The aim of this paper is to examine possible determinants of the prevalence of private medical insurance (PMI) in England. The entire British public has access to free care in the National Health Service (NHS) financed by general taxation and national insurance paid by all employed United Kingdom (U.K.) residents. There is no option for U.K. residents to opt out of contributing to the NHS, and NHS coverage is comprehensive. Thus, PMI is supplementary, typically purchased to guarantee faster access to health care (particularly specialists) and in some cases, better amenities in health care facilities. In the United Kingdom, PMI covers treatment for curable, short-term illness or injury. PMI does not cover general practitioner (GP) services, chronic conditions, or conditions an individual had prior to taking out insurance. At the end of year 2000, 6.88 million people in the U.K. (approximately 11.5 percent of the population) were covered by PMI and the value of the PMI market was estimated at 2.45 billion [pounds sterling] (Laing and Buisson 2001), 5.1 percent of the estimated year 2000/2001 NHS expenditure of 48 billion [pounds sterling].

Since 1988, Laing and Buisson, an independent specialist consultancy in health and community care, have reviewed the U.K. PMI market. The number of subscribers covered through an employer-paid plan has increased by approximately 23 percent since 1990, while during the same period, the number of subscribers who were either paying individually or as employees (as partial payment of a company plan) declined by about 6 percent (Laing and Buisson 2001). At the end of 2000, 66.5 percent of PMI subscribers were in plans fully paid for by their employer (Laing and Buisson 2001).
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Tax policies introduced between 1979 and 1997 encouraged both employer-paid and individual PMI subscription. Employers did not pay employers’ National Insurance contributions on PMI provided to employees as a benefit-in-kind. (1) And in 1990, tax relief on the total premium cost, at the marginal tax rate, was provided to holders of individual PMI over age 60 years.

Some of these incentives were weakened in 1997. Tax relief for individual PMI premiums paid by those over the age of 60 years was discontinued (Laing and Buisson 2000b) and the Insurance Premium Tax on all PMI policies (in effect, a sales tax on PMI purchase) was increased to 5 percent from 4 percent (introduced in October 1994 at an initial rate of 2.5 percent [HM Customs and Excise 2001]). Also, in April 2000 the government extended employer-paid national insurance contributions (2) to cover PMI benefits in kind (Laing and Buisson 2000b). Evidence exists to suggest that incentives intended to increase PMI prevalence were expensive, and largely unsuccessful in stimulating demand (Emmerson, Frayne, and Goodman 2001). Furthermore, the elimination of tax relief for those over age 60 years increased premiums for individual subscribers in this age group by 29.9 percent (Emmerson, Frayne, and Goodman 2001).

The future trend of PMI prevalence may be influenced by two factors: substantial increases in premiums on individual PMI policies (over the calendar year 1999 they were estimated to have increased by over 15 percent or five times the rate of inflation in 1999 [Laing and Buisson 2001; U.K. National Statistics 2001] and the current government’s significant increase in funding to the NHS, pledging to increase real NHS spending by 7.3 percent in each year until 2007 [HM Treasury 2002]).

Data from the British Household Panel Survey (BHPS) 1997-2000, the U.K. Department of Health and Laing’s Healthcare Market Review 1999-2000, are used in this analysis. The panel nature of the survey allows a national, representative sample of households to be followed over the years for which data on PMI subscription are available. The BHPS has not previously been used to examine determinants of PMI prevalence. Previous analysis utilized cross-sectional data that do not well reflect the dynamic nature of the PMI market. Insurance status, PMI policy changes, individual circumstances and waiting lists are all subject to change over time. Our analysis also incorporates data from other sources. We include data on inpatient and outpatient waiting times estimated at the health authority (HA) and regional level (provided by the NHS Waiting Times Team), as well as data on the number of private acute care beds, at the regional level (Laing and Buisson 2000a), and estimates of the regional distribution of physicians working in the private health care sector (DH 2001). The results provide new evidence as to what factors determine the size of the PMI market in England.

MODELLING THE DECISION TO PURCHASE PMI

Several factors impact on the decision to purchase PMI. These include the perceived magnitude of a potential loss because of illness, relative to income and an individual’s degree of risk aversion (Cutler and Zeckhauser 2000; Santerre and Neun 2000). Choice and convenience, as offered by a private health care alternative, are also benefits sought by PMI subscribers (Bosanquet and Pollard 1997; Barr 1998). In some cases quality of care available through private insurance, relative to that available through an NHS system, may also be an incentive (Besley, Hall, and Preston 1999).