HC Deb 16 June 1997 vol 296 cc90-6

Motion made, and Question proposed, That this House do now adjourn.—[Mr. Jamieson.]

8.12 pm
Mr. Nigel Waterson (Eastbourne)

I begin by welcoming the Financial Secretary to her new responsibilities, and by wishing her well. I raise this issue tonight because I received several letters during the recent election campaign from elderly constituents expressing concern about Labour and Liberal Democrat proposals to scrap tax relief for private medical insurance. Perhaps I should also declare a sort of interest in the debate: the law firm I founded has a corporate private health scheme for staff. I have a constituency interest also, as Private Patients Plan is a major and respected employer in Eastbourne.

My hon. Friend the Member for Woking (Mr. Malins), who is not in his place, wished to be present for my Adjournment debate, as he is the sponsor of early-day motion 26 concerning tax relief for medical insurance. However, illness in the family has sadly prevented his attendance tonight. I know that he takes a close and detailed interest in this issue.

For once, we have a clear pledge from the new Labour Government: in this case, to abolish private medical insurance. In opposition, Labour made no secret of its hostility towards it. It might be helpful to examine the background to this issue. The White Paper, "Working for Patients", which was published by the previous Government in January 1989, set out the growing importance of the private medical insurance sector in this country. It referred to the increase in the provision of medical insurance cover by companies for their employees. But in most cases this cover stops when an individual retires. As a result, people are faced with deciding whether to take out cover as individuals at a time when their income has fallen and when medical insurance premiums rise. There is no general tax relief for the costs of private health care, but tax relief is given for private health insurance for the over-60s. That relief is given by making a deduction from the amount of the premiums due, so that even non-taxpayers benefit.

In the 1989 Budget, the then Chancellor, Nigel Lawson, announced that the relief would come into effect from April 1990. In the November 1993 Budget, the then Chancellor, my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke), announced that the relief would be limited to the basic rate of tax with effect from April 1994.

One obvious reason for limiting the relief at that time was that it had become quite expensive because it had become popular. The total cost of relief is estimated at £120 million in 1997–98. That sum is payable in respect of some 400,000 contracts, providing cover for about 600,000 individuals. When the relief was introduced, only 400,000 individualswerecovered—so it is easy to see the rapid rise in its popularity.

It is estimated that 5 per cent. of the population of the United Kingdom over the age of 60 have a tax relief PMI plan. In my constituency, there are some 600 subscribers—involving 1,150 people, as obviously some policies cover a couple or a family—to PPP alone. The number of my constituents who have plans with other providers—I gather there are about 30 in the market at present—will be much higher. I have no doubt that a high percentage of those subscribers are over 60. According to recent statistics, some 40 per cent. of voters in my constituency are over retirement age.

The growth in the appeal of private medical insurance to the over-60s is interesting. As the Association of British Insurers has pointed out, three factors might lead one to expect that fewer older people would be covered by medical insurance. Those issues were addressed in the 1989 White Paper.

The first factor is the increased cost of insurance as one grows older. Secondly, as a rule, that portion of the population does not have access to employer-provided insurance. Thirdly, the over-60s tend to have less disposable income than those in full-time employment. Therefore, it is reasonable to conclude—as the ABI did—that the tax relief on these premiums is a major factor in encouraging a high level of take-up among the over-60s.

Labour spokesmen often try to drive a wedge between the NHS and private health provision for purely dogmatic reasons. The fact is that the two ways of providing health care in this country are complementary, and—as I shall demonstrate in a moment—a substantial fall in private health provision could cause major problems for the NHS. We should remember also that elderly subscribers to PMI have supported the NHS throughout their working lives by paying tax and national insurance contributions. They have made a personal decision—a choice—to use some of their spare resources to acquire PMI cover. The Government want to abolish that choice.

There is also considerable logic in providing tax relief only for the over-60s because, first, premiums naturally increase with age; and, secondly, upon retirement, people often take over the payment of premiums after leaving a corporate scheme. Tax relief therefore helps to ease the transition from the world of work to retirement.

There is no doubt that private medical insurance carries a major burden in terms of health care for the over-60s. We know that 80 per cent. of the premiums paid on such plans are paid out in treatment costs. The private sector now treats 28 per cent. of all hip operations, 20 per cent. of all heart conditions and 20 per cent. of all acute conditions.

Figures provided to me by Prime Health show that 6,840 hip or knee-joint replacement operations alone were carried out in the past eight months, at a cost of about £40.5 million. The average stay in hospital was 10.85 days for this procedure, equating to a potential of nearly 72,000 days' accommodation for hip and knee-joint replacement patients.

