Federalism and Health Care Cost
Containment in Comparative Perspective
Jason Jordan*
Comparative social policy literature generally relies on a shallow understanding of
the role of federalism in welfare politics. Federalism is largely understood as one
of a number of institutional ‘‘veto points’’ like bicameralism or presidentialism
that serves as a brake on welfare state expansion. By fragmenting political authority
and increasing the number of decision makers involved in policymaking, federalism
expands the opportunities for opponents of the welfare state to block major
legislation. Empirical evidence consistently confirms the role of federalism in
constraining social expenditures and welfare state programs (Huber and Stephens
2001; Immergut 1992; Obinger, Leibfried, and Castles 2005b; Stephens 1980;
Swank 2002).
Despite widespread agreement over the connection between federalism and
social expenditures during periods of welfare state expansion, disagreement exists
concerning the role of federalism in the current era of welfare state retrenchment.
Federalism may hinder efforts at welfare state retrenchment by increasing the
opportunities for welfare state proponents to access decision making and block
major reforms (Darby, Anton Muscatelli, and Roy 2005; Leibfried, Castles, and
*Florida State University; [email protected]
Publius:The Journal of Federalism volume 39 number1, pp.164^186
doi: 10.1093/publius/pjn022
Advance Access publication 30 July 2008
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Despite widespread agreement over the connection between federalism and social expenditures
during times of welfare state expansion, disagreement exists concerning federalism’s role in the
retrenchment era. Existing approaches fail to recognize institutional variation among federal
states. Analysis of Britain, Germany, and Canada suggests that federalism may promote or
hinder health care retrenchment depending upon how it structures the relationship between
regional and national governments. Power-sharing federalism hinders health care reform by
increasing the institutional obstacles to unpopular cutbacks. Power-separating federalism facilitates reform by creating opportunities for blame avoidance without substantially increasing the
number of veto players. These findings challenge traditional linear or dichotomous models of
federalism, suggesting the need for an approach that captures how particular types of federalism
affect retrenchment politics.
Federalism and Health Care Cost Containment
165
Federalism and Health Care Reform
Beginning in the 1970s, countries across the West witnessed a dramatic rise in the
costs of health care. Technological change, increasing patient expectations, aging
populations, and the weakness of existing cost control mechanisms combined to
drive health care expenditures well ahead of GDP growth. By 2001, total health care
expenditures among high-income OECD states had risen to 8.6 percent of GDP on
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Obinger 2005). From an alternative perspective, federalism may create opportunities for reformers to shield themselves from the political costs associated with
welfare reform by transferring responsibility for cuts to other layers of government
(Banting 2005; Obinger, Castles, and Leibfried 2005a).
Existing literature on the role of federalism in welfare state retrenchment suffers
from two significant weaknesses. First, the simple scoring of federalism in a linear
or binary fashion fails to recognize the complexities within federal systems and how
different federal arrangements might influence retrenchment politics. Second, when
different types of federalism are considered more carefully, comparisons generally
remain constrained to federal states without reference to unitary systems (Banting
and Corbett 2002; Obinger, Leibfried, and Castles 2005b). The absence of external
comparison makes it difficult to distinguish the distinct impact of federalism
relative to unitary systems (Wincott 2006).
This article addresses these theoretical weaknesses by examining the impact of
federal institutions on health care politics in the era of welfare state retrenchment.
Beginning in the early 1970s, health care costs across the West began to grow faster
than GDP, putting pressure on publicly funded health care systems to bring costs
under control. This article examines this period of health care reform in two federal
states, Germany and Canada, and one unitary system, Britain. The juxtaposition of
these three cases draws out valuable insights into the role federalism plays in
retrenchment-era politics. Specifically, this discussion sheds light on how and
under what circumstances federalism may either retard or facilitate retrenchment.
This article proceeds by first examining the common fiscal and political pressures
faced by national health cares systems in the latter part of the twentieth century.
This discussion is linked to broader discussions about the role of federalism
and welfare state retrenchment. The purpose is to isolate the expected political
dynamics surrounding different federal arrangements during times of significant
and often unpopular reforms to the health care system. The next three sections
outline the cases of Britain, Germany, and Canada in order to emphasize how
federal institutions (or their absence) shape opportunities for significant health
care reform. The final section addresses the contributions of a more nuanced
conception of federalism to our understanding of health care and broader welfare
state politics.
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average up from 5.4 percent in 1970 (Huber and Orosz 2003). In the context
of the economic slowdown and rising unemployment of the 1970s and 1980s,
spiraling health care expenditures brought cost control to the center of political
and policy debates over health care.
In theory, limiting government health care expenditures is a simple matter of
capping the health care budget. In practice, controlling health care costs poses
a conundrum for political leaders seeking reform. With national health care, states
offered an open-ended commitment to provide for the health care of their citizens.
Efforts to control costs often met with staunch public resistance as they were
construed as an abandonment of the government’s responsibility for care. Despite
widespread public grumbling in many countries concerning the state of the health
care system, survey data show little support for cost-cutting measures or health care
rationing (King and Maynard 1999; Tuohy 2002; Busse 1999). Moreover, efforts to
improve efficiency or achieve cost control often ran up against powerful and well
organized interest groups (doctors, insurers, and prescription drug companies) that
could stymie reform efforts (Giaimo 2002).
The question for would-be reformers is how to contain health care spending
without paying the severe political costs associated with expenditure controls.
In this way, efforts to contain health care costs resemble the larger political
dynamics associated with what Pierson (1994; 1996) dubbed the ‘‘new politics’’ of
the welfare state. After its initial period of expansion, the welfare state generally,
and health care in particular, generated its own constituency, which now worked
to curtail efforts at reform.
