Justifying the cost of private medical insurance

Private medical insurance helps cut sickness absence, but its cost may prompt employers to ask if they can always justify the expense of offering the perk to all staff, says David Woods

With sickness absence costing UK businesses more than £103 billion last year, according to Dame Carol Black’s report, Review of the health of Britain’s working age population: Working for a better tomorrow published in May, employers face a continuing challenge to minimise the amount of time staff are away from work because of poor health.

A longstanding solution to the issue taken by many employers is to provide staff with private medical insurance (PMI) so they can benefit from shorter waiting times and private healthcare if they become sick or injured, therefore speeding up their return to work. But when faced with tight budgets and rising PMI premiums, employers can find it hard to justify the cost of PMI, particularly as it is not always easy to measure the return on investment that they stand to gain.

Elliott Hurst, senior consultant in healthcare and risk consulting at Watson Wyatt, says: “Anecdotally, it is hard to prove that PMI will return pounds to the employer in terms of reduced absence. Every year we estimate that the utilisation rate of PMI would be around 20 percent of the workforce.”

But Hurst adds that even if staff do not use the benefit, simply knowing it is there can give them peace of mind. It can also help project the image of a caring employer and ensure that the benefits package is competitive.

Alternative perks?

Rather than paying for a costly benefit employees may never need, employers may prefer to fund private medical treatment for staff as and when required. But Alistair Sclare, head of healthcare at Groupama, says this may come at a price. “There is a tax implication because it constitutes a benefit in kind,” he says.

Although employees will typically be liable for this tax, in such cases employers could choose to cover the cost on their behalf, for example by increasing their remuneration package to offset any shortfall.

Some employers may opt to offer staff a healthcare cash plan rather than funding full PMI. Over the past couple of years, the healthcare cash plan market has undergone much development, with providers extending the range of treatments covered by their schemes.

But cash plans will still not cover some of the more expensive treatments, such as hip replacements, says Sclare. This means employers may be able to justify the cost of PMI because it will cover staff for more complex treatment as well as any minor medical needs.

However, Hurst believes employers cannot simply substitute PMI with a cash plan. “Cash plans and PMI are not the same thing. They are complementary but not substitutional,” he says.

A further consideration for employers looking to provide PMI is which employees to cover under the benefit. To help keep PMI costs under control, some organisations may choose to limit cover to certain sections of their workforce, such as management. “Taking PMI to a whole workforce will depend on what sector of the industry the employers are in, the salaries they are paying and what their competitors are doing,” says Hurst.

In higher-paid industries, it can prove costly for employers if employees are absent for an extended period. But in less-skilled industries, absences will often not be as expensive, says Sclare. To control the bill for PMI, employers may therefore wish to offer the perk to more senior staff and offer a cheaper alternative, such as a healthcare cash plan, to lower-level employees.

Rebecca Moss, reward analyst at BDO Stoy Hayward, believes PMI is an important benefit to offer in some form, but the costs can be a real challenge for employers to justify. “There is no doubt PMI is an expensive benefit and there is concern over the increasing cost of it when employee expectations are high. With more expensive and sophisticated treatments available, it is more challenging to provide the level of cover that both employees and employers desire.”[However], I think it is one of the benefits staff most value and it can support a much wider wellbeing programme. It is a valuable and important benefit,” she says

If you read nothing else, read this…

  • Private medical insurance (PMI) is a costly perk and it can be difficult to measure the return on investment. An estimated 20 percent of employees who have PMI will need to use it each year.
  • PMI shortens the time staff will have to wait for appointments and treatment, and therefore helps them to return to work sooner.
  • A healthcare cash plan can cover staff for treatment such as dentistry, but is not an alternative to PMI. Employers might consider limiting PMI to certain groups of staff.
  • Some employers pay for private treatment for staff as and when it is required. This saves the cost of PMI, but they may have to cover benefit-in-kind tax on employees’ behalf.