The modern welfare state arose in Imperial Germany in the late 19th century. Under pressure of growing support for the Social Democratic Party in the 1870s and 1880s, Kaiser Wilhem II and Chancellor Otto von Bismarck attempted to preempt the appeal of radical socialism by establishing a series of socialized insurance programs for retirement, unemployment and medical care.
In the 1890s, Bismarck explained his rationale to American historian and Bismarckian sympathizer William H. Dawson: “My idea was to bribe the working classes, or shall I say, to win them over, to regard the state as a social institution existing for their sake and interested in their welfare. It is not moral to make profits out of human misfortunes and suffering,” Bismarck said. “Life-insurance, accident insurance, sickness insurance should not be the subjects of private speculation. They should be carried out by the state or at least insurance should be on the mutual principle and no dividends or profits should be derived by private persons.”
In his 1913 volume, Monarchial Socialism in Germany , Elmer Roberts enthusiastically explained the goals of the German welfare state:
The endeavor of German statesmanship has been to hold to everything in existing social arrangements necessary to produce individuality in the higher orders, and yet to intervene in education, sanitation, sick, accident and old-age insurance, the physical training of youth in the army, and to participate in transportation, forestry, mining, farming, and industrial enterprises, designing thus to raise the lower orders mentally, physically, and economically, so that they too become worthy individuals, adding to the power of the state and the monarchy. The intervention of the government is to be determined by expediency. . . . Institutions are to be judged by their benefit to the greatest number. The government can bring this about for the community only by taking interest directly in the social and economic arrangements, and by limiting the freedom of individuals and groups should their activities appear upon examination [by the state] not to serve the general aims of the organized life.
German health insurance
State-mandated health insurance began in Germany in 1884, and initially covered workers in factories, mines, foundries, banks, dockyards, railroads and inland shipping. The blanket of coverage was extended over increasing portions of the work force in 1885 and 1892, with family members of workers included after 1892. In 1911, workers in agricultural and forestry occupations were added, and by 1928, practically every trade, occupation and craft in Germany was enveloped in the system.
Before the First World War, anyone making less than 2,000 marks in the covered occupations was required by law to participate in the insurance scheme. By 1928, all those earning less than 3,600 marks were forced to participate. The insurance funds mandated by the German state were organized on the basis of trades and occupations. But the state continually consolidated them, with the result that, while in 1909 there were 23,000 of such funds, by 1914 they had been reduced to 10,000, and to about 7,400 in 1929.
The insurance funds were managed by representatives of employers and labor unions in an industry. The government required that at least a sum equal to one and one-half of the average wage in an occupation be contributed to the fund by each firm, with the contribution being split on the basis of two thirds being paid by the employee and one third by the employer. And as a result, worker representatives made up two thirds of the members on the board of each fund.
Benefits first included thirteen weeks of free medical care and a cash payment equal to fifty percent of the prevailing wage in the pertinent occupation, with the cash benefit starting on the fourth day of an illness. After 1903, free medical care and cash payments were expanded to a period of twenty-six weeks. In case of hospitalization, the cash payment was cut in half. Besides these basic benefits, the compulsory-insurance funds often provided cash benefits equal to seventy-five percent of the worker’s pay (depending upon family size), and by the 1920s, these cash payments often started only one day after an illness began. Financial coverage was also extended to include nursing services and convalescent treatment for up to a year after the end of cash benefits. Maternity benefits were mandatory as well.
The results of German health insurance
The benefits paid out by the state-mandated health insurance system continuously exceeded contributions received from member employees and employers and required government subsidization. Total contributions received by the health-insurance funds from employers and employees in 1929 was 375 percent larger than they had been in 1913. But health-insurance benefits paid out by the funds in 1929 were 406 percent larger than what was paid out in 1913. Costs of administering the mandatory insurance funds had increased 288 percent between 1913 and 1929. And the government subsidy to the system had increased by 270 percent between 1924 and 1929.