In the age of welfare retrenchment, reformers face strong public and interest
group opposition to policies that will provide only limited political benefit.
Pierson suggests that in such a political environment, the opportunities for reform
are affected by two related but distinct factors. First, reform opportunities are
improved when the number of decision-makers can be reduced. The fewer decision
points and institutional obstacles a policy change must pass through, the easier it is
to build consensus and exclude opposition groups from the process. Thus, the
likelihood of reform should be inversely related to the number of institutional veto
points in the decision-making process. The second factor involves opportunities for
obfuscation and blame avoidance. Facing severe political opposition, reformers may
seek opportunities to shield themselves from public backlash (Weaver 1986). This
politics of ‘‘blame avoidance’’ involves efforts to reform the system in ways that
make it difficult for opponents to initially predict the consequences of policy
change or to trace the political accountability for reform decisions.
Taken together these two institutional factors, veto points and opportunities for
blame avoidance, suggest that the ideal political environment for reform involves
a system with veto free decision-making that provides ample opportunities to avoid
accountability for decision-making. It is important to note, as Pierson (1994) does,
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that these two features of the political system may be in conflict with one another.
Veto-free political environments allow reformers to exclude the opposition and
interest groups from decision-making process, but they may also allow the public
and interest groups to easily determine responsibility for change. The tension
between these two dynamics requires careful consideration of how institutional
environments affect the balance of these two factors and therefore opportunities
for reform.
Recognizing that opportunities for health care reform are affected by both the
relative number of veto players and the opportunities for obfuscation, what role
does federalism play in balancing these potentially conflicting dynamics? Again, we
can begin by looking to the broader literature on welfare state retrenchment. The
role of federalism in retrenchment politics is not initially clear (Obinger, Castles,
and Liebfried 2005a). From the veto points’ perspective, federalism functions to
decentralize political power in ways inimical to major reform efforts. During
periods of welfare state expansion, federalism multiplies the points of contestation
for opponents of the welfare state. Federalism may present an equally significant
obstacle to welfare state retrenchment. Specifically, opponents of reform may work
through regional governments to prevent large-scale reform efforts. The veto-points
perspective predicts that federalism will work as a ‘‘ratchet effect’’ that slows
program development while simultaneously preventing backsliding (Obinger,
Castles, and Leibfried 2005a).
In other respects, the diffusion of political authority in federalism may facilitate
health care reform by creating opportunities for blame avoidance through creating
confusion in the electorate concerning the level of government responsible for
benefit cuts. In cases where both levels of government share in fiscal and regulatory
responsibilities, it may be difficult for citizens to assess blame and hold political
leaders accountable (Cutler 2004). Leaders at the national level may utilize lower
levels of government to shield themselves from public discontent by transferring
responsibility for unpopular reforms to regional governments. These opportunities
for blame avoidance are unavailable to reformers within unitary states who must
instead face the full brunt of public dissatisfaction. Federal systems may therefore
improve the opportunities for retrenchment by providing political cover to
reformers promoting unpopular policies.
Existing retrenchment literature thus provides conflicting expectations concerning the role of federalism in the politics of health care reform. From one perspective, federalism may decentralize political authority making it more difficult to
push through politically contentious cuts to the health care system. Alternatively,
federalism may facilitate reform by shielding reformers from the direct political
costs of cutbacks. Though generally viewed as competing theories, a more nuanced
approach would examine the conditions under which the competing logics of veto
points or blame avoidance are most likely to play out. The presence of these two
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political dynamics should be influenced by both the policy arena, and the unique
structure of federal institutions within each state. In other words, differing federal
arrangements may present different opportunities and obstacles to reform.
The comparative literature distinguishes between two broad types of federalism
described as power-sharing and power-separating federalism (Braun, Bullinger,
and Walti 2002).1 In power-sharing federalism, the powers and responsibilities
of national and regional governments are highly interlaced and interdependent.
In these systems, policymaking generally occurs at the national level through
consultation with regional governments who share responsibility for policy implementation. Germany represents a clear example of power-sharing federalism. The
Basic Law of 1949 built on earlier patterns of federalism by giving the national level
government responsibility for policymaking while substantially constraining its
bureaucratic powers. This makes the federal government highly dependent upon
the regional, Länder, governments for policy implementation and administration.
Moreover, Länder governments, which are commonly controlled by parties opposed
to the governing party at the national level, are given direct representation in
national policymaking through their control over the upper house of parliament,
the Bundesrat. The Bundesrat is given veto authority over legislation that affects
Länder finances which, given their ownership of the majority of German hospitals,
includes almost all health care legislation (Altenstetter 1999). The German system
thus creates mutual dependencies between the national and regional governments
that demand cooperation and consultation between both levels.
Where power-sharing federalism emphasizes intergovernmental cooperation,
power-separating federalism clearly delineates between the powers and responsibilities of each level of government, allowing each to act with relative autonomy
within its own sphere. Power-separating federalism emphasizes distinct jurisdictions
and competencies between the federal and regional governments that reduce
opportunities for cooperation and coordination. The Canadian system represents
a clear example of power-separating federalism. The Canadian constitution divides
responsibilities between the federal and provincial level leaving much of the
regulatory and spending authority to regional governments. The provincial governments have no direct representation at the national level and must instead rely
upon informal strategies of negotiation between the prime minister and provincial
leaders. In contrast to power-sharing federalism, the Canadian power-separating
federalism emphasizes inter-governmental autonomy allowing for more competition and conflict between regional and national level governments.
