Health insurance - IPT rise: A bitter pill


With the failure of the industry's efforts to persuade the Treasury to freeze, or indeed lower, insurance premium tax on private medical insurance, Veronica Cowan looks at what it would take to lobby more effectively.

The insurance industry's prescribed methods of trying to persuade the Treasury not to raise insurance premium tax on private medical insurance in the Finance (No 2) Act 2010 has failed — and policyholders will have to swallow the medicine. Following Royal Assent on 27 July, this Act will increase the higher rate of IPT from 17.5% to 20% and the standard rate from 5% to 6% from 4 January 2011.

The Association of Medical Insurance Intermediaries reacted angrily to news of this rise and slammed the impact of the across-the-board increase on PMI in particular. Michael Payne, its general secretary, argues that medical treatment undertaken in the private sector helps relieve pressure on NHS resources and, at a time when the government is cutting back on public expenditure, it should actively be encouraging employers and individuals to do more by way of healthcare financing.

When the IPT rise was confirmed, the AMII declared it a move that "shows once again government departments cannot work together, as this decision made by the Treasury has far-reaching consequences for the Department of Health".

Demand for PMI fell by record levels last year, although Groupama Healthcare seems to have bucked the trend with results for the first six months of 2010 showing increased sales of 8%. But the healthcare market generally is predicted to remain subdued, according to figures published by Laing & Buisson. These reveal that, as the economy contracted in 2009, the number of policies in the UK — individual and employer schemes — fell by 4.8% at the start of 2010, with 11.7% of the population (equating to 7.23 million people) covered, compared to 12.3% at the same time last year.

A downward spiral
So, will these tax increases further fuel a downward spiral? David Gauke, Exchequer Secretary to the Treasury, who steered the Bill through Parliament, does not believe the rise will have a noticeable effect — pointing out in the parliamentary debate that the average premium would increase by less than £10 a year, whereas exempting medical insurance from the uplift would decrease revenue income by a further £40m a year.

Tal Gilbert, head of research and development at Pru Health — whose acquisition of Standard Life Healthcare was finalised at the beginning of August giving it 700 000 policyholders — agrees the 1% increase should not make a difference. But Adrian Fawcett, chief executive of the General Healthcare Group, believes the government should consider incentives to encourage greater self-responsibility in healthcare where there is a clear business case, based on reducing pressure on NHS budgets.

"During a period of economic austerity, it is important those that can afford to pay for themselves should be encouraged to, if that makes financial sense to the Exchequer," he says. So, why has the healthcare insurance industry failed to persuade the government that disincentives should be removed if that could help cut NHS and disability benefit costs?

One answer could be the lack of stomach for a fight it perceives it cannot win. Axa PPP spokesman John Dubois remarks that, as IPT is a general tax on all insurance policies, "it would be awkward for the government to single PMI out". While a spokeswoman for the Association of British Insurers comments: "At the moment the industry has to be pragmatic about this. We are emerging from a tough recession and the government's very clear and stated priority is deficit reduction.

"Every penny is being made to count [and] while we would never want to see a rise in IPT, 1% at this current time was not as bad as it could have been. HMT is highly unlikely to reduce short-term revenue at a time when tough choices are being made in every area of government, impacting on everyone's lives."

Fiona Harris, head of strategy and development at Bupa Health and Wellbeing UK, seems to agree that efforts to make a special case for PMI were futile, faced with the political priority of making strides to balance the books. She comments that "any increase in IPT is bad news for all of us — especially customers. However, everyone understands the spending challenges facing the government."

With insurers showing such touching understanding of the government's predicament, it is hardly surprising Mr Gauke didn't budge. Arguably it is that kind of pragmatism trumping principle that also allowed the Treasury to push through an increase in employers' National Insurance contributions on benefits-in-kind, including medical insurance premiums paid on behalf of employees, to 13.8% from next April. This is despite the fact it goes against the Department of Business Innovation and Skills' own encouragement of employers to play a greater role in the health and wellbeing of their employees, notes Mr Payne.

A big and continuing problem for the private healthcare sector is the perception that PMI is about well-heeled people buying their way out of the queue for NHS services — instead of the effective pooling of resources to ensure a better quality of healthcare for all, outside of taxation. This is borne out in a remark by Mr Gauke, who said: "I hear the points made by government members, who say private health insurance removes the burden from the NHS. But if we are all part of the system together, and make sure that we all take part in it, we have a better collective service."

That is difficult to refute, and Alistair Sclare, director of healthcare at Groupama, believes the benefit to the NHS of treatment carried out privately and funded by medical insurance is entirely unrecognised by the public or government. "The responsibility for the failure to recognise — and, therefore, to maximise these benefits — lies with government, the public and providers," he comments, "and stems from a deep-seated, and largely irrational, view of the public that anything that is not the NHS must be bad. We also believe that, without overwhelming evidence, political parties will be very wary of supporting PMI for fear of a lack of public support."

