Should private medical insurance be subsidised?
Carl Emmerson, Christine Frayne and Alissa Goodman
Conclusion...
The last 20 years have first seen a ten-year period of extremely large growth in the numbers covered by PMI
(from 3.6 million in 1980 to 6.7 million in 1990), followed by ten years in which coverage has essentially remained flat. The rate of coverage is correlated with a variety of socio-economic characteristics, with those between the ages of 40 and 49 and
higher-income individuals being more likely to possess insurance. For example, over 40 per cent of people in the top income decile are covered by PMI compared with under 5 per cent in the bottom four deciles.
Moreover, the higher
up the income distribution a person is, the more likely it is that their insurance has been provided by their employer.
The causes and implications of the trends in the coverage of PMI are both interesting and important from a public
policy perspective. When considering why individuals might choose to buy health insurance, we obviously need to
consider the link between the level and quality of NHS health care and the number of people purchasing PMI. For
example, Calnan, Cant and Gabe19 find that those with PMI are more likely to be dissatisfied with the NHS than those
without it. Whether this is purely a cause or also partly an effect of those individuals being in possession of PMI is
unclear. While it seems obvious that those who are dissatisfied with the quality of NHS provision will be more likely to
purchase PMI, it is also highly plausible that some individuals may change their valuation of NHS provision after using
private care paid for through employer-provided PMI. One measure of the quality of NHS provision that does seem to be positively correlated with the greater purchasing of private health insurance is the length of waiting lists for NHS treatment.
This could be an indication that waiting lists are a particular concern or, alternatively, that they are used as a barometer for NHS
performance.20,21 The fact that there is a link between waiting lists and the purchase of PMI is perhaps not surprising,
given the degree to which the media and political parties have focused on them. Despite the increase in use of the private
sector, private spending on health care makes up only 16.3 per cent of total health spending in the UK, which is
lower than in any other G7 country. In 1998, UK health spending was 6.7 per cent of GDP, which is some 2.4
percentage points lower than the average of the other 14 EU countries. The Government is eager to redress this
balance and large increases in NHS spending have been planned until March 2004. The result will be that NHS
spending will increase by 1.0 percentage point of GDP between 1998-99 and 2003-04.
While substantial, these
increases alone will be insufficient to fully close the gap between the UK and the rest of the EU by March 2004. Another
way of increasing total spending on health would be to encourage people to take out PMI. This would have the added
effect of reducing the demands on the NHS. Some individuals with PMI would in effect 'opt out' of the NHS for the
treatments they were covered for. One possibility would be for the Government to encourage individuals to
take out PMI by offering a subsidy. We have considered whether the introduction of such a rebate could
actually be self-financing, in other words, whether the saving to the NHS could be greater than the level of subsidies paid by
the Treasury. Our analysis shows that this is unlikely to be the case, largely because a subsidy would benefit current holders of
PMI while the saving to the NHS would only stem from the additional policies that would be sold due to the subsidy. It is also the case that the purchase of PMI will lead to a decrease in demands on the NHS by less than the policy cost, as
private health care is more costly due to the higher quality of care provided, for example through less waiting and greater
provision of private rooms, and the higher costs faced by the private sector. Prior to 1997, such a subsidy existed for
the over-60s - individuals with PMI received a subsidy equal to the basic rate of income tax on the cost of their
insurance. We analyse the effect of the abolition of this subsidy on the demand for PMI and find that, on our best
estimate, there was a 0.7 percentage point decrease in the number of people covered by such insurance. This is equivalent to
nearly 4000 individuals. While this would clearly have led to increased demands on the NHS, the cost of treating these
individuals is likely to have been substantially lower than the £135 million annual cost of the subsidy.
http://www.ifs.org.uk/docs/private_med.pdf
Apologies for the lay out, but you can read the whole thing easily enough via the link above.
Ignorance is bliss, bliss is happiness, I am happy...to draw your attention to the possible connectivity in the foregoing.
