As the National Health Service comes under increasing financial strain, and the economic costs of sickness become more apparent, Michael Payne, outlines the part private medical insurance (PMI) could play through a restructure of current taxation rules
The PMI industry is on the verge of seeing a window of opportunity open to play a greater role in the provision of healthcare in the UK. Political pundits are foreseeing a change of government at the next election, while economic forecasters predict that the ever growing public debt burden can only be tackled by major curbing of public spending across all departments, including the Department of Health.
The big ‘if’
Although there is no indication that any of the major political parties intend to cut the NHS budget, the above inflation increases in health spending over the last decade will inevitably come to an end. Even if public finances allow the NHS budget to be index-linked, and that in itself is a big ‘IF’ over the coming years, the reality is that increases in life expectancy and on-going medical advances will mean stretching this budget further. The Annual NHS Confederation Conference earlier this year was told to prepare for significant budget cuts, and estimates are that by 2014 the NHS could be facing a real terms funding gap of £15-£20 billion per year.
Politicians will naturally say that this funding gap can be bridged with greater productivity, more efficient use of resources and better use of patient information. In theory, there is sufficient room for manoeuvre in the health system to do this – 20% of patients in hospital do not need to be there if the right care services were available consistently across the country. Half of hospital admissions are avoidable if the right systems or approaches were put in place to intervene at a much earlier stage. Like most developed nations, when we are sick we over consume healthcare, but we are under consuming preventative healthcare when we are well.
Cultural change
To ensure long term savings in health spending, cultural change is required within a National Health Service that is open to major reform. However, past experience shows that Governments and departmental budget holders are more likely to opt for the short-term fixes – pay freezes that demoralise frontline staff; rationing of treatments; manipulating targets so that increasing waits for treatment are hidden; and a scaling back of ‘non-essential’ services.
Tinkering at the edges will only have a small impact on the long-term costs of healthcare. What is needed is major reform, with a frank and honest debate about how future healthcare provision is funded, and how to ensure that individuals take a more pro-active interest in their own health and well-being.
Health insurers have a part to play in this debate. The current tax treatment of employer-funded private medical insurance is inequitable, when compared with other employer-funded benefits, such as group income protection (IP) and pension schemes.
Company-paid PMI is taxed in three ways: insurance premium tax at 5%; employer’s class 1A National Insurance of 12.8%; and a benefit-in-kind P11D charge on the employee, at their marginal rate of tax.
For a basic rate tax-payer, this means that an extra 37.8% of the net PMI premium is taken in tax, and for a higher rate tax-payer it is an extra 57.8% of the net PMI premium that is taken by the Exchequer. Although some of the employer’s tax burden can be mitigated by corporation tax relief, this may not always be available for smaller employers. Also, this corporation tax relief would have been available to the employer anyway, if they had chosen to spend the money on an income protection benefit or pension contribution for the employee, which is not taxable.
Dame Carol Black’s 2008 report ‘Working for a healthier tomorrow’, estimated that the annual economic costs of sickness absence and worklessness associated with ill-health amongst the working-age population is over £100 billion a year – greater than the current NHS budget – calling it an “unsustainable burden in a competitive global economy”.
Her report recognised that employers have a vital role to play in helping alleviate this burden, showing that “there is a compelling case for organisations of all sizes to move beyond the traditional health and safety agenda to embed health and well-being at their heart and to create an empowering and rewarding work environment for all employees.”
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Well targeted incentives for employer funded healthcare would have a positive effect on the public finances, by relieving pressures on over-stretched NHS budgets, and with prompt access to treatment resulting in lower welfare costs for the government.
Dave Priestley, sales director for PRU Health, agrees: “There is no question that employers increasingly see the benefit of supporting the health of their workforce through a combination of good quality health insurance provision and – increasingly –employee wellness promotion. However, it will always be a challenge for employers to find new money to invest in extending these programmes and there is no doubt that increases to the costs of these benefits and services – whether as a result of taxation or other cost drivers – work against this aim.
“The introduction of well structured incentives for employers who implement proactive wellness programmes would be an intelligent way to support employers in this aim. As well as encouraging more employers to take an active role in the health and well-being of their workforce, for those that already do, it would motivate the expansion of existing programmes to a wider groups of employees. This approach would align well to wider public health initiatives and over time help to manage both direct and indirect health risk costs for businesses, including the cost of health insurance.”
The current tax treatment of employer funded medical care acts as a disincentive for many employers to take a more pro-active approach to the health and well-being of their workforce.
If a professional footballer suffers a knee injury while training and his club pays for a private surgical procedure to correct that injury, it is not classed as a benefit-in-kind.
However, if a bus driver injures his knee while playing football over the weekend, and cannot get back to work for several weeks because he is on an NHS waiting list for the operation, there will be a hefty benefit-in-kind tax charge payable if his employer steps in and pays for the operation privately, even though it is saving the Exchequer money by reducing the burden on the NHS and avoiding lengthy State Sickness benefit payments.
Surely it is the medical problem itself that needs resolving, and the corresponding financial burden on the employer or State, irrespective of the cause?
Benefit-in-kind
If the employer has put private medical insurance in place to pay for the treatment, the employee is taxed heavily on the premium as a benefit-in-kind. However, if the employer had a Group Income Protection plan in place, and the IP insurer decided to manage the long-term costs of the income protection claim by paying for private treatment as an early intervention, there is no tax charge involved on the employee or the employer.
The Association of Medical Insurance Intermediaries (AMII) is prepared to work with other bodies, such as the Federation of Small Business (FSB) or Confederation of British Industry (CBI) to put the argument for reform of taxation of employer funded healthcare provision to politicians of all parties.
As a product, private medical insurance should be treated consistently in line with other benefits of this type and there should not be tax disincentives for companies purchasing PMI on behalf of their employees.
Jack Briggs, intermediary sales and marketing director for Simply Health, agrees that there is inequity in the tax treatment of pension and health benefits provided by the Government to companies, although any major tax reform may be hard to achieve. “President Obama’s current difficulties in trying to force through healthcare reform in the States throws a sharp focus on the difficulties associated with achieving meaningful reform in any healthcare model as parties always retrench to firmly held views that changes to existing systems are inherently unfair.
“Respect for the NHS is so hard wired into the British psyche that tax reform is unlikely to be delivered by current government thinking, although equitable encouragement to employers to provide more to augment State provision should both make sense and alleviate pressure on public finances.”
Dame Carol Black’s report recognises that employers have significant scope to facilitate an employee’s early return from sickness absence. The challenge for Government is to ensure that policies, including taxation, across different departments are consistent and complementary. The challenge for healthcare insurers is to create affordable products for companies of all sizes, that address the healthcare needs of employees and their families.
Michael Payne is general secretary of the Association of Medical Insurance Intermediaries
