Buyer’s guide to private medical insurance 2012

Focus on facts

What is PMI?
Private medical insurance (PMI) pays for the costs of private medical treatment, enabling claimants to jump the NHS queue and arrange treatment at a convenient time.

What are the origins of PMI?
The first PMI policy was launched by Crusader Insurance (now part of Cigna) in 1907. Prior to that, not-for-profit organisations had been selling a variety of pooled savings schemes offering health cover, but these were more like health cash plans than PMI.

The main growth in employer-paid PMI cover started in the 1970s, when many employers gave employee benefits as opposed to pay risesat a time of high inflation and pay freezes, and continued until the 1990s.

Where can employers get more information and advice on PMI?
Many employee benefits consultants can advise on PMI.

Other useful information can be obtained from the Association of Medical Insurance Intermediaries (Amii), the British Insurance Brokers Association (Biba) health insurance focus group on 0844 770 0266 and the Association of British Insurers (ABI) on 020 7600 3333.

In practice

What is the annual spend on PMI?
Figures from Laing and Buisson show the total spend on employer-paid PMI in 2010 was £2,476 million. Of this, £1,975 million was spent on medical insurance and £501 million on self-insured medical expenses schemes.

Which PMI providers have the biggest market share?
According to Laing and Buisson, for insured business, Bupa had the largest market share in 2010 with 41%, followed by Axa PPP Healthcare (25%), Aviva (11%) and PruHealth (10.5%). Other major players include Cigna Healthcare Benefits, Simplyhealth and WPA.

Which providers increased market share the most over the past year?
Simplyhealth, which announced the acquisition of Groupama Healthcare in August 2011, will have increased its share the most, assuming the deal is completed. The takeover should give it a market share of about 5%.

Nuts and bolts

What are the costs involved?
Employer-paid cover can cost anything between £200 and £1,500 per year per employee, depending on factors such as age, scheme numbers, level of cover, underwriting basis, funding type and location. According to figures from Laing and Buisson, the average premium paid in 2010 was £826 per employee.

What are the legal implications?
Cover is normally a contractual obligation of employment, but it can usually be withdrawn or altered significantly with due notice and negotiation. However, some legacy schemes are very hard to close legally, so employees may have to be offered inducements. Healthcare trusts cannot technically guarantee employees’ entitlement to benefits, so it is important to check that these are compatible with contracts of employment.

What are the tax issues?
Employer-paid cover creates a P11D liability for the employee, and employers have to pay Class 1A national insurance contributions. But cover is usually a corporation tax-deductible business expense. Premiums are subject to insurance premium tax (IPT) except with self-insured schemes, where the admin fee is subject to VAT and any stop-loss cover is subject to IPT. If partnerships contribute out of partnership capital to PMI premiums for employees, it becomes partnership expenditure, which can be offset against capital allowances.

Private medical insurance has been looked upon as an increasingly expensive benefit in these straitened times, but there are ways to make it more affordable, says Edmund Tirbutt

As well as being an attractive employee benefit, private medical insurance (PMI) can cut absence rates significantly by enabling employees to receive private medical treatment at a time convenient to them and their employer.

Benefit levels vary widely, but most schemes will pay out for inpatient and outpatient treatments, specialist consultations and diagnostic tests. Most cover is employer-paid, but it is often restricted to senior employees. In some cases, however, staff who are not in the scheme may be able to access the perk via a voluntary benefits scheme.

The economic downturn has had a big impact on corporate PMI sales. In its report Health and care cover – UK market report 2011, published in July 2011, Laing and Buisson recorded record low levels of new business of 16.5% for 2010, compared with 21% in 2009.

Not surprisingly, in these tough economic times, employers have been taking various measures to cut the cost of PMI, which has become increasingly expensive because of medical inflation relating to advances in medical technology, new drugs and treatments.

One way of cutting costs is for insurers to restrict or eliminate claimants’ ability to choose their own consultant. Axa PPP Healthcare, Simplyhealth and Standard Life Healthcare (acquired by PruHealth in 2010) offer this option for employers. Similarly, in January 2012 Bupa introduced open referral as a default option to its claims-related schemes, which means the right to select consultants sits with the insurer instead of the GP. This concept, which had already been piloted for a year, will be extended to all Bupa schemes this June.

GPs have limited information

Natalie-Jane Macdonald, managing director of Bupa Health and Wellbeing, says: “Recent research carried out for the Office of Fair Trading shows that GPs often have limited information about a consultant’s care practices, outcomes, patient experience, private patient charges or end-to-end costs of care.