Apart from hip replacements, other common procedures such as cataract removal, coronary bypass and prostatectomy operations carried out on customers increased by no less than 30 per cent. in 1996 over 1995.

I have already said that people already expect their premiums to increase as they grow older. There are also yearly adjustments for inflation. The ABI tells me that that means that there is already a natural incidence of lapses in cover and what is called trading down, which is buying a policy with lesser benefits.

My argument is that policyholders know in advance that their premium costs are likely to increase, and can therefore budget and plan to meet likely increases. The ABI tells me that the industry average for the lapsed rate is between 5 and 10 per cent., rising to between 15 and 20 per cent. when age-related increases are made to the premium rates.

The removal of tax relief at 23 per cent. means that policyholders will in effect pay an extra 30 per cent. According to Prime Health, its research has shown that, when an increase of 30 per cent. was mentioned, 35 per cent. of policyholders said that they would cancel their policies or look for a replacement policy. According to the ABI, some companies estimate that up to 50 per cent. of policyholders would lapse their policies.

That is not all. There is also what the ABI calls a domino effect. As the number of existing PMI policyholders decreases, an additional burden will be placed on remaining contributors. That in itself would increase the cost of premiums yet further, causing even more policyholders to lapse their cover. I am told that there would also be significant administrative costs to the insurers in abolishing tax relief.

But, I hear you ask, Mr. Deputy Speaker, "Does this matter?" Surely these people could revert to relying on the NHS for any medical care they needed. Well, let us remember that we are talking about an age group of whom many will already have a pre-existing condition, which in turn makes it difficult for them to shift health schemes or trade down, or who, because of their age, are more likely to develop health problems than younger sections of the population.

National health service hospitals such as my local district general hospital would suffer if the Chancellor of the Exchequer removed the relief. Thirteen pence in every pound paid out, for example, by PPP goes to the NHS. That amounts to about £220,000 paid to the NHS by PPP alone every working day, or £55 million a year. That is only one company.

I do not have the figures for all the other companies, including, for example, BUPA, but no doubt the Minister will be able to supply them in her reply. The point is that the Government would have to find additional resources merely to maintain the financial status quo. Additional costs, which are difficult to quantify, would also arise for the NHS because many subscribers are elderly and require expensive treatments, and more often.

I hope that the Minister has her own best estimate of the revenue stream that would be lost, and also the knock-on costs of many current elderly subscribers reverting to health care on the NHS.

Mr. Geoffrey Clifton-Brown (Cotswold)

I am sorry to interrupt my hon. Friend. I am listening with great care to what he has to say. I wonder whether, in his research, he has carried out any costings on the differential between abolishing tax relief on private medical insurance and the cost to the national health service of those people who will inevitably have to opt out of PMI and into the NHS, thereby costing the NHS a considerable sum. Is he able to tell the House the sums involved?

Mr. Waterson

I am grateful to my hon. Friend, who in his inimitable fashion has put his finger on the central issue. It is easy to draw attention to the figures on the one side, which are the savings to the Treasury. I think that the Minister referred to them in a written answer recently, and stated that they would amount to £120 million.

On the other side of the equation are two significant areas of costs. Direct revenue will be lost from the private sector to the NHS on a daily and yearly basis. In addition, there will be all the additional costs to which my hon. Friend the Member for Cotswold (Mr. Clifton-Brown) has referred, as a result of policyholders opting out and lapsing their policies, and relying on the NHS instead. That is the key point.

The plain truth is that there is a massive contradiction at the heart of the new Government's policy on this issue. My right hon. and hon. Friends will well remember that, during the election, the Labour party made five major pledges, one of which was that it would cut NHS waiting lists by 100,000. I think that Labour party members even carried little cards setting out their five major pledges. In fact, their proposal to abolish tax relief for PMI would put greater strains on NHS resources.

In my constituency, with a high proportion of elderly residents and many PMI subscribers, I have little doubt that waiting lists would lengthen, not least because some of the elderly who were previously relying on private health care would be waiting for difficult and expensive treatments from the NHS. I must stress to the Minister that the constant theme in the letters I have received on the subject from constituents has been that it was tax relief that made the cover attainable, and that removing it would make all the difference as to whether they could continue paying their premiums.

The Government may rethink their proposal—I certainly hope they will—but if, for what are clearly dogmatic party political reasons, they are determined to proceed, may I urge upon the Minister the ABI' s view that, at the very least, the withdrawal of the tax relief should be phased? There has already been a reduction in the maximum tax relief from 40 to 23 per cent. There was a similar staged reduction in tax relief on mortgage interest, which is a useful parallel.

