Which is the NHS hospital?

When Chancellor Gordon Brown announced a dramatic hike in the funding of the National Health Service, private medical insurers could be forgiven for letting out a communal groan. After years of hard work building up a market of people keen to take the private route to healthcare rather than risk the NHS, insurers could see their market snatched away by a new, well-funded public health service.

But are private medical insurers feeling down? Far from it. Private medical insurance (PMI) providers are a stoic bunch, and if anything, are confident demand will increase. Group sales are rising and while individual sales are falling, there are initiatives underway to make PMI more affordable.

Norwich Union Healthcare spokeswoman Louise Zucchi says: "Of course we welcome more [NHS] spending, but we are not convinced it will make a difference. We think there needs to be sweeping reform. Money itself is not enough. How long will it take to train more doctors and nurses? Until it's clear that standards are higher and waiting lists have come down, we do not believe people will abandon PMI."

Andy Sampson, head of planning and research for Legal & General, says while affordability is an issue, those who can, will continue to pay for PMI. And he even sees sales rising. "I think many people will be cynical about the NHS improving. The health service is fantastic for emergency and life-threatening conditions, but for many others, I think the pressure on waiting lists will remain," he says.

The number of people with PMI cover in the UK rose in 2000 (the most recent figures available from Laing & Buisson) to 6,877,000, up 5.5% on the previous year. Including those in voluntary schemes run by employers, the total number of people covered was 7.5 million people or 12.6% of the population.

The increase was down to the group market - schemes were up to 4.79 million lives covered, compared to 4.21 million for the previous year. Individual sales were down to 2.09 million from 2.4 million.

Builds loyalty
Providers are bullish about continued growth in the group sector. Chris Jones, head of business development for Royal & SunAlliance's healthcare division, says: "The corporate market is likely to remain the target of insurers because it tends to be a better risk - the age profile of staff tends to be refreshed fairly regularly. Employers know that PMI builds loyalty."

Bupa membership managing director Fergus Kee agrees: "It's a valuable benefit and with high levels of employment and signs the economy is improving, employees won't want to lose it. We see the market growing and last year had a record year."

But, while the signs for the group market are looking good, what can be done about the beleaguered individual sector? It seems that cost is the biggest inhibitor of growth.

Providers have offered solutions to date, mainly products with large excesses (which were pioneered by Western Provident Association). But, having the means to put £5,000 aside is not an option that suits everyone.

An alternative low-cost plan is AIG's Healthnow, which promises to be around 30% cheaper than standard policies. It covers a list of about 100 conditions including cataracts, hip replacements and varicose veins. Serious illnesses such as cancer and strokes are not covered, although policyholders do have initial access to a private consultant. The company insists serious conditions are often best treated in the NHS and covers those conditions with long waiting lists.

Rubicon Health (formerly Executive Healthcare) is also developing new lower cost options.

Managing director Clive Kent says the company will continue to manage schemes, but will also launch new ones for a range of companies on a white label basis. These could be life assurers or branded distributors such as retailers. The company has invested heavily in technology that can design policies.

While fully comprehensive cover is one option, he also believes offering a pick and mix approach to insurance is one way of cutting the cost.

Kent says: "If we step in where long waiting lists remain, then this can be of most use to people. The big claims are for diseases such as coronaries and cancer. Strip these out and PMI becomes affordable. Because of the way we are set up, distributors can choose what they want to offer."

Groupama healthcare marketing head Bruce MacLellan says he sees a place for policies that cut out serious conditions, but agrees that not everyone will want them. "I think the national insurance rise will hit employers through the payroll and that will make them consider alternatives to fully comprehensive plans. Cashplans also look set to be offered on a wider scale as they can be a popular company benefit."

But, specialist PMI broker Stephen Walker who runs Brighton-based Medical Insurance Services is sceptical about cut-price PMI.

"I think it's a worrying trend. PMI has survived investigation by the Office of Fair Trading, but providers are now aware of how transparent their products must be. We have plans that could be available though a wide variety of channels, from department stores to affinity group."

