Sarah Houlton

The system was overhauled as recently as 2003, but further changes were inevitable after a new government took power in 2005 and announced plans for widespread reform. The reform proposals, introduced last July by Chancellor Angela Merkel, were designed to increase competition among Germany's 250 statutory health funds, thereby reducing costs. Merkel's suggestions were met with widespread criticism from health experts, the pharma industry, economists, and even members of her own Christian Democrat party.

Germans pay for their healthcare through an insurance system. Both employers and employees make contributions to insurance schemes, with employees putting on average about 14 percent of their salaries into the health funds. Higher earners can opt out in favor of private health insurance, which is often cheaper. The result? The eight million richest Germans contribute nothing to the system that pays for the remaining 70 million insured people.

After much argument over appropriate reforms, a compromise solution was agreed upon that doesn't really suit any of the political players. Substantial reform hasn't happened—the current system of employer and employee contributions is expected to continue. Major tax funding will not happen. And the costly bureaucratic duplication of the many health funds isn't being addressed, either.

Even a central health fund, which most constituents considered a sure thing, failed to materialize. Its creation was postponed until 2009, on the basis that other changes need to be made first. And even the central fund—intended to give tax money to the health funds, primarily to pay for children's healthcare—has a hang up: The proposed amounts fall well short of the actual cost of children's healthcare.

Many in the pharma industry believe that Germany's latest reforms are fundamentally flawed. "We are in constant contact with the authorities, and we explain to them what our position is and why we cannot agree to the healthcare reform as it is designed at the moment," says Werner Wenning, CEO of Bayer, the country's largest pharma company.

One of the biggest problems the pharma industry has with the reforms is the proposed cost-benefit analysis for innovative drugs, which executives say is not in line with international standards. Rather than evaluating the drugs once they are being used by patients outside of a trials setting, the system is set up so that the Institut für Qualität und Wirtschaftlichkeit im Gesundheitswesen (IQWiG), Germany's version of NICE in the United Kingdom, makes a secondary evaluation of their effectiveness—a process that German pharma trade association Verband Forschender Arzneimittelhersteller (VFA) says is a duplication of the approval process.

VFA also takes the position that IQWiG should look at medicines in the context of the savings they can create in other areas, such as reducing hospitalizations. "The practical use of most new medicines is only proved after broad application in everyday life, and not under the artificial conditions of a clinical trial," according to a VFA spokesperson.

Pharma also has issues with pricing—notably, a plan to introduce reimbursement limits for innovative drugs, which could put an end to market-based pricing. On the contrary, VFA believes that interference in the setting of market prices should be diminished. Rather than government interference, it would prefer that pharma companies be able to work directly with the health insurance funds to set prices and arrange discounts, which VFA says would lead to genuine competition.