Buyer’s guide to private medical insurance

Focus on facts

What is private medical insurance (PMI)?

PMI provides cover for individuals if they become unwell or suffer an injury. The patient will be referred by their doctor to a private consultant, who will arrange treatment or surgery. PMI is usually offered to staff as a benefit to ensure they avoid having to wait for treatment on the NHS. It is used by employers as a perk to recruit and retain staff, help manage sickness absence and to ensure staff make a speedy return to work after illness or an operation.

What are the origins of PMI?

When the industrial revolution began in the late 18th century, mining and machine-based manufacturing became the main forms of industry, and workers began to form co-operatives and friendly societies to improve working conditions and protect their interests. The origins of PMI can be traced back to such co-operatives, which were set up by the working class and supported by forward-thinking industrialists. The launch of a number of provident organisations for middle-income earners followed. In the 1930s, Axa PPP Healthcare was launched as a health insurance scheme for middle-income earners in London. In 1947, 17 provident associations merged to create Bupa.

Where can employers get more information and advice about PMI?

The Association of Medical Insurance Intermediaries and the British Insurance Brokers Association both offer information and advice about PMI healthcare schemes. The Association of British Insurers also produces a general factsheet on PMI.

Nuts and bolts

What are the costs involved?

The average employer-paid subscription was £790 per head in 2009, according to Laing and Buisson. This was up £22 from 2008, when it cost an average of £768 per employee.

What are the legal implications?

PMI is subject to the same legal obligations as any other benefit, in that if it is offered as part of a worker’s employment contract, it cannot be removed unilaterally. Employers will have to take into account current legislation, such as age discrimination, when it comes to allocating PMI cover to staff of all ages.

What are the tax issues?

Group PMI is subject to insurance premium tax (IPT), which is due to increase from 5% to 6% in January 2011. If PMI is fully paid for by the employer, employees pay tax at their marginal rate.

Larger employers may look to avoid paying IPT by setting up their own company-funded or self-insured health trusts. Although employers will be charged VAT on a trust, this is often reclaimable on the administration of the trust.

In practice

What is the annual spend on PMI?

PMI revenue fell by 1.4% (after taking into account the retail price index) in 2009 to £3.58 billion, says Laing and Buisson. This followed an annual rise of 3.8% in revenue in 2008.

Which PMI providers have the biggest market share?

Bupa has a 42% share of the market, followed by Axa PPP Healthcare with 26%. Aviva commands 10-11%. Other providers include Pruhealth, Simplyhealth and WPA.

Which PMI providers increased their share the most over the past year?

The PMI market remained fairly flat in 2009. The only insurers to increase their share were Bupa (up 1%) and Axa PPP Healthcare (up 0.5%). On an international level, Allianz Worldwide achieved an estimated 33% growth in 2008.

Faced with employers looking for cutbacks, private medical insurance providers are having to upgrade their offerings and demonstrate a strong return on investment, says Georgina Fuller

Private medical insurance (PMI) providers have been stung by the recession, with many employers deciding it was a perk they would have to do without. But insurers’ outlook is still buoyant, despite the cutbacks.

Employer-funded PMI policies fell by 4.7% in 2009 to 3,050,000, according to independent healthcare analyst Laing and Buisson. This followed a small rise of 0.7% in 2008. Its Health and care cover – UK market report 2010 showed almost 12% of the population, 7,238,000 people, were covered by PMI and self-insured medical expenses schemes at the start of 2010.

Dr Peter Mills, founder of the Glasslyn Health Solutions consultancy, says PMI providers are struggling to keep premiums affordable in a tough economic climate. “With the increasing costs of inflation and drugs, PMI has become more and more expensive and insurers have got to show they can really add value,” he says.

With PMI now costing an average of £790 per head for employers and healthcare costs rising faster than retail inflation, he has a point.

Private healthcare is the second most desirable benefit after a pension, according to PruHealth. It has traditionally been offered as an enticing extra to senior staff who know they will receive prompt, comprehensive medical treatment if they fall ill. As well as being an effective recruitment and retention tool, a good PMI scheme can help manage sickness absence and boost employee productivity.

But Mills says there is not much to differentiate between insurers at the moment and providers must show employers a tangible return on investment and offer a range of provisions to stand out from the crowd.

Complete service needed

“Providers must understand the status quo is not an option,” he says. “They need to offer a more complete service, not just step in when someone needs an operation.”

Paul Moulton, Axa PPP Healthcare’s sales and client relationships director, says: “The key change for providers is making the transition from ‘just PMI’ to becoming more consultative by helping employers to develop and introduce strategies to manage staff attendance, health and wellbeing more effectively.”

Axa is beginning to offer some significant add-ons, including health checks, personal counselling, access to occupational health services and a back-to-work rehabilitation programme. It has also launched a new corporate healthcare programme for larger employers where Axa acts in a similar way to a GP by referring people to specialist medical providers, such as physiotherapists and scanning centres.

Bupa, which has a 42% share of the PMI market, also sees the need to demonstrate a strong return on investment on health and wellbeing. Fiona Harris, head of strategy and development at Bupa Health and Wellbeing UK, says:

“Retention of current customers continues to be a key trend for most health insurers. This also links to an increased focus from customers for measurement of the quality and effectiveness of their healthcare treatment.”

Satisfaction surveys after treatment

Bupa carries out a number of patient satisfaction surveys after treatment and recently launched Corporate Select, a menu-style option that enables large employers to review their PMI cover. The ‘menu’ includes reducing monthly subscriptions by adding an excess to a PMI policy or including on-site health assessments.

Although most major PMI players realise they have to change their strategy and enhance and expand their services, PMI is still becoming more costly. The rise in insurance premium tax (IPT) from 5% to 6% in January 2011 could stretch providers further. Group PMI is subject to IPT and is also treated as a benefit-in-kind. Bigger employers may look to avoid IPT by setting up company-funded or self-insured health trusts. They will be charged VAT, but this is often reclaimable on the administration of the trust.

Tal Gilbert, head of research and development at PruHealth, says the IPT rise could trigger more problems for PMI providers. “With [employers] already looking to reduce their PMI costs, any increase in tax only serves to further question PMI’s value. But employers will still have little choice but to offer PMI if they want to attract and retaining the right calibre of staff, as well as manage the impact of ill-health on their productivity and, ultimately, profitability.”

Despite cutbacks by employers, Dr Doug Wright, principal clinical consultant at Aviva UK, believes insurers will always have a role to play. “Employers view PMI as a powerful incentive for long-term staff retention, loyalty and reduced absence,” he says. “Today’s products offer increased flexibility, and encourage a more holistic and proactive approach to workforce wellbeing by dovetailing with occupational health, wellness and absence management.”

And with sickness absence costing the UK economy about £17 billion a year, PMI providers have plenty to keep them busy.

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