The market for private health care and the demand for private insurance in Britain

There has been little economic analysis of the private health care industry in Britain and as a result much of the policy debate about its role has been ill-informed and based on rhetoric. The purpose of this paper is to analyse the market for private health care and the demand for private insurance in Britain. It is shown that the market is highly specialised, providing care for non-emergency (mostly surgical) cases. Care is provided in NHS pay beds and just over 10,000 private beds, the majority of which are owned by for-profit organisations. The sector is very specialised, providing predominantly cold elective surgery and whilst its turnover is small relative to the NHS, in relation to the particular submarket in which it operates its role is very significant, with over 1 in 6 cold elective procedures in England being provided in the private sector. Geographical inequalities in this provision mean that some London Regions now have nearly one third of such procedures carried out privately. The finance for such care comes from predominantly non-profit making (private) insurers. Over 5 million people are covered by private health care insurance and in 1987 over £580 million was paid out in benefits. If private payments in cash are added to this figure, total private health expenditure in 1987 was of the order of £750 million. The insurers have sought to control the costs, arguing that market growth is dependent on premia stability and that increases in stability will reduce coverage. However, the implied price elasticity (i.e. the implication that coverage is reduced significantly by price increases) has not been estimated until now. In this paper the authors use available date to provide estimates of the short (impact) and long run price elasticity of -0.6 and -2/55 respectively. The low value for the estimate of the short run elasticity implies that if providers raised their charges aggressively and these costs were passed on in high premia, market demand would decline by a relatively small amount. Elsewhere Propper and Eastwood (1988) have argued that private buyers of insurance tend to be conservative in adjusting to market changes. This behaviour is consistent with these elasticity estimates. The tentative conclusion from this paper, based on the short run elasticity estimate of -0.6, is that providers could be aggressive price makers with little risk of losing market share. This result merits further investigation as the price elasticity value may vary in different submarkets (for example, it may be higher in the corporate sector). If data were made available, such questions could be examined. Further, without better data the discussion of the efficiency of the private sector will remain vague and policy will be based on the images rather than the reality of the market’s operations.