How might these different types of federalisms influence retrenchment politics
generally and health care politics more specifically? The discussion of retrenchment
politics suggested that rolling back social policy is facilitated by political systems
that allow reformers to overcome political opposition and/or shield themselves
from electoral backlash. Unitary systems like the British make it easier to overcome
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opposition by eliminating the potential veto role played by regional governments.
At the same time, unitary governments may find it more difficult to deflect public
attention and avoid blame because the public can more easily draw clear lines of
responsibility between unpopular policies and government actions (Pierson 1994).
Which of these two effects, blame avoidance or veto points, will govern politics at
any one moment is unclear, making it difficult to predict from the outset the
overall effects of unitary governments on health care reform.
Within power-sharing federal systems, conditions for health care reform or
spending cuts appear particularly grim. Power-sharing federalism opens nationallevel decision making up to a number of veto players. At the same time, because
policymaking remains essentially a national-level phenomenon, voters can still
easily connect unpopular policies and outcomes to particular political actors and
parties. Power-sharing federalism thus increases veto points without substantially
reducing the accountability of the government for unpopular policies. Powersharing federalism should prove a significant obstacle to health care reform.
As with unitary systems, the impact of power-separating federalism on health
care reform is not immediately clear. Power-separating federalism allows both levels
of government to act autonomously within their own sphere. This means that if the
federal government can engage in cutbacks while staying within its own jurisdiction, it faces no direct political opposition from the regional level. Under these
conditions, power-separating federalism may not add a significant new veto
threat to retrenchment efforts. At the same time, the existence of a second layer of
government may create opportunities for obfuscation and blame avoidance
concerning which layer of government is responsible for cuts (Cutler 2004). Powerseparating federalism may then facilitate retrenchment efforts by opening opportunities for reformers to shift blame and responsibility onto regional governments
while locking those governments out of the policymaking process.
It is important to recognize that the above hypotheses link federal institutions to
the opportunities for health care retrenchment and reform, not the overall rate or
growth of health care spending in each country. Variation in the level of health care
expenditures across countries results from a range of factors outside the scope of
this study including annual GDP growth, the overall size of the economy, preferences of the population, population growth, population aging, and technological
change. More importantly, spending growth at any given time may reflect failed
efforts at cost containment, successful efforts at program expansion, or changes in
the underlying demand for health care caused by changing demographics. The fact
that spending growth may represent different political phenomenon at different
times means that it cannot by itself tell us about the success or failure of reform
efforts. Instead, we must examine the underlying political dynamics to determine
when spending growth represents failed efforts at reform and when it is the product
of a politics of health care expansion. In other words, the current spending level
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Britain
British government is characterized by a high concentration of political authority
in the hands of the ruling party. Parliamentary supremacy, party discipline, and
an electoral system that encourages single-party majority governments allow the
ruling party to govern with few institutional obstacles. The relatively veto-free
political environment reduces political obstacles to major reform efforts but also
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and growth rate is the product of periods of both expansion and retrenchment.
Because, as discussed above, the politics of health care expansion are fundamentally
different from the politics of retrenchment, the current spending level cannot be
explained by hypotheses designed only to explain periods of retrenchment.
In this article, the major question involves not long-term spending trends or
levels, but rather the impact of federal institutions on the politics of health care
reform. How do federal institutions shape the opportunities available to those
seeking to reform the health care system and constrain spending growth? More
broadly, how do federal institutions affect the ability of political actors to engage in
unpopular policy reforms without paying substantial political penalties? Because
the intention of the article is to explain the effects of federalism on the politics of
retrenchment (rather than overall spending patterns), this article limits both its
empirical and theoretical scope to those periods in each country in which health
care cost control was a major part of the political agenda and a goal of governing
parties. In each of the three countries included here, the last two decades of the
twentieth century were a time of broader fiscal austerity in which the growing costs
of health care became a significant political issue. During this period, governing
parties sought to constrain and even roll-back health care spending in order
to reduce the financial burden of the health care system on government and the
broader economy. By the late 1990s, improved economic conditions and the
control of government by left parties weakened political and economic pressures
for health care reform. Because this article concerns itself only with the efforts of
reformers to scale back the health care system in different institutional environments, it will focus its attention on the stage of health care retrenchment in the
1980s and 1990s, when parties actively sought to engage in major policy reforms to
contain and even cut health care expenditures.
The hypotheses are explored through a brief analysis of Britain, Germany,
and Canada and their experiences with health care reform. The analysis begins with
Britain for two reasons. First, the inclusion of a unitary system highlights the
specific dynamics generated by federalism that are difficult to isolate in samples
limited to federal systems (Wincott 2006). Second, the British unitary government
helps to draw out the potential tensions between the dynamics of veto points and
blame avoidance described above.
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concentrates political accountability in the government by eliminating opportunities for blame avoidance.
Despite the strong centralization of political authority in Britain, regional actors
are not wholly without representation at the national level (Mitchell 2006; Wincott
2006). The Irish, Welsh, and Scottish regions all obtained some level of local
administrative authority as part of their incorporation into the larger UK. The
character of local administration in Britain up until the devolution reforms of 1998
highlights the differences between unitary and federal models of government.