I have already said that the relief costs about £120 million a year. Against it, as my hon. Friend the Member for Cotswold has said, must be weighed the extra costs to the NHS of subscribers who give up their PMI as a result of losing relief. As I have described, we could be talking of up to 300,000 people. The Minister's reply will be entirely meaningless unless she can tackle that specific question, and in detail. There are worrying parallels with other Government policies, such as the recent Bill to abolish the assisted places scheme. Like that measure, the one that we are discussing is petty and vindictive, with no tangible saving. It has at its heart the desire to remove choice.

The proposed measure is yet another policy initiative that has not been properly thought through. Perhaps it should join the ever lengthening queue of reviews promised by the Government. It is yet another attack on pensioners in our society. We may well see an attack on private pension provision in the forthcoming Budget. Now it is being suggested that pensioners should pay prescription charges, and that those going into hospital or being visited by a general practitioner should also be charged. None of these dramatic departures from the founding principles of the NHS appeared in the Labour manifesto.

Mr. Clifton-Brown

I am sorry to interrupt my hon. Friend again. Is it not at the heart of the issue that pensioners whose income is on the margin will have to relinquish their private health schemes? We are talking not of wealthy pensioners but of those whose income is at the margin. That is what is so cruel.

Mr. Waterson

My hon. Friend is absolutely right. As I have described, it is just one of a series of measures that the Government have brought forward, or will bring forward, that will have the effect of disadvantaging pensioners in my constituency, in my hon. Friend's constituency, and across the country.

I urge the Government not to break faith with pensioners in respect of private medical insurance.

8.29 pm
The Financial Secretary to the Treasury (Dawn Primarolo)

I congratulate the hon. Member for Eastbourne (Mr. Waterson) on securing the debate. He made a number of interesting points about tax relief for private medical insurance, to which I paid careful attention.

I realise that tax relief on private medical insurance is a matter of some interest to many of the hon. Gentleman's constituents, and I hope that he will understand if I do not comment on the possibility of any future tax changes affecting this relief. It would not be appropriate for me to anticipate in any way what my right hon. Friend the Chancellor of the Exchequer may do in his forthcoming Budget. I am sure that, in this, the hon. Gentleman had no great expectations.

Tax relief for premiums paid on private medical insurance for the over-60s is of fairly recent origin. It was introduced only in 1989 and took effect from 1 April 1990. When it was first introduced, as the hon. Gentleman said, relief was given at both the basic and higher rates of tax. That did not last long. Relief at the higher rate was withdrawn with effect from 6 April 1994 in relation to payments made on or after that date.

That change reflects, perhaps, a less than total commitment to the relief by the then Government. It is certainly true that, when the relief was first introduced, there were reservations even on the Conservative Benches about whether it was right to give such a tax relief. Indeed, on Second Reading, the previous hon. Member for Beaconsfield expressed "major reservations" about the introduction of such a tax relief.

The tax relief is not unconditional. There are restrictions about the type of treatment that can be included if payments under a contract of insurance are to qualify for the relief. To qualify, a private medical insurance contract can offer only certain approved benefits, which, broadly speaking, are limited to medical and surgical treatments of a kind normally available in the national health service.

When the relief was introduced in 1990, the then Government stated that they intended the relief to encourage the take-up of medical insurance by older people. Arguments against the relief centred on the fact that the cost was largely what is known as dead weight. It would primarily benefit those who had already taken out medical insurance or who would have done so anyway. Events have largely confirmed the truth of that concern.

In the period from 1990–91 to 1996–97, the estimated number of contracts rose by only 25,000, from 350,000 to 375,000. The number of people covered by such contracts rose, on our estimates, from about 500,000 to 550,000. It seems that the cost of this relief continues to be largely dead weight—that is, going to people who have already decided to take out medical insurance. In addition, a tax relief for a select group of taxpayers ran counter to the policy of having a broad tax base and low rates. That was the stated policy of the then Government, but they chose to make an exception in this instance.

Let me assure the hon. Gentleman that the Government are not opposed to private medical treatment; it clearly has a part to play in the care of people in this country. The public sector, which is supremely important in its provision, can have a good working relationship with the private sector.

I assure the hon. Gentleman that I have taken note of all his comments and concerns on behalf of his constituents, and that any of my right hon. Friend's decisions will be based on effective and genuine need and on a proper assessment of what is best for the taxpayers of this country. I assure the hon. Gentleman that the Government intend to support the health service, to continue to support the lowest-paid pensioners, and to do nothing to undermine their access to the national health service.

Question put and agreed to.

Adjourned accordingly at twenty-six minutes to Nine o'clock.