Free Market Reforms Transforming Health Care in the Netherlands

Most Europeans have followed the American presidential campaign with interest, particularly when it comes to the groundswell of support for comprehensive healthcare reform. It seems likely that the U.S. will attempt to introduce an old European model, accepting heavy government involvement in the delivery of and payment for healthcare services in exchange for universal coverage.

Considering that several European countries are moving away from this paradigm and instead giving the private sector a more robust role, this trend is ironic.

The Netherlands is the best example of Europe's move toward market-oriented reform. Before U.S. officials devote even more taxpayer dollars to health care, they should take a long look at how the Dutch have improved their health care system by reducing the government's role in it.

Health insurance has been mandatory for all Dutch citizens since 1941. During the sixties, the Dutch government gradually took over the entire healthcare industry. This crescendoed in 1971 when a national bureaucracy was established to plan everything from funding to staffing and pricing.

Unsurprisingly, the Netherlands' healthcare costs spiraled out of control, far outpacing overall growth in prices and incomes. The government tried to limit price hikes by rationing care, resulting in fewer choices, waiting lists, and staff shortages.

But such rationing did little to rein in costs. So Dutch leaders turned to the private sector.

Today, every Dutch citizen is required to have basic insurance coverage for major areas like medical treatments, long-term care, and dental and maternity care. Citizens and noncitizens alike in the Netherlands choose from among 14 private insurers. Supplemental insurance for vision or dental care is available; about 90 percent of the population has such coverage.

To enforce the mandate, the government imposes a fine on anyone who doesn't purchase basic insurance. The fine is steep – thirty percent more than the cost of insurance for the period they weren't covered.

For citizens who cannot afford insurance on their own, there are government subsidies.

Private insurers can't deny coverage to high-risk individuals, and are prohibited from charging people different prices based on age, gender, or risk of illness.

The Dutch spend less on health care as a percentage of GDP than Americans do. The government keeps costs low through intelligent subsidies.

Every Dutch worker has 7.2 percent deducted from his salary, with a maximum deduction of around US$3,300. This fee goes to a central Health Insurance Fund that equalizes risk. About two-thirds of households get a subsidy through the Fund to purchase private insurance, with the size of the subsidy tied to income level.

The results have been remarkable. Previously, 70 percent of the population -- basically everyone with an annual income below US$49,000 -- was directly insured by the government. This scheme was financed with an 8.2 percent tax on workers' salaries.

By leveraging the power of competition between insurers, Dutch policymakers have been able to lower the "health tax" a full percentage point.

Private competition has also improved the purchasing power of Dutch consumers. The average annual premium is nearly US$1,500 lower than initially estimated. Eighty percent of the population has saved money on health care.

During the first year of reforms, healthcare prices increased by a mere 0.5 percent -- less than the increase in average income or in the price of other goods. So real healthcare costs actually decreased. Instead of seeing their pay raises eaten up by higher medical costs, Dutch workers were actually left with more disposable income. If this trend continues, a person of average income will have a salary about US$1,500 higher in 2040 than he would have had under the previous tax code.

Consumers can now shop around for the best deal on health insurance -- just like for any other good or service. Using the internet, Dutch consumers can compare insurers with regard to prices, services, customer satisfaction, and supplemental offerings. Hospitals are also rated on a number of performance indicators, allowing patients to make informed decisions about where to get treated.

The Netherlands provides a blueprint for successful, market-oriented healthcare reform. The real question for American voters is whether their leaders will be smart enough to follow it.

Johnny Munkhammar is Managing Director of Munkhammar Advisory, Research Director of the European Enterprise Institute, and author of "The Guide to Reform" (Timbro/IEA, 2007).