Feature – Product Buyer’s Guide: Private medical insurance

Employers are looking to control costs by resorting to healthcare trust funds and redesigned PMI policies, says Sally Hamilton

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The recent abundance of bad news surrounding the National Health Service, ranging from trust deficits and job cuts through to rationed drugs and big pay rises for GPs, seems impossible for the lumbering healthcare behemoth to shake off. No matter how loud the government shouts about shortened waiting lists and money being poured into improving services, the reality is that access to treatment is generally faster in the private sector.

Negative headlines about the NHS provide the oxygen the private medical insurance (PMI) industry needs to stay high up the benefits wish list. Employers have the advantage over ordinary folk because as bulk buyers they pay premiums that are on average £660 a year per employee, around half the amount paid by an individual, according to the Laing & Buisson Health and Care Cover: UK Market Report 2006. Nevertheless, increases in premiums are inevitable as the cost of medical medical advances rise . This issue, plus the fact that just 12.5% of the population is currently covered, has forced insurance providers to take action to stimulate sales. They have set about redesigning policies, with various routes taken from restricting cover and working with particular hospitals to standardise treatments and therefore cost, to encouraging healthier lifestyles and sharing medical costs with policyholders.

A move towards self-insurance by employers, where they set up a healthcare trust fund to pay medical costs, is also having an effect on the market, although such funds are often managed by conventional insurers. Philip Blackburn, an economist and author of the Laing & Buisson report, says self-insurance is the fastest growing area of the PMI market. However, that growth is slowing. Although self-insurance increased by 13% in 2004, the latest Laing & Buisson report shows it only grew 0.5% in 2005. Since the trusts are not technically insurance policies, they do not attract insurance premium tax (IPT), which means a cost saving of 5%.

However, self-insurance is a game that only larger organisations (normally those with 200 or more employees) can play for it to be financially viable. Dudley Lusted, head of corporate healthcare development at Axa PPP, the biggest player in the self-insurance arena, says that organisations are looking at ways of controlling costs. "Saving IPT is one way, but different companies want different things. Some keep their costs down by buying conventional comprehensive insurance just for senior managers, while some will buy a lower cost option for everyone," he says. Charlie MacEwan, a spokesman for health insurer WPA, says the company is investing heavily in the healthcare trust sector. He believes the savings on IPT are too minor on their own for employers to make the move, but that the cost-management savings make a more convincing reason.

MacEwan cites the example of a City bank that shifted from the insurer’s conventional plan to a trust and saved 30% in the first year. "Employees behave differently if they think they are claiming from the company. Employers can also offer exactly what they want in terms of healthcare," he adds. The PMI market is also changing, with insurers offering a wider choice of conventional cover, including low-cost options. "We have seen a small but significant shift in the budget options across the PMI market. If an employer has a young workforce it may feel it doesn’t need cover for hip replacements or certain cancers, for example. But they do want their staff back to work quickly after an accident or illness," explains Blackburn. PMI is also increasingly becoming a tool for managing absence. "Insurance can help someone get a scan done or see a counsellor quickly. It helps to deal with the problem before it gets worse and then becomes an issue of long-term absence," Axa PPP’s Lusted points out. There is a risk though that employees can take PMI cover for granted. To help tackle this, WPA offers an option where members pay a percentage of any claim. "As a general rule people tend to value the benefit more if they are paying something towards it," says MacEwan.

One of the most eye-catching developments in the market in the last couple of years has been from PruHealth, which offers reduced premiums to individual purchasers who take active measures to improve their health through exercise and healthy living. The corporate market is slightly different. David Priestley, a spokesman from PruHealth, says: "Scheme members get annual cash back if they have reached certain levels of vitality or haven’t made any claims. They get a cheque in the post, which might be more than their annual tax liability." Some in the industry have criticised the cash-back method as a disincentive for policyholders to claim, but Priestley disagrees. "There’s been a load of research that suggests the level of cash does not prevent people seeking treatment.

Many providers have policy excesses which if they are high might stop people claiming." One thing is clear, PMI providers are increasingly picking up on employers’ concerns about the health of their workforce and building these aspects into their plans. David Furness, a spokesman for Standard Life, calls it the ‘Jamie’s School Dinners effect’. "We package information from wellbeing provider Vielife with our plans, which allows employees to get health assessments online. The information is passed to the employer on an anonymous basis and can [help] locate [problem] areas," he adds.

The Facts

What is private medical insurance (PMI)?

A PMI policy provides rapid access to and covers the cost of private medical treatment for curable, short-term medical conditions or injuries and necessary medical accommodation costs. It will not normally cover pre-existing conditions or those arising from alcoholism, HIV/Aids, infertility, pregnancy and kidney dialysis. Cheaper plans exclude outpatient services, limit the choice of hospitals or restrict the conditions covered.

What are the origins of PMI?

PMI started to emerge as early as the 19th century with the introduction of worker co-operatives and friendly societies and then later, provident organisations. Even when the NHS came along in 1948, some people wanted faster treatment and PMI started a steady growth from the 1950s to the 1970s. There was an explosion in the 1980s to three million sales on the back of the consumer boom and the expansion of private hospital networks. The number of people covered peaked at seven million in the 1990s.

Where can employers get more information?

The Association of British Insurers (www.abi.org.uk) provides information on the different types of plan available. Before choosing an insurer, employers should shop around or contact an independent broker. The Independent Healthcare Association (www.iha.org.uk) is another useful contact.

In practice

What is the annual spend on the product?

Laing & Buisson’s Health and Care Cover: UK Market Report 2005 revealed that the total spend in 2004 was ¬£3.1bn. The self-insurance market (healthcare trusts) rose a robust 13%, while the number of conventional policies in the corporate market fell 1.7% on the previous year.

Who has the biggest market share?

BUPA is the provider with the biggest market share, with 41% in 2004. This is followed by AXA PPP with a 22.5% market share.

Which provider increased their share the most over the past year?

Standard Life recently took over First Assist, growing its share from 7% to 10.5% and putting it in third place, overtaking Norwich Union’s 9% share. Other significant players in the corporate market are WPA with 3.5% and Cigna with 3%. Groupama recently doubled its share to 2% after taking over Clinicare.

Nitty gritty

What are the costs involved?

When individuals buy PMI they normally purchase because they expect to claim at some point. In the corporate market everyone is covered, including those unlikely to claim, so the prices are lower. Healthcare trusts are not insurance so there is no insurance premium tax to pay – a saving of 5% to the buyer.

What are the legal implications?

Conventional insurance policies create a legal relationship between the insurer and the policyholder. Any complaint arising from a claim is made direct to the insurer, or as a last resort, the Financial Ombudsman Service. For self-insurance, the relationship is between the employee and the trust, which appoints trustees in a similar way to a pension scheme.

What are the tax issues?

Private medical insurance is a benefit-in-kind whether it is given through a conventional insurance policy or under a self-insurance scheme. If it is fully paid for by the employer, employees pay tax at their marginal rate.