Making occupational health pay
The business case for investing in occupational health services is strong, but a flawed tax system and other barriers are discouraging their uptake by most employers. We look at the ways forward.
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Occupational health services do not make economic sense for many employers. It can be cheaper to pay for the consequences of unhealthy workplaces than to invest in occupational health provision to prevent problems occurring.
This article considers the advantages of occupational health services for employers and society as a whole. It also examines the ways in which occupational health provision could be made more financially attractive to employers in the UK.
Occupational health benefits
Occupational health is a specialised aspect of medicine that can provide a valuable service to employers and employees. Specially trained occupational health nurses and doctors are able to:
- advise on potential hazards at work;
- conduct workplace risk assessments;
- offer relevant services, such as providing medical advice, liaising with other healthcare professionals and providing fast-track access to appropriate treatments; and
- help employees return to work as quickly and safely as possible following a period of sickness absence.
These services provide employers with paybacks in the form of:
- lower absence rates (see box 1 for evidence);
- healthier employees; and
- potentially reduced exposure to compensation claims and prosecutions for health and safety violations.
Chart 1
highlights the top five reasons why employers provide occupational health
services.
Despite these potential benefits, the costs involved may deter many employers, although there are other factors involved, as shown below.
It can be cheaper, in fact, for an employer to face the financial consequences of ill health at work than to invest in preventing injuries and illnesses in the first place - ie, the "market" for safe workplaces is not functioning efficiently. This market failure is beginning to worry many policymakers and occupational health bodies.
In particular, it represents a major barrier to the government's aim of using employers as a means of helping improve citizens' health. Official policy now wants employers to play an important role in improving fitness and wellbeing instead of merely complying with basic safety legislation.
There is also a financial and political agenda. The government has become increasingly concerned about the number of people who have left the labour market, usually after a period of long-term absence. This tends to be a one-way street: many people leave employment and claim incapacity-related state benefits, and very few return to work afterwards. The costs are enormous in terms of benefits payments, lost tax revenues and human unhappiness.
Speaking at an Association of British Insurers conference in October 20061, Stephen Haddrill, director general of the organisation, pushed the point home about the social benefits of employers' investment in occupational health. He said: "It isn't just a company's employees that gain from being fitter, happier and more productive workers. There are also great gains for the employers, insurers and, of course, the taxpayer. Yet the costs of providing these benefits fall overwhelmingly on employers alone."
Employers' views on occupational health
Research published in late 2006 by the Association of British Insurers2 explores in detail the attitudes of employers towards occupational health provision. In particular, it gathered information on why employers use occupational health services, or why they do not.
Almost eight in 10 of the 435 employers polled know where and how to obtain occupational health services. This means that lack of knowledge is not a barrier.
Moreover, the survey found that in most organisations it is clear where responsibility for commissioning occupational health services would lie. This means that occupational health provision has not been hindered by lack of clarity about management responsibilities or "turf wars" between departments.
Employers' attitudes towards occupational health are largely favourable, according to this research. Many of those surveyed consider that occupational health services help to keep employees fit and at work. Four-fifths of the decision-makers in the poll would want to cover all their workforce, rather than confine occupational health provision to senior or key members of staff. And almost four in 10 employers consider that expenditure on occupational health is cost effective.
Despite these positive results, the survey report says that only a minority of the 435 employers actually provides occupational health services to their staff. The best estimate, according to the Health and Safety Executive, is that between one in five and one in three employers have some form of occupational health provision3.
Even those employers that value occupational health services indicate some barriers to provision, such as patchy access to services in their area, or the fact that personal injury litigation prevents them working effectively. The current tax regime, in which occupational health is treated as a benefit in kind rather than an investment in human capital, is also criticised.
Market failures in health provision
Haddrill's conference speech argued that the tax regime and other problems have led to a market failure in the take-up of occupational health services. He explained: "Elsewhere in the economy, the state encourages investments with wider social benefits by providing tax relief. But despite the productivity, public expenditure and broader public welfare gains, the state penalises employers that provide occupational healthcare for their employees. This makes no sense - either in policy or economic terms. Occupational health [provision] should no longer be taxed as a benefit in kind."
His reference to tax penalties being based on "benefits in kind" needs explaining. The flawed economics of occupational health provision affect employees as well as their employers. Individuals are penalised by having the cost of many forms of medical treatment taxed as benefits in kind.
At about the same time as the Association of British Insurers conference, Norwich Union Healthcare produced a report4 that examines in detail the economics of helping sick employees return to work. It provides evidence of the market failure relating to the provision of occupational health services.
Its report highlights four factors contributing to market failure:
- the costs of illness are spread across many different stakeholders, including employers, the NHS, individuals and the social security system, meaning that no single stakeholder sees the true cost, making it harder for employers to demonstrate a business case for investing in occupational health;
- the benefits of early intervention in individual cases accrue over time - for example, the benefits of securing a return to work may not accrue to the employer making the investment in occupational health if the worker switches jobs soon after, creating uncertainty about the potential return on investment;
- levels of awareness and understanding about the causes of absence and the benefits of early intervention remain low; and
- the supply of early intervention services for workplace rehabilitation is not well developed.