“This means that GP referrals to consultants are often based on informal information, and claimants sometimes experience unexpected top-up fees from the consultant because they charge outside the insurer’s monetary limits.

“Open referral allows patients to avoid such shortfalls and to ask us about the range of specialists in their area who might be appropriate to treat their condition.”

Wayne Pontin, sales director for Jelf Employee Benefits, adds: “I welcome open referral because anything that can control costs and sustain premiums in the future has to be welcomed. Major insurers had already been operating similar practices behind the scenes without making it obvious to clients.”

Mike Blake, compliance director at PMI Health Group, expects many insurers will insist on putting restrictions on the choice of consultant in the future to cut costs and control quality. But some PMI providers, including Cigna Healthcare Benefits, say that they will not be going down this route, and will instead seek to control costs through effective case management.

Introducing an excess

Introducing an excess, whereby the employee pays, say, the first £100 or £200 of every claim they make, is another way in which employers can claw back some of these costs. Bupa reports that 64% of its corporate customers are now choosing to take an excess on their scheme, compared with 54% two years ago.

However, while insurers make their policies more affordable by imposing restrictions in some areas, there is growth in others, including cancer cover. For example, Axa PPP Healthcare and Aviva have improved their cancer cover in recent months.

John Horley, client director at Enrich, explains: “Bupa still has the broadest cancer cover [because] it will cover palliative care without any questions, but Aviva and Axa now consider palliative care on a case-by-case
basis and have made their cancer treatment cover broader.”

Kirsty Jagielko, head of product management at Cigna Healthcare Benefits, says employers are increasingly opting to include psychiatric cover in their package, even though excluding it has traditionally been used as a cost-cutting tactic.

Another trend is that employers are increasingly looking at PMI in a more integrated way as part of a wider package with other products such as employee assistance programmes (EAPs) and absence management systems. Alastair Antell, senior proposition and strategy manager at Aviva UK Health, says: “Employers are starting to talk to advisers and providers more around business needs such as how they control and reduce employee absence, and how to engage employees and provide a suite of benefits as opposed to a single product.”

Corporate deductible arrangement

But the most dramatic potential future development is undoubtedly the corporate deductible arrangement, which WPA launched in 2010 and Aviva is planning to offer soon. Essentially, this replaces the claims fund, which is based on insurers pricing policies on employers’ previous claims history, with a group excess paid by the employer.

By treating the risk as an excess, the insured element of the policy is minimised, reducing insurance premium tax and national insurance costs.

WPA reports savings of between £25,000 and £150,000 on schemes that have converted to this approach.

Sandra Hall, senior consultant at Lorica Employee Benefits, says: “Based on the information available at the moment, there seems to be no downside to this and I can see it gaining in popularity but, as with anything brand new, there will always be a time when people watch and wait.”

There have also been developments in the international PMI market, reflecting employers’ increased concern about the health and wellbeing of employees working abroad.

Last year, for example, Aviva UK Health set up an arrangement with Abu Dhabi-based Emirates Insurance Company to provide expatriates working in the United Arab Emirates (UAE) with compliant PMI products. This means employers with staff based in the UAE will no longer be required to purchase local insurance to satisfy visa requirements.

According to Aviva UK Health, offering health provision in the UAE is complex because of different legislative requirements across each of the emirates.

Meanwhile, at the beginning of this year, Axa PPP International introduced a health insurance service to support employees in 247 countries. The service, called MyGlobe, gives employees access to information about the insurer’s global network of 10,000 healthcare providers.

Most insider information on the PMI market revolves around declining service standards at PruHealth since its acquisition of Standard Life Healthcare in 2010. However, these claims are refuted by the provider.

Tal Gilbert, head of research and development at PruHealth, says: “During the course of an acquisition, you will often get people asking questions about your service, but we have been very confident of the service model we have had in place.

“It has been a good period for new business and our lapse rates have been better than the industry-wide figures.”

Sign up to our newsletters

Receive news and guidance on a range of HR issues direct to your inbox

This field is for validation purposes and should be left unchanged.

Overall, the changes and movement within this market demonstrate how both insurers and employers have had to think creatively to adapt PMI so that it can still be offered as a highly-valued benefit at a time when cost margins are being squeezed and the cost of reward packages is under scrutiny.

Read more buyer’s guides