In Britain, local administration was expressed by the presence of cabinet-level posts
appointed by the governing party.2 Most importantly for the purposes of this
article, the NHS Scotland Act of 1947 gave the Secretary of State for Scotland
administrative control over the national health care system in Scotland. These
cabinet level posts could and did advocate for local interests and had some ability
to shape policy implementation and administration (Stewart 2003). At the same
time, local administration in Britain did not provide the regions the level of
institutional autonomy characteristic of federal systems. As cabinet-level posts, the
regional administrative authorities were highly constrained by party unity and the
absence of independent policy-making authority, institutional protections for their
autonomy, or the public legitimacy of democratic elections. The British strategy of
local administration therefore provides a clear example of how unitary systems
attempt to constrain the expression of regional political actors and incorporate
them into broader, national-level politics. As a result, as will be discussed subsequently, these local administrative authorities could not play the same role as veto
actors or targets of blame avoidance as regional governments in more federal
systems.
The centralization of government authority is reflected in the original design of
the British National Health Service (NHS). Created immediately after World War II
as part of Labour’s ambitious plan to develop a universal welfare state, the NHS
nationalized all hospitals, placed medical specialists on salary, and guaranteed all
citizens free access to health care. The system was hierarchically designed with the
budget set annually at the Treasury Office and administered by the Department of
Health, with the exception of Scotland as noted above, through Regional and
District Health Authorities (DHAs).
Though highly centralized and hierarchical, the British system relied heavily
upon the discretionary power of general practitioners (GPs) who practiced
medicine with little administrative oversight. The NHS guaranteed all citizens the
right to full access to health care while allowing doctors through individualcare decisions to determine the appropriate level of health care supply. Originally,
the payment schemes were thought to de-link doctors’ incomes from their care
decisions, avoiding potential abuse of the system by doctors who might over
prescribe care; however, the existing pay schemes also made doctors and other
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9
Germany
Britain
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20
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95
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Figure 1 The growth of public health-care spending.
health care suppliers largely insensitive to health care costs. The result was a health
care system administered with little concern for growing costs (Baker 1992).
As medical technology improved and the population grew older, the costs of the
NHS began to rise rapidly (figure 1).
The initial response of the government to rising costs was to continuously
expand the budget particularly in poorly performing areas of the country (Bevan
and Robinson 2005). This approach was threatened in the late 1970s both by the
overall weakness of the British economy and the election of the Conservative Party
led by Margaret Thatcher in 1979. Elected with a mandate for sweeping reform of
the entire British economy and public system, Thatcher initially avoided significant
reforms of the NHS. Initial steps taken by the Thatcher government involved
slowing the growth of health expenditures directly by constraining the expansion
of the national health care budget. Following the Griffith Report in 1983, the
Conservative government sought to improve the efficiency of the NHS by increasing administrative oversight. Government administrators were now charged with
improving efficiency and were directed to no longer defer to the authority of
doctors in administrative decisions (Klein 1985). Finally, the new Conservative
measures placed hard budget caps on GPs and hospitals, deducting cost-overruns
from future years’ budgets.
The Conservative reforms had the immediate effect of freezing public health care
spending, which remained fixed as a percentage of GDP through the 1980s. Though
the Conservatives had managed to contain spending, they could not contain the
growing political crisis surrounding the perception of chronic underfunding in
the NHS. In spite of global budgets, the British were not immune from the general
pattern of rising demands for health care associated with advances in medical
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Public Expenditures as % GDP
Canada
8
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technology, increasing expectations, and population aging that affected all Western
countries. Rising demand and fixed budgets generated growing dissatisfaction with
the NHS. (Klein 1985). The Conservative suggestion that real quality improvements
could be achieved under fixed budgets through increased efficiency appeared
questionable in a system that already operated near peak efficiency (Bevan and
Robinson 2005).
By the late 1980s, doctors began to place increasing public pressure on the
government. This occurred through an increasingly strident public relations
campaign culminating in the announcement in late 1987 by three members of the
Royal Colleges of Medicine that Thatcher’s budget constraints threatened to
undermine the entire NHS (Giaimo 2002). The media and the Labour opposition
brought to the public’s attention the problem of growing waiting lines and hidden
health care rationing (Jacobs 1998). The effect was a growing dissatisfaction with
the NHS directed not at the structure of the system or health care providers, but
rather to the government’s interference and refusal to commit sufficient resources
(Klein 1995; Day and Klein 1999; King and Maynard 1999).
Britain’s health care cost-crisis of the late 1980s fits well with Pierson’s description of the retrenchment process. Though no direct efforts to rollback the health
care system were made, attempts to control costs were met by staunch resistance
from doctors, who helped to mobilize the public against budget constraints. The
hierarchical nature of the Westminster system and the NHS gave the government
the ability to easily stop health care cost growth through budgetary fiat, but the
clear lines of accountability made these budget constraints hard to maintain in
the face of growing public pressure. Thatcher’s Conservatives needed more than
a strategy to contain costs. They needed a strategy to diffuse the political backlash
from cost containment.
Thatcher responded to the growing political pressure with the surprise public
announcement of a complete review of the NHS. The review was conducted under
strict secrecy and occurred without consultation from the medical profession
(Giaimo 2002; Appleby 1999; Day and Klein 1999). The resultant white paper,
Working for Patients, outlined the Conservative plan for addressing the perceived
crisis in the NHS. The core of the new reforms involved the introduction of
‘‘internal markets’’ within the NHS that would harness the power of market
competition within a publicly provided health care system (Maynard 1995).
In practice, this meant drawing for the first time a distinction between the state’s
dual role as a purchaser and provider of health care. In the new system, the state
would remain the primary purchaser of health care through the existing DHA;
however, providers of health care (hospitals and doctors) were now no longer
guaranteed access to public funds. The DHAs were responsible for contracting with
individual doctors and hospitals, forcing them to compete against one another on
the basis of price and efficiency. System administrators in both public hospitals
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and the DHAs were now held directly accountable for remaining within budget
constraints. GPs were similarly allowed to form into ‘‘fundholding trusts’’ that
could contract with other providers for a limited range of services for their patients.
