgesetzgebung  (http://www.parlament.ch/ab/frameset/d/n/4714/228044/d_n_4714_228044_228045.htm?DisplayTextOid=228046)
  7. Balthasar et al (2005), Monitoring 2004, Die sozialpolitische Wirksamkeit der Prämienverbilligung in den Kantonen (http://www.bag.admin.ch/themen/krankenversicherung/01156/01159/index.html?lang=de)
  8. Preuck, R. (2007), Individuelle Prämienverbilligung im Zeichen des Neuen Finanzausgleichs, Soziale Sicherheit 5/2007, 262-264 (http://www.bag.admin.ch/themen/krankenversicherung/01156/01158/index.html?lang=de)

Reform formerly reported in

A drop of solidarity in a sea of inequity
Process Stages: Implementation, Legislation

Author/s and/or contributors to this survey

Crivelli, Luca

Proof-reading by Mary Ries

Suggested citation for this online article

Crivelli, Luca. "Are premium allowances at risk of downsizing?". Health Policy Monitor, April 2008. Available at http://www.hpm.org/survey/ch/a11/4