A healthy idea in the long run

Nicholas Timmins on the benefits of an opting-out system for long- term health care
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Is Britain moving from a social insurance to a private insurance society? That certainly is the signal the Government's right-wingers are sending. Michael Portillo wants to identify areas of the welfare state from which the public sector can withdraw altogether. Peter Lilley has called for more "self-provision" and predicted that in "the welfare society" of the future "an increasing share of provision will be made by individuals, families and companies".

Their stance has been the most overt attack yet on the post-war social compact - that people would pay contributions and taxes and in return receive health and national insurance benefits as of right, without a means test. The system has long been under strain. Over the past decades, though at varying rates, private pension provision, private health insurance and private cover for legal expenses have all been growing. Since the early Eighties, sick pay costs have increasingly been shifted from the state to private employers and individuals. The NHS has drawn more tightly the boundary between health and social care, putting more of the burden of long-term care on to individuals and means-tested social services. And from October, in a change that financially is relatively small but politically is highly significant, those taking out new mortgages will be expected to cover their costs privately for the first nine months of unemployment.

Eighteen months ago, in a move which reflected this new climate, the Association of British Insurers, the industry's trade body, produced an internal paper detailing where it thought private insurance could contribute to the dismantling of the welfare state.

The paper listed item by item the areas where insurers perceived they could "assist" in any such redefinition of welfare. Among others, it mentioned private health cover, pensions, long-term care, unemployment insurance and industrial injuries as areas where it believed there were "major opportunities for partnership with the Government over the next two to three years".

Yet little has happened subsequently to enforce the shift to the private insurance society. This loss of momentum might seem puzzling, but some explanation is forthcoming in a follow-up ABI report out today, entitled Risk, Insurance and Welfare; The Changing Balance Between State and Private Provision. The report's findings, set out in 100 pages, have been compiled by economists asked to review the various markets - not by the industry's salesmen who may be keener to spot niches and develop them. Thus, it is offered up for thought, not as an industry view. But its conclusions are in the main cautious, making sobering reading for those who believe there is a private insurance market out there just ready and waiting to take over.

Instead, the various essays come up with rather more awkward propositions. By trying to compete with the NHS, private medical insurance is concentrating on the wrong market, the paper suggests. It should instead be working to complement NHS provision. For long-term care, the cost of sufficiently generous policies appears to have proved simply too high to be afforded by the older generation most eager to take them out. Unemployment benefit has been increasingly dismantled. But there are big problems in substituting private cover in its place - those most at risk are least able to afford the premiums; and to provide anything like universal cover risks would have to be pooled, something that is anathema to the private insurer. The study does find potential demand for more legal expenses insurance, but is clear that it "will not provide a complete substitute for legal aid".

And the report makes uncomfortably clear that the private sectorcannot supply all the answers. The old problems of private insurance remain - adverse selection in which the industry is least willing and able to provide affordable cover to those who most need it; a desire in a competitive market to cream off the best risks, offering them lower premiums, while no one wants the high risks at other than prohibitive premiums; tightly drawn exclusions which can leave people who thought they were covered discovering they are not; and the "moral hazard" that makes those most generously covered the most likely to claim, with the result that premiums rise.

Yet in some areas - pensions, for example - the argument for greater private provision is strong. Rising numbers of elderly combined with a likely decline in the numbers of those of working age next century mean fewer people will have to pay more taxes to support a social insurance system. It is an open question whether they will be willing to do so. Individuals may be better off with their own invested pensions.

In other areas, health care for example, paying for the NHS out of general taxation remains easily the most attractive option. Over the past 15 years, the proportion of the population holding some form of private health insurance has risen from 5 to 11 per cent. Yet amid rising costs in an increasingly competitive market, many policies are much more restrictive than they used to be, limiting treatment to particular conditions, particular types of hospital or only to conditions where the NHS wait is long. In other words, more and more people are being covered for less and less. The private sector seems to have little to offer here, other than as a complement to the collective service, not a substitute for it.

The future for an expansion in private cover may therefore lie more in working as a partner with the state than as a competitor. To an extent, this is happening with pensions. The basic state pension - despite its value being progressively eroded - remains as a platform on which private provision can be built.

A new opportunity exists in solving the problem of how long-term care is to be funded - a mounting crisis which the Government is just beginning to address. Given the industry's failure to build a significant market in long-term care insurance, the report - remarkably, given its provenance - suggests that a new national insurance for long-term care should be created and introduced over 20 years.

Participation would be compulsory but, as with Serps, those buying equivalent cover would be allowed to opt out. "Requiring people to buy, but offering them a choice of supplier, would act as a major stimulus to the private insurance long-term market, just as it did for private pensions," the study suggests.

But once that was established, the government could in fact move a step further, in effect buying care policies for less well-off people, which would reduce the burden on future taxpayers to finance their care. This would also give people more rights to long-term care, without the need for a means test. Public spending would inevitably rise, but as an investment for the future by the present generation against higher tax rates later.

Such an approach would mean a new partnership between the public and private sectors - but one which might prove far more constructive than attempts to rebuild a social insurance which may not be affordable or to dismantle the welfare state in favour of entirely privatised and atomised provision.

Bryan Appleyard is away.

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