Consumer backlash
Walker adds that private cover will need careful explanation. "The last thing the industry needs is a consumer backlash from people thinking they've bought a cheap PMI policy only to find out they aren't covered - many people don't read the small print."

For example, he adds, that if a plan does not cover cancer treatment there could be problems. "Even though it's an area in which the NHS is meant to be focusing resources, many patients are still forced to wait for treatment. Fears over serious illness are one of the reasons people buy PMI. Not including it as a way of saving money would defeat the object in my view of getting the fastest and best possible care."

Kee of Bupa adds: "These products may appeal to actuaries and should be easy to develop, but I don't think they will be of much value for the consumer ,who will be confused and want to be covered for major illnesses."

Rubicon's Kent disagrees: "Many people buy a pension without advice, PMI should be no different. Provided there is clear literature and the customers receives explanations there should not be a problem. The market needs innovation."

The governement's boost for the NHS
Chancellor Gordon Brown decided to raise revenue for the NHS from national insurance (NI). This meant he did not have to raise income tax and so break Labour's election promises. This was a fudge, NI remains a tax like any other.

NI is collected by the Inland Revenue and then passed on to the Treasury, for use by government departments.

How much more will we pay?
Tax, through increased NI, has been raised by the equivalent of 3p in the pound. Everyone who works will pay an extra 1% on their earnings above £4,615 a year.

Previously, a ceiling had been imposed on NI contributions, set at £30,420 this year. That ceiling, due to be raised to £30,940 next year, will remain for the main NI rate, which has been increased from 10% to 11%.

But for the first time, from next April, all earnings above that level will be subject to the 1% surcharge. This will amount to an extra £10 for every extra £1,000 of taxable pay.

The new top rate of tax will be 41p in the pound. The NI contribution paid by companies on behalf of their employees will also rise by 1%.

How much does the NHS currently received from NI?
Around 10% according to the Treasury. The remainder comes from other taxes.

Will the NI hike definitely go towards the NHS?
The government says it will "predominantly" will fund the NHS, but no money is ring-fenced.

Why not?
The Treasury does not want to tie departments down as they need room to manoeuvre.

Why is more being spent on the NHS?
The government was influenced by The Wanless Report, produced by former NatWest executive Derek Wanless.

He looked at health spending requirements over the next 20 years and said that by 2022, NHS spending would need to be between £154bn and £184bn, compared with £68bn now.

This will take up between 10.6% and 11.1% of national income, compared to 7.7% now. Brown promised that health spending would rise to 9.4% by 2007-2008.

What are health spending plans over the next five years?
Brown plans to double NHS spending from £65bn to £105.6bn by 2007-2008. He said spending would increase by an average of 7.4% in real terms for each of the next five years - in part funded by a 1% increase in national insurance contributions.

This means that the total NHS budget will rise from £65.4bn in 2002-2003 to £105.6bn in 2007-08. This will mean that the proportion of national income spent on the NHS will rise from 7.7% now to 8.7% in 2005-2006 and 9.4% in 2007-2008.

Over five years NHS budget will rise by 43% in real terms, and will have doubled since 1997.

Government health spending predictions:
2002-2003 - £65.4bn

2003-2004 - £72.1bn

2004-2005 - £79.3bn

2005-2006 - £87.2bn

2006-2007 - £95.9bn

2007-2008 - £105.6bn

Tax breakdown for this year
Total public spending is expected to be around £394bn this year, around £6,500 for every man, woman and child in the UK. It is set to rise to £418bn in 2003-03 and to £444bn in 2003-04.

Where taxpayers' money is spent
£110bn - Social security

£13bn -Other health & personal social services

£60bn - NHS

£11bn -Transport

£50bn - Education

£24bn - Defence

£22bn - Debt interest

£19bn - Industry, agriculture and employment

£23bn -Law and order

£19bn - Housing and environment

£44bn - Other expenditure

£394bn - Total managed expenditure

Source: HM Treasury, 2001-2002 figures