The reforms meant to force health care providers to compete against one another
on price in order to promote improved efficiency within the health care system.
A thorough analysis of the implications of these market reforms is beyond the
scope of this article. Here it is important to understand the political strategy that
underlies the internal market reforms. For the Conservatives, the health care crisis
was not a technical issue of cost control, which had been largely achieved. Rather,
the crisis involved the political fallout associated with the appearance of health care
rationing implied by cost constraint. The new policy did not directly address the
public’s concern for underfunding but instead pushed decisions over budget
constrains down to the level of DHA administrators and the doctors who must
compete against one another for their favor. By focusing on competition between
doctors, the new system divided the major political opposition to budget cuts
(Giaimo 2002). This new structure reinforced the powers of local level administrators, making them directly responsible for making hard choices concerning
health care rationing (Johnson and Cullen 2000) and helping to relieve the political
pressures felt by Whitehall associated with the cost-crisis.
In the end, competitive reforms could not diffuse the growing public resentment
against Thatcher. With her replacement by John Major in 1990 and the victory of
Labour in 1997, many of the competitive elements of the system were eliminated
as the public objected to the perception of privatization implied by the internal
market strategy. It is important to recognize that the purchaser–provider split has
been retained and even strengthened with recent reforms (Klein 1998). This aspect
of the system retains its political utility as a layer of bureaucracy shielding the
national government from direct health care rationing decisions.
The British story is relevant to the discussion of federalism in health care in two
respects. First, the unitary nature of the system allowed the Thatcher government
to easily contain costs and to overhaul the entire system without concern for lower
levels of government. Because local administrative authority was exercised by
cabinet level officials appointed by Thatcher herself, they posed little resistance
to the reforms (Holliday 1992). Scottish GPs did resist participating in many of the
reforms at the implementation stage, but they had few institutional avenues for
converting their discontent into real a serious obstacle for the managed competition reforms. This is consistent with arguments that unitary systems should be able
to more easily engage in health care cost containment and reform. Second, though
the unitary system made cutbacks technically easy it also made them politically
difficult to sustain as the public could easily trace the lines of accountability to
the top. The political fallout forced the Thatcher government to pursue a new
strategy that ironically empowered a regional layer of administrative bureaucracy,
Federalism and Health Care Cost Containment
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the DHAs, to engage in cost control as a means of shielding the government from
public criticism. This case reflects the dilemmas of retrenchment in which fewer
veto points also means less political cover for reformers.
Germany
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Beginning with the Health Insurance Act of 1883, the German system was based
on mandatory enrollment of workers into formally private, non-profit ‘‘sickness
funds’’ organized by industry and financed through contributions by workers
and employers. Doctors are organized into unions arranged by regions. These
Kassenartzliche Vereinigung (KVs) negotiate with insurance funds directly on behalf
of all doctors in the region. Each KV receives a lump-sum payment from each
sickness fund to provide health care for its members in that region for the year.
The KVs then distribute these funds to doctors in exchange for their services.
After World War II, the new constitution severely constrained the capacity of
the national government to regulate the health care system. The cornerstone of the
Basic Law of 1949 was the reintroduction of a power-sharing federal system that
placed substantial bureaucratic and administrative responsibilities in the regional
Länder governments and also gave them direct representation at the national level
through the Bundesrat. Federalism poses a significant obstacle to government action
at the national level particularly when the lower and upper houses of Parliament
are controlled by different parties, which is often the case. The combination of
significant checks and balances with a large and complex welfare state created the
conditions for what Katzenstein (1987) has described as the semi-sovereign state.
Faced with the responsibilities of regulating and administering the health care
system with limited administrative and political capacity, the federal government
sets out the general goals of national policy and relies heavily on corporatist
bargaining arrangements in which ‘‘social partners’’ are responsible for administering social policy. In the health care sector, corporatism delegates responsibility for
health care policy to doctors and insurers. This strategy allows the German
government to maintain a national health insurance system despite fractured
political institutions that render governance difficult (Altenstetter and Busse 2005).
Strains in the system began to develop in the 1970s as costs began to rise rapidly
(figure 1). The inability of the system to constrain costs emerged from structural
flaws in the initial corporatist bargain that severely weakened incentives for cost
control. First, the KV system granted doctors a supply-side monopoly in their
negotiations with a large number of fragmented insurance funds. The combination
of a supply-side monopoly and a multi-payer system created the worst possible
conditions for cost control. The sickness funds were forced to compete against one
another to gain access to the best doctors and facilities. This created a situation
of ruinous competition as insurance funds continuously bid-up doctor wages
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(Altenstetter 1999). This ruinous competition was exacerbated by a second
structural flaw in the system. Mandatory enrollment of workers allowed the funds
to be largely unresponsive to a captive clientele. The result was that sickness funds
were to some degree insensitive to costs as any increase in fees by doctors could be
passed along to its members without fear of reprisal.
By the mid-1980s the Christian Democratic Kohl government began to interpret
high health care costs as a political and economic crisis. The financing of the health
care system through social security contributions provided both workers and
employers a direct indicator of the increasing financial burden of health care.