As long as these factors persist, the Norwich Union Healthcare report concludes, employers will continue to under invest in workplace health - ie, their decision-making will still be based on the private company-focused benefits, rather than the broader social, benefits of retaining an employee in work.
No one is responsible
One of the main problems with occupational health services lies in the confusion about the responsibility for the costs involved, and of the broader economic consequences of work-related illness and injury. Table 1 gives an example of the problem, using the costs of the two major causes of long-term absences from work.
Employers shoulder only part of the true costs of absence and workplace ill health. The remainder of the bill is picked up by the NHS, social security benefits, carers and relatives. The government estimates the bill for incapacity benefits in 2005/06 to have been around £13 billion. Sickness absence affects other areas of public spending in addition to the direct costs of benefits. Much of the financial burden of providing healthcare falls on the NHS.
Incapacity benefit claimants may also become eligible for other benefits, such as tax credits and housing benefit. Private products, such as medical insurance, may cover part of the absence burden, but take-up is low, so much of the cost continues to fall on public services.
The Norwich Union Healthcare report argues that the solution to long-term sick leave involves early intervention. This is particularly true of absences linked to stress or musculoskeletal disorders. However, early intervention is not possible where most employees have access only to the NHS, where queues for treatment are long. Wider access to occupational health services could produce real benefits to the employee, the employer and society.
In many instances, the benefits to employers would far and away exceed the costs of establishing and running occupational health programmes, the report points out. The problem, according to the Norwich Union Healthcare report, is the lack of responsibility for expenditure on health at work. No single stakeholder, including the employer, has an overriding incentive to invest in occupational health.
What employers want
According to the Association of British Insurers research, employers are clear about what would persuade them to offer occupational health services. This includes the following:
- help with the cost through tax relief and other incentives from the government;
- reforms to the personal injury compensation system so that employees can be fast-tracked into occupational health without getting bogged down in legal issues;
- a change in the law so that an employee who is making a claim against their employer for personal injury should be required to accept occupational health where a clinical need is demonstrated, and the employer should have a legal duty to provide it in these circumstances;
- easier access to NHS services that help in the rehabilitation of employees on sick leave, and encouragement for GPs to focus their efforts on getting their patients back to work; and
- publicity funded by the government that makes the business case for occupational health services.
Tax credits or matched funding?
Norwich Union Healthcare's study of healthcare economics agrees with much of what the Association of British Insurers has found. The former is particularly interesting because it has examined the feasibility of two possible monetary solutions: tax credits and matched funding.
Its research recognises that targeted fiscal incentives can be complex to administer and expensive to manage for both government and the recipient (citing tax credits for low-income workers as an example). It does not consider that tax relief against corporation tax is an option because a large group of employers - the public sector included - does not pay it.
Encouraging occupational health provision by providing public funds to match employers' expenditure might not be effective, the Norwich Union Healthcare study says. The government would expect to have a say in where and how employers spend their money, and this would be unpopular. Tax credits against NI contributions are, instead, seen as the better option.
The research sets out two alternative methods for using tax credits to encourage investment in workplace health:
- a carefully controlled scheme, such as one in which employers have to follow the requirements of an approved occupational health framework (see next section) - however, this could discourage employers because of the effort required to demonstrate that their occupational health programme meets the rules for support; or
- a more loosely controlled scheme linked to a lower level of tax relief - if this route were taken, politicians and policymakers would need to accept that some public funds would be used for other purposes or channelled into existing occupational health programmes.
Towards an approved tax scheme
Dudley Lusted, head of corporate healthcare development at private health insurer AXA PPP, has proposed an approved workplace health programme. This would attract an initial 1% reduction in NI contributions for employers that implement it.
Speaking at a fringe event at the 2006 annual Labour party conference, he suggested that an approved programme could include prevention, risk assessment, health promotion and management training. A cut in NI should provide the necessary incentive for employers to invest in the approved programme, Lusted said. The result would be an increase in the number of people of working age who remain in jobs, ultimately producing an increase in the tax collected.
Lusted also proposes tax reforms to remove the liability on employees when employers pay directly for private treatment for illnesses and injuries not caused by work - the benefits-in-kind liability. He stresses that he is not calling for tax relief across the board on private medical insurance; instead, he would like to see the chancellor identifying a narrowly defined set of circumstances where tax relief would be available.
For example, Lusted would like to see tax relief on private medical care provided when an employee is of sick, where waiting lists for NHS treatment are long, and where the individual employee is unable to return to work without appropriate treatment.
Lusted argues that such a reform would remove one of the major barriers to the provision of rehabilitation: "We've tried threats and encouragement; let's try financial incentives."
