When German Health Minister Karl Lauterbach first revealed details to reform the country's overstretched hospital system, he said this was the beginning of a revolution.

The comprehensive reform proposals aim to put an emphasis on medical rather than economic considerations, focusing on the complexity of the treatment of an individual patient. The current system, according to the minister, encourages hospitals to perform as many treatments as possible as cheaply as possible.

At the center is a reform of the Diagnosis Related Group (DRG) system, which lists fees per medical case that determine how hospitals are paid by health insurers. Lauterbach, who once helped introduce flat rates per case, now promises "to overcome the flat rate per case system" and to bring about the "end of economization in hospitals."

In Germany, the operating costs of hospitals, i.e. all costs incurred for the treatment of patients, are financed by health insurers. Investment, on the other hand, is financed by the federal states, which decide whether a hospital is to be built, expanded, or closed and finance these investment measures. 

Wrong incentives?

The German Hospital Federation (DKG) has warned that the current sharp rise in energy and other costs would send many hospitals to the brink of insolvency.

But the hospitals' immediate cash-flow troubles due to rising energy costs have been overshadowed by larger structural issues, which Lauterbach has made it his task to resolve. Germany's understaffed and over-bureaucratic hospital system, where doctors and patients have for many years complained of too many financial incentives to "over-treat" patients, has resulted in long hospital stays, unnecessary operations and unnecessary antibiotic treatments, among other things.

A recent documentary by German public broadcaster ARD related several such stories. One was told by gynecologist Katharina Lüdemann, who described a patient who had developed a so-called placental insufficiency in the first 25 weeks of her pregnancy.

Following two weeks of daily assessments on whether or not the baby had more chance of surviving inside or outside the woman's womb, a colleague at a conference told Lüdemann: "You do know that if the child weighs more than 1,500 grams (53 ounces), then we make only half as much money. So what are you waiting for?"

"That really knocked me off my feet at the time," Lüdemann recounted. "What does it mean when it isn't even about what is medically reasonable anymore?" Premature babies are one of the most lucrative income sources for hospitals, and Germany has a network of 170 hospital centers for premature babies, far more than other countries. 

There are similar stories in all hospital departments: Artificial ventilation, a treatment that was needed more than ever during the first wave of the COVID-19 pandemic, costs nearly €11,000 ($11,560) for the first 24 hours. Anything over 25 hours, and the hospitals can earn twice as much. This sum goes up with time, providing a financial incentive to carry out prolonged ventilation that can cause significant damage to the lungs and heart.

Diagnosis-Related Groups

The Diagnosis Related Group (DRG), or "Fallpauschale" (case fee) system, was introduced in Germany in 2003 partly to reduce the length of hospital stays and the ensuing pressure on hospital staff. Hospitals are now paid based on the case itself, not on how long the patient stays in the hospital. It worked: The average length of a hospital stay in Germany has dropped from 10 days to 7 days since the introduction of the case fee. The occupancy of hospital beds remained low in 2021, despite the pandemic.

But this has only brought its own detrimental incentives with it: pressure to get to treat as many patients as possible, and a pressure to over-treat them. There's an old medical joke about this, which the doctor and journalist Werner Bartens repeated in the Augsburger Allgemeine newspaper last year: "There are no healthy people, there are only people who haven't been examined thoroughly enough." That, Bartens said, "was not irony anymore but dangerous reality."

Promising the "biggest hospital reform in 20 years," Lauterbach has said he is determined to replace case fees with a better system and has instituted a 16-person experts' commission, made up of leading doctors and legal experts, to come up with radical solutions.

Gerald Gass, board chairperson at the German Hospital Federation, is skeptical that the case fee system should be scrapped altogether. "We share the minister's opinion that there's a need to reform the financing of hospitals," Gass told DW. "But we aren't calling for the scrapping of the case fee system. We want it to be extended and adapted."

The parallel often drawn by doctors is that of firefighters: They are not paid per fire but to be ready for all fires. In a medical context, that would mean giving hospitals a basic budget. Gass says the best path would be a flexible one: Give hospitals a budget but also case fees for certain individual cases — especially outpatient treatments.

This, says Gass, would negate the incentive to "permanently treat new patients." "This hamster wheel effect, which puts a massive strain on staff, would be reduced because the financing would also include other incentives," he said.

More outpatients

Such a flexible approach would bring with it another reform that the DKG is calling for: equipping hospitals to better mix outpatient and inpatient services — something that Gass says is already standard in many European countries. It would mean getting rid of hospitals that treat only inpatients with a variety of ailments and creating more specialized hospitals able to take more outpatients.

Other countries, including Switzerland, Sweden and Norway, already have some kind of mixed system like the one Gass describes. Denmark has recently instituted a drastic reform of its hospital system that has resulted in the closure of some hospitals to make way for so-called "super-hospitals," some of which required the building of new roads and infrastructure.

Something similar, though not quite as far-reaching, could also be possible in Germany: fewer inpatient-only hospitals, some fusion of hospitals, and other hospitals specialized in certain conditions.

"I am convinced that the minister and the commission are aiming for such a major reform," Gass concluded. "But I'm also skeptical whether the path they are choosing is the right one."

His worry is that, since Germany's health policy is largely determined at the state level, the state governments will block reforms like closing certain hospitals that might make them look like they mismanaged things for years.

"The states aren't represented in the current commission," he said, "so everything that is being decided and proposed now will have to be approved later by the states." As always with ambitious plans, the political hurdles may be the toughest ones.

Edited by: Rina Goldenberg

This article has been updated to reflect recent developments.

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