Although health expenditures as a proportion of GDP remained steady in the 1980s
(figure 1), the contribution rate of workers and employers into insurance funds
continued to rise (Kamke 1998). By 1990, health care contributions had risen to an
average of 12.6 percent of wages and showed little signs of stabilizing (Manow
1997). Earlier efforts to restrain the contribution rate through strengthening
corporatist bargaining and series of cost containment acts led to short-run cost
stabilization but could not slow long-run expenditure growth (Kamke 1998). The
reliance on the social partners to restrict costs consistently failed as the KVs utilized
their market power over funds to push up wages and compensate doctors for the
continued expansion of health care demand. The incorporation of East Germany
into the West German health care system after reunification further stressed
corporatist bargaining arrangements and resulted in an immediate and seemingly
uncontrolled expansion of health care spending.
The Kohl government responded to the rising political crisis surrounding
expenditure growth by circumventing the traditional corporatist system. In an
unprecedented move, the government engaged in secretive negotiations over health
care reform that excluded doctors, sickness funds, and Länder governments. After
only three weeks, the Kohl government announced a new strategy to inject
managed competition into the German health care system (Giaimo 2002). Though
managed competition had the rhetorical flair of privatization and markets, its basic
strategy was to induce competition between funds in such a way as to re-incentivize
the system toward cost control (Maarse and Paulus 2003; Kirkman-Liff 1999).
The core of the new strategy allowed workers for the first time to choose their own
sickness funds, forcing them to compete against one another on the basis of cost
and services. Failure to control contribution rates would now result in members
shifting to cheaper funds. By injecting cost discipline and concern for consumer
satisfaction into the decision making of funds, the new system forced sickness funds
to negotiate with doctors and hospitals to keep costs down.
In addition to the highly touted managed competition reforms, the new Kohl
strategy involved a direct effort to bring costs under control through global
budgeting (Kirkman-Liff 1999). The Reform Act of 1993 introduced an immediate
freeze of contribution rates for three years and placed a hard budget cap on
Federalism and Health Care Cost Containment
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hospital services. The new system also created regional prospective budgets for
doctors enforced through financial penalties that forced them to compensate
sickness funds for cost overruns.
Despite the rhetoric surrounding the new proposals, the actual passage of the
Health Care Structural Reform Act required a significant number of compromises
that substantially undermined its competitive pressures (Brown and Amelung
1999). The Länder ownership of public hospitals insured that the cooperation of
the Bundesraat would be required. Social Democratic control of the Bundesraat,
forced the Christian Democrats to create a consensus across the party spectrum.
For their participation, Social Democrats demanded that fund competition should
not undermine the uniformity of benefits across funds. In practice, this meant
(i) a reduction in the flexibility of funds to vary prices and services and (ii) the
introduction of the Risk Equalization Mechanism (REM) designed to protect
weaker funds from falling revenues through transfers from wealthier funds.
In addition, the small Free Democratic Party in coalition with the Christian
Democrats in the Bundestag resisted efforts to allow funds to negotiate with doctors
directly rather than with the KVs, which held monopoly control over doctors’
services in each region. As a result of these compromises created by the federal
system, the impact of competition was highly constrained. Limited fund competition and the maintenance of supply-side monopolies severely restricted the
competitive forces in the new system. Compromise essentially weakened the most
significant structural changes of the Kohl governments reforms (Brown and
Amelung 1999).
In response to the new reform, sickness funds began to consolidate to increase
economies of scale and improve their bargaining power in negotiations with
doctors. Global budgets also resulted in an immediate stabilization of contribution
rates (Kamke 1998). Doctors responded to the reforms with an intense public
relations campaign focusing on the impact of global budgets on prescription drugs.
As doctors reached the limits of their budgets, patients were informed that services
which had been previously guaranteed were now only available to those willing to
enter the private health care market (Altenstetter 1999). In 1996, cost discipline
broke down as doctors exceeded their budgetary limits on drug prescriptions.
When the government balked at enforcing the financial penalties on doctors, the
cost discipline of global budgets broke down (Giaimo 2002).
The Kohl government responded to the staunch political reaction against
global budgets and the breakdown of cost discipline with the Health Care
Reorganization Acts of 1997. The new reforms built upon the earlier framework
while attempting to diffuse political pressures on the system. To reinforce
competition, the new system required funds to raise co-pays with every increase in
the contribution rate. At the same time, it allowed consumers to immediately shift
funds upon a rate increase. This once again put strong pressure on funds to focus
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J. Jordan
Canada
The Constitution Act of 1867 established Canada as a federal state built around the
Westminster style political institutions of Britain. Both the national government
and the provinces and territories operate within their own jurisdictional limits as
relatively veto-free political environments with party discipline and executive
dominance. The Constitution grants jurisdiction over social policy and health care
to the provincial and territorial governments. The decentralized nature of the
Canadian Constitution generates strong incentives for cooperation between the
national and regional level governments to achieve national level policy objectives,
while not creating any formal mechanisms to insure or promote this cooperation.
The explicit jurisdictional limits built into the Constitution effectively blocked
national level efforts at national health care until after World War II (Maioni 2002;
Banting 2005). In response to political challenges from left parties in the provinces,
the Liberals introduced national health insurance through a series of incremental
steps that culminated in the introduction of Medicare in 1966. Medicare overcame previous constitutional limitations by not directly regulating in the field of
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on controlling costs, yet it did not remove earlier limitations to competitive
pressures that severely limited the ability of funds to negotiate with doctors and
drive prices down. More directly, the Health Care Reorganization Acts eliminated
the nationally set global budgets, which had been the focus of intense public debate.
In their place, the new system required that the KVs create softer ‘‘target’’ budgets
for each doctor.
