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Employers may end up paying more for healthcare, warns IFS

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Policies to limit demand, increase productivity or up the use of private money in healthcare should be seriously considered while there is still time, according to a new report by the Institute of Fiscal Studies (IFS).

Spending on health, pensioner benefits and long-term care is set to rise from 37% of spending now to 47% in 50 years’ time, as a result of changing demographics, says the IFS report, The Changing Composition of Public Spending, released yesterday. Even small additional cost increases in health will push this total to well over half of spending, it adds.

Paul Johnson, director of the IFS and one of the authors of the report, said the way the state spends money has shifted over the past 30 years towards greater spending on health and social security.

“The current government’s plans are very much consistent with this trend,” he said. “This change has been possible because the state has withdrawn from other areas of activity – defence, housing and industrial support. Going forward, pressures on health and pension spending are severe.

“Governments have three choices: increase total spending to accommodate these changes; reform health and pension spending dramatically to cap future costs; or cut back elsewhere,” said Johnson.

If there is no significant contraction of other areas of public spending over the long term, total public spending will have to increase to accommodate demographic pressures.

Projections from the independent Office for Budget Responsibility show spending will need to increase five percentage points of GDP higher in 2060-2061 than in 2015-2016, implying a long-term expansion of the state and further tax increases.

The IFS says the alternative is to implement far-reaching and radical reform now. Some commentators believe such a reform would include employers playing a larger role in helping government to reduce escalating healthcare costs.

“There are no easy answers to meeting people’s ever-increasing need for healthcare services and, as the authors rightly observe, something is going to have to give,” said AXA PPP head of marketing, Alison Green.

“So don’t be surprised if this, and future, governments turn to employers to do more to safeguard their people’s health and wellbeing,” she added.

One barrier to this is the fiscal disincentives that deter employers from doing more in this area, she said. These include employees having to pay tax on health cover as a benefit in kind and employers having to pay insurance premium tax on the purchase – resulting in healthcare largely being provided by employers as a perk for senior managers rather than as an integral part of their sickness absence management strategy for the whole workforce.

The proportion of UK residents covered by private medical insurance (PMI) has now fallen from 12.4% in 2008 to just 11.1% at the start of 2011, with last year’s fall compounding the 4.7% decline in individuals covered in 2009. ?The number of people covered in corporate schemes fell 3.3% to 2.95 million, while individual policies fell 5.1% to 1.01 million, according to healthcare industry analyst Laing & Buisson’s Health Cover UK Market Report 2011.

“Removing the fiscal disincentives would be a big step in the right direction and should help to increase the proportion of Britain’s workforce protected by employer-paid health cover from the current 20%,” said Green.

“Moreover, in addition to helping ill or injured employees back to health and back to work, employers can also play a much bigger part in helping employees to manage the their physical and mental health by providing them with relevant information and support to encourage them to live healthier, more active and productive lives.”

The Changing Composition of Public Spending report, by Rowena Crawford and Paul Johnson, is available free on the IFS website at www.ifs.org.uk.