The extension of socialized health insurance also saw an increase in what the German literature called “malingering.” As Walter Sulzbach expressed it in his study of the German Experience with Social Insurance (1947):
Over a period of fifty years [1880-1930], during which medical science scored one triumph after another, it took the average patient under compulsory health insurance an ever longer time to recover.
In 1885, a year after socialized health insurance began, the average number of sick days taken by members of the system each year was 14.1. In 1900, the annual average number of sick days per member had gone up to 17.6; in 1925, it had increased to 24.4 days; and in 1930, it was an average of 29.9 days. People also were noticeably sicker around weekends and Christmas and New Year’s Day, particularly in those occupational insurance funds that waived the four-day rule before receiving cash benefits (The cash benefits were also tax-exempt, so the take-home pay lost by not working was less than fifty percent.).
The ease with which an increasing number of insured workers were able to receive benefits from longer or more frequent periods of illness was not independent of the behavioral incentives at work on the physicians who were part of the system. Originally, the insurance funds set the fees for services rendered. But in 1913, a doctors’ strike almost occurred, and was only averted at the last minute. After that, the fee schedules were determined by a joint committee comprised of representatives of the medical profession and the insurance funds. An essential ingredient of the fee system was that similar fees were paid for similar services, regardless of the patient’s ability to pay. In other words, the frequent practice of private physicians to charge higher fees to wealthier patients as a means to earn higher income and to subsidize voluntarily the treatment they provided to poorer patients was outlawed. Hence, the determination of income earned by doctors in the system was purely on the basis of “quantity,” i.e., the number of bodies examined at the fixed fee per period, as opposed to the quality of the service provided.
At the same time, the tendency of a conveyor-belt view of patients resulted in workers insured under the compulsory system demanding freedom of choice in selecting a physician, rather than being assigned to a doctor participating in the system. This was established as part of the agreement of 1913. But it also meant that a doctor now had an incentive for greater leniency in diagnosing an illness and prescribing sick leave. A less accommodative physician ran the risk of losing his steady patients and suffering a decline in his income as fewer patients entered his examination room.
According to some estimates, by the late 1920s, up to eighty percent of the medical profession in Germany was working for the mandatory health-insurance system, and sixty percent of all earnings in the medical profession came from payments from the compulsory-insurance funds. Pharmacies also were increasingly dependent upon the compulsory system, with as much as fifty percent of their business turnover coming from these insurance funds in 1928; by 1932, that figure was estimated to be as high as eighty-five percent.
Walter Sulzbach summarized the nature of the system by the 1920s:
The members of the German insurance funds were rarely satisfied with the medical help they received. There was little personal contact between the patients and their doctors. It was a system of mass treatment under which many doctors spent only a few minutes on each visitor during their office hours and made home calls as short as possible. “ Kassenarzt, ” meaning sickness fund doctor, was not a complementary term. “Kassenlowe, ” “sickness fund lion,” a term used to describe doctors who made big money from a huge number of insurance patients, was even less complimentary.
Under the Nazi regime after 1933, the compulsory health insurance system became even more centralized and controlled. The insurance funds lost almost all autonomy and became subservient to the Fuhrer principle. And the employer share of health-insurance payments was increased from one-third to fifty percent. Once the Nazis were in power, explained Melchior Palyi, in Compulsory Medical Care and The Welfare State (1949):
The ill-famed Dr. Ley, boss of the Nazi labor front, did not fail to see that the social insurance system could be used for Nazi politics as a means of popular demagoguery; as a bastion of bureaucratic power; as an instrument of regimentation, and as a reservoir from which to draw jobs for political favorites and loanable funds for rearmament.
Thus, ended the first experiment in socialized health insurance. Begun by Bismarck as a tool of state policy to fight radical socialism through the implementation of Imperial State Socialism, it ended up as one of the cogs in the wheel of Hitler’s National Socialism.