Alternatives to private medical insurance

Private medical insurance may seem a likely target for reducing expenditure on perks, but some newer hybrid products may offer a more economical alternative, says Tom Washington

If benefits practitioners are looking to reduce employee-related costs by reviewing expenditure on perks, private medical insurance (PMI) is likely to come under the microscope. Amid widespread redundancies, this expensive perk may appear something of a luxury, especially for employers that offer it to their entire workforce. Andy Dean, chief executive officer at provider Healthfund, says: “The economic climate is pretty severe at the moment and when cash is hard to find, employers are going to look at every aspect of their costs to make savings.”

According to the Trapped in a downturn research published by Ceridian last November, almost half (47%) of workers would be prepared to forgo PMI in order to keep their job. But although it may appear an obvious way of saving cash, removing PMI from a benefits package entirely is likely to have a negative effect on morale, recruitment and retention. If the benefit forms part of employees’ contractual entitlement, removing it may not be straightforward, because employers must consult staff over any proposed changes to such perks.

While there are ways of tinkering with an existing scheme to reduce costs, such as increasing employee-paid excess charges or trimming the level of cover, some newer product developments could provide a cheaper alternative. For example, although healthcare cash plans have never been considered a direct substitute for PMI, some products now aim to bridge the gap between the two. National Deposit’s Group Healthcare Deposit Account, for instance, combines elements of each, with half the premium used to fund the running of the scheme and the other half going into a personal deposit account that increases in value over time. This account will pay a set percentage of the cost of treatment based on an employee’s age and cover level.

Healthfund’s corporate healthcare product also offers a combined savings plan and health insurance policy. This works by sharing the cost between employer and employee, with the employer contributing towards the cost of private treatment for staff and any dependents up to a set level, with the insurance covering any costs above this. So the employer pays for minor treatment, such as consultations with specialists, diagnostics and physiotherapy, or for the initial treatment costs for more serious medical conditions, such as cancer and heart conditions.

However, there is a high excess charge for staff on such products, and by increasing employees’ contribution, employers could potentially save up to 80% on traditional insurance premiums. Adrian Norris, managing director of Buck Consultants’ health and welfare division, says: “Products such as a savings scheme mixed with a kind of insurance arrangement mean the employee is deciding whether they want to spend some of their money [on] their treatment or keep it.”

Similarly, WPA’s Top-Up product provides employees with a cash plan-style benefit, with the option to top up areas of cover, such as cancer drugs that are not available on the National Health Service, cosmetic surgery, accident and emergency treatment abroad, and daily hospital costs. Offering such a scheme gives choice to the employee, so if they want to upgrade their cover, they can do so. Charlie MacEwan, corporate communications director at WPA, says many organisations should be encouraged to avoid spending a huge amount on PMI.

Another way of shifting the responsibility of choice from employer to employee is to offer PMI through a flexible benefits scheme, providing a set level of cover as a core benefit and enabling staff to increase this at their own expense. However, James Crossland, business development manager at NorthgateArinso, says: “There is a significant downside to offering PMI on a voluntary basis [which is a] cost-related issue. People who feel they have more of a need for it will pay for it [through flex] and therefore [employers] have a higher risk of claims.”

Overall, Norris believes employers are beginning to seek other means of covering their employees’ healthcare, but many are more likely to rejig an existing provision rather than bring in a new type of plan. “Maybe we will see a greater shift to some of the more unusual products, but it would be wrong to say there has been great demand from the corporate circuit for something very different,” he says.

If you read nothing else, read this…

  • Although PMI is an expensive perk, removing it from a benefits package may have a negative effect on staff morale, retention and recruitment.
  • Some healthcare products offer a mixture of PMI and cash plan-style benefits, which insure staff up to a certain level while also paying into a cash pot that builds up over time.
  • Other products offer employees the chance to top up their cover in areas such as cancer drugs that are not available on the NHS and daily hospital costs.
  • Offering PMI through flex may reduce outgoings because it shifts the responsibility of choice from the employer to employee, but it may result in a higher risk of claims.