As in Britain, the Kohl government could not survive the political reaction
against the handling of the health care crisis. With the election victory of
Schroeder’s Social Democrats in 1998, many of the competitive reforms were
undone. The struggles of the government to control health care expenditures reflect
the traditional understanding of federalism as a check against substantial reforms.
Federalism fractured political power at the national level, rendering control over
the health care system difficult. Corporatism helped to reduce the politicization of
the health care by taking its administration largely outside of the political sphere,
but it could not adequately contain costs. Faced with the need for significant
reform, the Kohl government found itself highly constrained by the need to
compromise with Länder governments represented by the opposition. In the end,
compromise weakened the competitive elements within the system. At the same
time, the centrality of the federal government in policymaking process made it
difficult for the Christian Democrats to avoid the significant public backlash against
reforms. This case represents and example of how power-sharing federalism can
make reform difficult by increasing the number of veto players without significantly
reducing the political accountability of reformers.
Federalism and Health Care Cost Containment
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health care. The new strategy provided matching funds on a dollar-for-dollar
basis to provincial governments that established national health insurance programs
meeting a minimum set of standards. The strategy of inducing provincial
participation through conditional grants without direct mandates was upheld by
the constitutional courts allowing for the development of a uniform, federally
financed health care system operated and partially funded by the provincial
governments (Banting 2005).
Improvements in medical technology and the aging of the population drove up
the costs of Medicare in the 1970s. The rising costs of health care contributed to
and occurred in the midst of a growing debt-crisis in which the national debt
exceeded GDP by 1990 (Banting 2005). The difficulty from the perspective of the
national government lay in the fact that the structure of Medicare amounted to an
open-ended guarantee to match provincial spending. The provincial governments
themselves had little incentive for cost discipline as cost-sharing significantly eased
the burden of spending increases. Given the loose conditions built into the original
Medicare legislation and the absence of any mechanisms for the federal government
to discipline the states beyond a complete withdrawal of funding, the health care
system became an almost entirely uncontrollable spending program (Rocher and
Smith 2002; Braun, Bullinger, and Walti 2002).
In 1977, the federal government under the leadership of the Liberal party sought
to bring expenditures under control through the introduction of the Established
Program Financing (EPF) mechanism. The EPF replaced the existing system of
matching funds with a block grant to the provinces indexed to population size and
the average growth of GDP. The EPF reduced the overall size of the federal grant
but compensated the provincial governments through a permanent transfer of
‘‘tax points’’ that allowed each province to claim a percentage of federal income tax
revenues. The provinces saw the EPF as a way of reducing federal oversight and
improving their own financial position through access to greater tax revenues.
From the perspective of the federal government, the EPF limited the overall growth
and unpredictability of health care expenditures by eliminating the commitment
to match provincial spending increases with increased federal expenditures (Rocher
and Smith 2002). Crucially, the cuts to health care spending went largely unnoticed
by the public. In the short run, the EPF appeared to the public as a relatively
uninteresting reform of complex tax and fiscal arrangements between the two levels
of government. Because the EPF did not directly affect benefits received, public
concern was not raised by the new financing system. In this way, the federal
government had managed to substantially reduce its own future fiscal responsibility
for health care without paying direct political penalties.
The full effects of the EPF on the health care system became apparent soon after
its introduction. The provincial governments still faced health care costs that rose
above the rate of inflation and GDP growth. This meant that the relative federal
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financial role in the health care sector, which was indexed to GDP growth, was
declining, forcing the provinces into an increasingly difficult fiscal position.
The provinces, backed by the Canadian Medical Association, began to complain
openly about the declining federal role in health care. The federal government
charged that the problem lay in the diversion of revenue from the tax points into
nonhealth care related spending. Faced with growing fiscal strains, the provinces
responded to the situation by experimenting with increased private provision and
user fees for previously free public services, a move that threatened the integrity
of Medicare (Charles and Badgley 1999). Given its declining role in health care
financing and its unwillingness to discipline states for violations of Medicare rules
through the complete withdrawal of funding, the federal government was effectively
losing control over the system.
The Canada Health Act (CHA) of 1984 emerged to reinforce the federal position
in health care. The CHA restated and clarified earlier conditions established under
the Medicare system requiring that the provinces eliminate user fees, insure
comprehensive coverage, and guarantee public administration of the program.
The key unique feature of the CHA is that it allowed the federal government
to withdraw partial funding as a means of penalizing provinces for failure to meet
CHA requirements. This gave the national government the ability to enforce the
uniformity of health care standards across the country (Charles and Badgley 1999).
From the perspective of the provinces, the CHA effectively eliminated many of the
mechanisms such as user fees (copays), managed competition, and limited privatizations that the provinces had begun to use in the face of growing fiscal pressures.
Politically, the CHA allowed the national government to appear on the surface to
be reinforcing standards and disciplining provinces that had begun to erode the
quality of the health care system. However, the CHA did nothing to resolve the
underlying fiscal problems within the health care system while severely curtailing
the tools available to the provinces for coping with them (Banting 2005). Effectively, the CHA allowed the federal government to engage in expenditure cuts while
appearing to the public as a savior of the health care system. The Liberals had
managed to cut national level health care spending without paying the political
costs by offloading responsibility for cuts onto the provincial governments.
