(Also See OECD Health Report 2006)

Like so many ageing Western societies, Germany has struggled with surging healthcare costs in recent years. But instead of coming up with a grand reform to the healthcare system, the government in Berlin has agreed to a sickly compromise.

Gesundheit. The German word for "health" can be used when someone sneezes. Which is perhaps appropriate considering Germany's Gesundheitsystem -- that is healthcare system -- has long been sick. The country's politicians have tinkered with it for years, but only this week did they set about trying to dramatically reform part of the social welfare net set up by Otto von Bismarck.

Medical care in Germany might still be excellent and affordable compared to some other industrialized countries, but costs have continued to rise and the way health insurance is financed -- via payroll contributions -- deters companies from creating desperately needed jobs.

Last year, Germany's public health insurance companies spent €143.6 billion, a 1,005 percent increase over 1970 expenditures. With daily turnover of €650 million, Germany's medical industry has greater revenues than all of the country's automobile manufacturers or energy companies taken together. Every tenth euro spent in the country goes to a doctor, hospital, pharmacy or pharmaceutical company. Indeed, the only country tracked by the Organization for Economic Cooperation and Development that has greater expenditures in the sector is the United States, which in 2004 spent 15.3 percent of its gross domestic product on health care.  

The surge in costs comes at a time when the German birthrate is decreasing, the population is aging, fewer people are paying into the country's elaborate social system and the costs of providing treatment are growing. On top of that, the country has a two-class healthcare system that has further complicated matters. The country's highest earners can opt out of the public healthcare system and go with an often cheaper private insurer instead. This means that of the 78.7 million Germans who are insured, 8.4 million of the country's highest earning individuals are not contributing to the public-private national healthcare system. Private insurance companies attract new customers with prices that are often below the patient's actual health care costs, but as an insured person gets older, that person's monthly premiums also increase.

Both the conservatives of Chancellor Angela Merkel and her junior coalition partners the center-left Social Democrats (SPD) agreed the system needed an overhaul, but for months, they were at loggerheads over the best way to do it.

So instead of opting for a clear plan, the ruling grand coalition opted for a sickly compromise after Merkel and her colleagues emerged from an overnight bargaining session on Monday morning. She called the planned reform a "true breakthrough," but since then, nobody, not even the members of the two ruling parties seem particularly happy with the deal.

Instead of radically altering the system -- for example, by financing it significantly via taxes, or eliminating many of the duplicated bureaucracies of the state-funded health insurers -- contributions that are roughly equally divided by employers and workers will continue to rise from their current 14 percent of an individual's salary. The compromise enables the coalition government to neatly avoid imposing a hefty new tax (in recent days, SPD leaders were calling for up to €45 billion in fresh taxation to support the costly healthcare system) at the same time it is making a major three percentage point increase to the country's value-added (sales) tax, taking it from 16 percent to 19 percent.

A jumbled plan

Although tax revenues will begin to play a roll from 2008, they will primarily be used to cover healthcare costs for children. The government plans to establish a new central fund that will be used to dole out money to the country's some 250 state-backed insurers, but it will start out with only €1.5 billion from the federal budget in the first year of the reform. That will double in 2009, but even then there will still be a huge gap with the €16 billion that children's healthcare is estimated to cost. Any efforts to deal with that prickly matter have been pushed back to the next legislative period.

The ideological differences between the conservatives and the SPD left the coalition unable to deal with the question of what to do with Germany's private health insurers, which generally cover the wealthy, civil servants and the self-employed for often far less than the state insurance.

Merkel's Christian Democrats hailed their ability to limit the SPD's attempts to place a greater burden on the private insurance companies. The Social Democrats were dead set against a system based on a flat fee per insured, which could have helped Germany lower its non-wage labor costs.

But it is exactly this jumble of models that makes German healthcare so expensive and inefficient. And it is far from certain that the proposed reform will increase competition or transparency enough to help rein in exploding costs.

In the end, Germany gets a half-baked compromise that is loathed by an insurance lobby reluctant to commit to any change, those who are insured who are opposed to higher contributions and even the politicians themselves, who couldn't agree upon the proper path for the future of the country's healthcare system. It also raises the important question of whether Merkel's grand coalition really has the courage to initiate the tough reforms Germany requires.