Going for broke
In that case, perhaps the industry should go for broke and, instead of tinkering at the edges and muttering under its breath about marginal increases, mount a powerful case for PMI to be totally exempt from IPT. Aneurin Bevan established the NHS in 1948, to provide free medical care at the point of delivery, so the government is legally obliged to provide it — and should be grateful to those making their own provision instead of subjecting themselves to double taxation.

Iain McMillan, managing director of specialist PMI broker The Health Insurance Group, agrees: "There is a case to exempt PMI from the tax altogether." For example, John Redwood MP, in supporting the attempt by Christopher Chope MP to prevent the increase in standard IPT rate, said: "As he is suggesting, people who insure for their health needs are paying twice, because they are also paying their contribution to the NHS, thereby helping doubly. Does he therefore think that keeping the tax rate at 5% is enough, or would he really rather it were lower?" Mr Chope replied: "I would prefer the tax to be much lower — indeed, perhaps there should be no tax at all for particular insurance premiums. However, in order to try to carry as many people with me as possible in this debate, I thought I would limit my ambition."

It could be argued that such lack of ambition in the industry itself has seen its policyholders doubly taxed because, as Mr Gauke observed, insurers can always pass IPT on to their customers. In Mr Dubois' view: "We need to try harder to make the business case that the net benefit would be more than the tax lost." So, why has that not happened?

Mark Howard, head of rehabilitation and return-to-work services at Crawford & Company-owned Broadspire, observes: "Those that design and distribute health insurance products don't focus, in terms of working together. And until there is common agreement in terms of what they are trying to do, they won't get what they want. The industry is too fragmented in its representative culture, with no commonality. You can't lobby on a 'yes, but' basis. They haven't got a position from which to lobby, and need a proposition — a coherent strategy."

Mr Payne doesn't believe the health insurance industry speaks as one voice either, but rather as competing companies: "We would need a common voice to go for a total exemption — and to gather evidence to show a cost benefit to counter the loss of tax revenue." And Mr Sclare agrees that the industry must convince government of the significant benefits to the country that could be accrued from people being willing to fund aspects of their own healthcare privately. "This can only reduce strain on the NHS and facilitate it providing a better service. Only by the industry working together — insurers and brokers, emphasising the benefits already provided — is it likely enough confidence will be built to provide a platform on which to ask for government support to further develop PMI. This will take time and is not best handled in the context of objections to economic-climate-driven tax changes."

As to the chances of getting a complete exemption in the future, a Treasury spokesman predictably remarks: "All tax is kept under review and I can't speculate on future tax changes or rises." The likelihood is, though, that the Treasury will continue to collect this tax — certainly in the absence of compelling empirical evidence to substantiate assertions of savings to the NHS, equal to the revenue yield from IPT.

Influencing policy
So, is the failure to lobby more effectively due to a lack of data or, if statistical data is available, why has it failed to influence policy? The ABI's spokeswoman claims there is a "plethora of statistics", that the "industry and Department for Work & Pensions have reams of stats" but "the government's priority is to reduce the deficit". She says Nick Starling, the ABI's director of health and general insurance, is a "stakeholder with the DWP" on health, work and well-being issues and will continue to seek to persuade the Treasury to take a "longer term approach with recognition of cross-sector (DWP/DH) gains and losses".

As to how serious the ramifications will be of heightened tax levels on employer take-up of private healthcare provision, Mr Payne does not expect the 1% increase to affect employers who already provide PMI — although it might discourage those that have yet to look at the health agenda. Dr Doug Wright, principal clinical consultant at Aviva UK Health, comments: "We have already seen a greater focus on the costs of providing health benefits as one part of the response to financial pressures businesses are facing. The change to IPT, and indeed the future increase in NI contributions, will bring an added pressure.

"Many businesses are ready to accept a greater role in encouraging positive health behaviour in their employees, but often find it difficult to decide what to do. And anything that puts an additional obstacle in the way simply does not help."

The approach of the Treasury could also stifle innovation, and Dr Wright remarks: "We are already seeing an evolution of the market with many key providers moving away from traditional insurance-based offerings in favour of new propositions that encompass rehabilitation and return-to-work services. If this appetite for change were supported by increased investment in employee health, the industry could revolutionise the way sickness and health in the workplace is managed with benefits for employers, employees and the UK."

Carl Carter, managing director of IMG Europe, and chairman of the Association of International Medical Insurance Providers, notes that this will have no affect on overseas companies and individuals stationed abroad, and says brokers that feel their UK business may be materially affected may wish to consider increasing their overseas book of business that is less sensitive to changes in the UK economy and insurance tax structure. "When the going gets tough, international customers are less likely to cancel cover because, in most cases, there is no national healthcare system to fall back on."

The problem for UK health insurers is that as long as there is an NHS, the government has the ability to bleed their policyholders dry to help fund it.

What can health insurers do to improve PMI penetration?

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