Over the next two decades, both Conservative and Liberal governments would
rely on the EPF and CHA spending arrangements to reduce federal responsibility
for health care expenditures while guaranteeing no loss in benefits (Rocher and
Smith 2002). In 1985, the Conservatives re-indexed the growth of block grant
expenditures to GNP growth minus two percentage points. The complexity of the
reform and the fact that it had little immediate impact substantially reduced public
awareness of these changes. The Liberals in 1995 further limited federal health care
expenditures through the Canada Health and Social Transfer system, which allowed
the government to set the bloc grant expenditures for the next five years. Sold as
Federalism and Health Care Cost Containment
181
Conclusion
The health care cost crisis of the 1970s posed a significant political challenge to
governments across the West. National health care systems were organized largely
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a mechanism for improving the predictability of transfers to the provinces, the new
budgets were predictably tight. Eventually, declining federal expenditures forced the
provinces to begin to adopt austerity measures. Interestingly, many provinces began
to experiment with regional planning board, which, as in Britain, helped to create
a new layer of bureaucracy in the system that buffered provincial governments
from direct public anger (Charles and Badgley 1999; Naylor 1999).
Throughout the 1990s, public health care expenditure stagnated, actually falling
as a percent of GDP (figure 1). This dramatic decline in health care spending
reflects the relative ease with which political leaders at both the regional and
national level could engage in potentially politically costly cuts to the health care
system not possible in other countries. By the year 2000, declining funding had
become a serious public concern (Tuohy 2002), yet the complexity of the system
and the continued bickering between federal and provincial politicians made it
difficult for the public to appropriately assess blame and hold politicians accountable (Cutler 2004). After the elections of 2000, the Liberal government faced with
improved economic circumstances and mounting public discontent with the health
care system began to expand the federal role in the system, reversing the previous
period of austerity.
In the Canadian health care system, federalism facilitated cost-cutting measures
by easing the political burdens of austerity on national and regional level parties.
Power-separating federalism was crucial to this process in two respects. First, by
creating a separate layer of government between the national level government and
the actual regulation of the health care system, federalism created opportunities for
national level political leaders from both the right and left to make severe cuts
in the health care system without paying substantial political penalties. Second,
the separation of powers in Canada allowed the federal government to act almost
completely unchecked within its own realm of competencies. The absence of a
direct provincial role in decision making allowed national level politicians to easily
overcome the opposition of provincial leaders, avoiding the political compromises
that hampered the efforts of reformers in Germany. From the perspective of
provincial leaders, federalism provided an opportunity to shift blame for severe
budget cuts onto national level leaders, allowing them to at least partially avoid the
full political fallout from reforms. Power-separating federalism increased opportunities for blame avoidance without significantly increasing the number of veto
players in national level decision-making, facilitating deeper reform and spending
cuts than within Britain or Germany.
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as open-ended commitments that quickly began to put pressure on governments
faced with slowing economies and growing budget deficits. The difficulty with cost
control lies in the broad public resistance to health care rationing and the power of
doctors to resist efforts to place the burden of cost-cutting solely on them. The
political unpalatablity of health care cost control forced politicians to seek ways to
avoid blame for reforms and cutbacks. The stories here reveal the important role
federalism plays in this process.
In Britain, the hierarchical structure of both the government and the NHS made
cost control a simple matter of holding budgets steady. Yet, the absence of
a regional buffer between the public and the national government, forced the
Thatcher government to face the full brunt of public dissatisfaction. As a response
to growing public pressure, Thatcher’s reforms are most notable here for their
efforts to reinforce the role of regional bureaucracies within the NHS in health care
rationing thereby diffusing political resistance to cost restraints.
In Germany, federal institutions significantly weakened the national government’s ability to engage in dramatic reform. By opening the process to more veto
players, federalism undermined more radical reform efforts without eliminating the
Kohl government’s accountability for unpopular efforts at tightening the health
care budget.
Finally, in Canada, federalism gave national level leaders little direct control over
the system, yet it opened up the opportunity for reformers to substantially reduce
health care spending without paying the direct political costs associated with these
actions. The result was severe expenditure cuts at both the national and regional
level. The severity of national level cuts was often hidden in complex negotiations
over indexing and tax points that made it difficult for the public to predict the
impact of reform and thereby hold political leaders accountable.
These three examples provide two major insights into the relationship between
federalism and health care reform and welfare state retrenchment more broadly.
First, this comparison demonstrates that the common understanding of a simple
continuum between unitary and federal systems fails to recognize the complex
variations within federal systems. Different types of federalism alter the balance of
veto points and accountability in different ways. As a result, federalism does not
have a simple or uniform effect on retrenchment politics; rather, federalism may
hinder or improve opportunities for reform depending on how it structures the
relationship between national and regional level governments. This is reflected in
the fact that German and Canadian federalism had contrary effects on health care
reform efforts. In Germany, power-sharing institutions hampered efforts at reform,
while, in Canada, power-separating institutions facilitated deep spending cuts.
The addition of Britain to the comparison reveals a second important insight.
The British case reveals how governments in unitary systems may be disadvantaged
by the absence of regional governments that buffer reformers from public backlash.
Federalism and Health Care Cost Containment
183
Notes
1. These two types of federalism do not necessarily represent an exhaustive or complete
typology of federal systems; a task beyond this project. This distinction is designed to
highlight particular dynamics of federal systems of relevance to the questions surrounding welfare and health care retrenchment politics. For a similar distinction applied to
welfare politics in the six federal states among the advanced industrial democracies of
the West, see Obinger, Leibfried, and Castles (2005).
2. Beginning with the Scotland Act of 1998, the Blair government devolved a significant
portion of administrative authority over the BNHS to the new regional parliaments.
Devolution has strengthened regional governments substantially and may have important consequences for the BNHS (Woods 2004). These changes and their impact on
health care policies in Britain are not discussed here as they occur after the period of
Thatcher’s managed competition reforms, the focus of this article.
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