The idea of offering fiscal incentives only for pre-approved programmes is supported by the research for Norwich Union Healthcare. Smaller employers in particular could exploit the economies of scale inherent in an approved scheme that are otherwise available only to the largest of employers running their own occupational health programmes. From the government's point of view, an approved scheme could be designed so funding for programmes did not draw staff away from the NHS - for example, by requiring that scheme providers train their own staff rather than poaching them from the NHS.
A growing campaign for reform
The Norwich Union Healthcare report is part of an expanding lobbying effort to persuade the government to incentivise the provision of occupational health services by employers. The lobbyists include insurers, healthcare providers and some employers.
There are signs that some policymakers, too, are beginning to listen. Significantly, these are believed to include Lord Hunt, a parliamentary under secretary of state at the Department for Work and Pensions - the department responsible for incapacity benefits.
The lobbying campaign is focusing on the introduction of tax incentives for employers that pay for occupational health services. Tax incentives could be used to encourage employers to invest in a clearly defined set of products focused on early intervention, return to work and rehabilitation, proponents argue.
The tax-relief lobby argues that financial incentives should become long-term political commitments when they are introduced. They should not be withdrawn in a subsequent Budget after significant numbers of employers had introduced occupational health schemes and the arguments in their favour had been won.
This, they say, is because employers do not operate in isolation from other employers or society. For example, labour turnover means that employers would not always see the full benefit of their investment in occupational health. There would always be a downside to funding occupational health schemes, from an individual employer's point of view, that public intervention would need to counter.
An offset against NI contributions represents the most appropriate way of providing an incentive for investing in employee health, the Norwich Union Healthcare report concludes. It has developed a model of the annual cost of such a proposal based on an occupational health programme costing an average of £100 per employee, and a predicted 25% cut in long-term absence as a result of the investment.
The model assumes that the take-up of the incentive would be similar to the number of employers currently offering a group pension scheme to staff. On this basis, the cost of 50% NI relief would be around £850 million a year to the exchequer.
In conclusion, the Association of British Insurers says that a full debate is needed about the best ways of removing employers' disincentives from investing in occupational health services.
1Improving the Health of the Working Population, 17 October 2006, www.abi.org.uk/Members/circulars/viewAttachment.asp?EID=14859&DID=13632.
2Improving health at work: employers' attitudes to occupational health, Association of British Insurers, 2006, www.abi.org.uk/Members/circulars/viewAttachment.asp?EID=14857&DID=13632.
3Health and Safety Executive's estimates quoted in In with the out, Occupational Health, 1 July 2006.
4Sharing the costs - reaping the benefits: incentivising return to work initiatives, norwich union Healthcare, 2006, www.healthcarezone.co.uk/document-library/files/ge/gen1900.pdf.
This article was written by Sarah Silcox, a freelance writer and trainer on employee health issues, sarahsilcox@waitrose.com ; www.sarahsilcox.com.
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1. Internal resources Free to subscribers of XpertHr or IrS's Occupational Health Review:
2. External resources
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Employers that provide occupational health services can achieve lower absence rates, according to research by the EEF, an employers' association for mainly smaller manufacturing companies. Its survey of 622 EEF members in March 2006 shows that where employers provide occupational health support, 39% reported a reduction in short-term absence and 28% experienced a cut in long-term absence. These results are considerably better than those reported by employers without any occupational health service. There is a gap of 17 percentage points in respect of short-term absences between employers with and without occupational health services (22% versus 39%). And there is a gap of nine percentage points in respect of long-term absences (19% versus 28%). EEF chief medical adviser Professor Sayeed Khan said: "These figures demonstrate a clear link between addressing sickness absence and improved business performance. Those companies that still put this issue in the 'too difficult' tray would do well to sit up and take note of the very real benefits they would reap from tackling the problem." Source: "Survey on sickness absence shows link between business performance and occupational health care", press release, EEF, 15 May 2006, www.eef.org.uk. Our coverage of the EEF's 2006 absence survey can be found in The CBI and EEF agree that absence is falling , Employment Review 850. |
Table 1. Who pays for stress and musculoskeletal disorders?
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Stress and mental illness |
Musculoskeletal disorders |
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Annual working days lost |
12.9 million |
11.6 million |
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Average length of absence |
30.9 days |
20.5 days |
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Aggregate cost to the NHS |
£3,667 million |
£1,198 million |
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% of all short-term absences |
14% |
23% |
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% of all long-term absences |
30% |
39% |
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Number of people claiming incapacity benefit |
2,387,000 |
481,800 |
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Number of people receiving incapacity benefit |
1,444,800 |
337,300 |
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Cost to the NHS of GP consultations |
£385 million |
£238 million |
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Cost to society |
£4.3 billion |
£7.34 billion |
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Cost to employers |
£398 million - £430 million |
£760 million - £804 million |
Source: Sharing the costs - reaping the benefits: incentivising return to work initiatives, Norwich Union Healthcare, 2006. Most data relate to 2005.
