The demand for private health insurance: do waiting lists matter?

Abstract

In spite of government dominance in financing health care in many countries, the private health care sector remains important. This is true even though most public provision is heavily subsidized, and in many cases free, at source. Britain's National Health Service fails to drive out the private sector because it suffers from certain inflexibilities. Here, we show that longer waiting lists for NHS treatment are associated with greater purchases of private health insurance.

Introduction

In most developed countries of the world, government is the dominant financier of health care. Yet still the private sector remains an important force. This is true in spite of heavily subsidized, and in many cases free, public provision. Perhaps the principal reason why government provision fails to drive out the private sector completely is that it is generally less flexible in catering to the diversity of tastes in the population than a market allocation. That is not to argue that there are not good equity and efficiency reasons for government provision, just that it comes at a cost. Hence, some individuals will regard it as worthwhile to pay for health care, foregoing free public sector provision, in order to get their exact treatment requirements.¹ For the most part, these individuals purchase insurance to smooth their medical payments.

This paper explores one dimension of this using evidence from the UK. Within the UK, the National Health Service (NHS) remains the dominant provider of health care and insurance, with provision that is basically free at source. Yet some 14–17% of the population voluntarily purchase supplementary private insurance. We look for evidence that this is motivated by the inflexibilities of the public sector. Chief among these, which have figured greatly in popular discussions, are waiting lists for NHS treatment. An individual who needs a non-urgent medical intervention is often placed on a waiting list prior to seeing a consultant or to receiving treatment. Economic theory predicts that private insurance purchases should be sensitive to such concerns since, in the private sector, individuals can guarantee themselves instant access to treatment when necessary.² Furthermore, the privately insured also gain access to certain `hotel benefits' such as better food and private rooms.

We study the demand for private health insurance using data from the British Social Attitudes (BSA) survey, a nationally representative annual survey of some 3000 individuals. The questions on health that we use were collected in five years of the data (1986, 1987, 1989, 1990 and 1991). Individuals are matched with data on the NHS from Regional Trends, by identifying which regional health authority each respondent lives in. We estimate a model of the demand for individually purchased private health insurance, which is allowed to depend upon information about NHS service provision. Here, we exploit the regional organization of the NHS to get both cross-sectional and time series variation in our measures of NHS performance. We show that increases in long-term NHS waiting lists are linked to increases in private health insurance purchases. We also relate insurance demand to a host of individual and household characteristics, showing that a typical individual with private medical insurance is relatively well-off, middle-aged and a supporter of the Conservative party.³

The analysis of this paper relates to a large existing literature on government programs. Our principal finding that waiting lists affect private insurance demand is consonant with the literature on rationing by waiting (see, for example, Nicholls et al., 1971Barzel, 1974Deacon and Sonstelie, 1989). Since the NHS is essentially free at source, such models argue that queuing may serve as a rationing device. In particular, Lindsay and Feigenbaum (1984) makes this observation explicitly about NHS waiting lists. Our analysis emphasises that individuals face an opportunity to avoid public sector waiting by purchasing private health insurance. Empirical evidence on the relevance of these kinds of models is relatively rare (Deacon and Sonstelie, 1985, being a key exception). This paper provides further evidence.

The literature has also observed that rationing by waiting is a pure deadweight loss unless there is some gain in terms of targeting resources to a particular socially favoured group. Here, we show that low income individuals are least likely to exit the queue by purchasing private insurance, which empirically confirms the pro-poor bias that has previously been suggested as a consequence of rationing by waiting.

Our paper emphasises the importance of viewing the public provision of private goods in a market context. In Stiglitz (1974), Sonstelie (1982), Ireland (1990), and Besley and Coate (1991) individuals can purchase a private sector alternative which allows them to opt out of the public sector, while in Epple and Romano (1996) and Gouveia (1996) they can supplement their public sector allocations. In either case, the emphasis is on substitutability between public and private sector alternatives. In spite of its theoretical importance, there is almost no previous empirical evidence on whether such substitutions appear to occur empirically. A recent exception is Cutler and Gruber (1996) who study how medicaid provision, which varies across states in the US, affects the decision by low income individuals to insure. They find evidence of `crowding out', in which government alternatives diminish the incentive of low income individuals to purchase private insurance. Such findings are consonant with ours even though the institutional circumstances are very different.

The remainder of the paper is organized as follows. The next section discusses some background information relevant to understanding the health care system in the UK. Section 3then builds a simple model of the willingness to pay for private insurance in the UK system, making precise the link between public sector quality and the decision to insure. Section 4establishes the framework for the empirical work and develops the results. Section 5concludes.