Private medical insurance - The true cost of medical insurance
With costs rising dramatically, there are fears that private health cover will go the same way as final-salary pension schemes. Andrew Donaghue reports.
Proud as the UK is of the NHS, it seems many companies still see state-funded health treatment as a potential black hole when it comes to lost productivity. Around 90% of UK businesses claim to offer private medical cover to some of their staff and spend on average around 7% of their total payroll costs on health benefits. Private cover is seen not only as a way to speed up treatment for staff but also an important perk.
But despite the popularity of private medical insurance (PMI), it is a benefit under siege. According to a recent report from financial services specialist Mercer, the cost of providing health benefits rose by an average of 5% in 2007. Further research conducted by the company in July this year, revealed that medical cover inflation is running at 10%, which means a plan that cost a company £1 million in 2008 could cost up to 60% more in five years' time.
The result is that PMI could face the same fate as final-salary pensions, eventually becoming unsustainable for most companies to offer, unless there are radical changes in the structure and comprehensiveness of plans.
Jack Briggs, sales and marketing director for private health provider BCWA, says every year for the past 20 years he has been "faced with the issue that the price of cover is more expensive than the previous year".
The milestone that providers seem to fear is when the cost of PMI exceeds £1,000 a year per employee - a big psychological barrier. According to Richard Munro, managing director of PMI Health Group, one or two companies may be there in a year's time. "I don't think we have one where it has exceeded £1,000 but we certainly have them at the £800-plus mark," he says.
Cost drivers for PMI
The rising costs of PMI provision is hard to attribute to one individual factor. However, experts agree that more sophisticated treatments, such as the drugs used to treat cancer, have driven up the cost of some individual claims by an unprecedented amount. "The volume of claims in the market is not actually increasing," says Munro. "It is the cost of them that is going up, particularly when cancer drugs are involved." A claim that might have cost £20,000 a few years ago is now £70,000, he adds.
A gilt-edged benefit?
Despite these spiralling costs, for the time being at least, it appears few large companies are prepared to cut health benefits to make a saving. Medical insurance is seen as the kind of benefit companies want to hang onto. A recent report from Mercer revealed around 41% of companies claimed they were unlikely to make changes to their health benefit provision. However, it is argued PMI does have some intrinsic pricing problems that will be exacerbated.
There are two main ways of pricing a medical insurance contract. One is claims-related where, if a company has more than 100 employees, the premium is determined by the claims made in the past three years. If claims go up, then premiums follow. This approach only works for a reasonably large group of employees as it allows the insurer to spread the risk.
For smaller schemes for 50 or fewer staff, insurers prefer to push community-related insurance where the individual employees are priced, according to age, postcode and medical history. Companies work out their rates for these companies based on a whole population of similarly-sized organisations. The problems of this model is that potentially a few individuals claiming heavily in one company could drive up the premiums for the whole community who may not claim at all.
The Government could help alleviate some of the cost pressure on companies providing PMI to their employees by reducing the tax burden. But even industry insiders acknowledge this is unlikely given that private health cover is often viewed as queue-jumping or unfair.
Impact of the credit crunch
Munro believes it is possible PMI could go the same way as final-salary pensions but that it is unlikely at the present time. "The costs are not as big as pensions for one thing and it's very difficult for employers to take benefits away from people. Contractually they are difficult to remove and it also impacts staff morale," he explains. He says he has seen no evidence of large employers dropping PMI schemes so far but is aware of some smaller family-owned companies cancelling their policies.
Despite rising costs, companies are continuing to offer the benefit, according to the latest research from analyst company Laing & Buisson. Demand for traditional corporate PMI increased by 2.3% in 2007, although self-insured corporate medical expenses remained static, the company claimed. Private health provider Bupa has also been relatively bullish about the state of the market, with the company's head of personal markets, Fiona Harris, claiming the company saw "good overall growth in both corporate and individual PMI" throughout 2007.
However, despite being optimistic about the future of PMI, Philip Blackburn, senior economist at Laing & Buisson, acknowledged in his report that the future success of PMI providers would depend on offering a range of services including promoting prevention by focusing on general health. "Crucial will be the sector's ability to innovate to meet consumer demand in the future, by offering affordable products and promoting healthy lifestyle choices for customers," he said.
The industry's response
PruHealth is trying to create a niche in the PMI market by offering discounts and incentives to individuals based on how healthy they appear to be. "It is still a small player compared with Bupa, Axa and Standard Life but I think that a lot of people are recognising that it's a good thing to do - I think it has about 200,000 people signed up now," says Trevor Hunter, managing director of PMI broker Halcyon Healthcare, which acts as consultants for a range of providers including PruHealth.
PruHealth encourages gym attendance via free or discounted memberships for policy-holders. In return, individuals receive vitality points. Members are rated as platinum, gold, sliver or bronze depending on their vitality points. If an employee achieves Platinum status they can get £350 tax-free and if a partner is included in the scheme that sum rises to £700.
However, some PMI providers are still sceptical about whether the focus on wellbeing is a substantial alternative to traditional health insurance. "I don't think we have seen sufficient evidence one way or the other to know if it is going to work or not," says Munro.
Aside from looking at the 'total health and wellbeing' approach, some PMI providers are responding to the price pressure by considering some more drastic options. One obvious way is to offer cut-down packages that may include putting a cap on the value of cancer claims. Other policies exist where cancer isn't included at all because some or all of the treatment is available on the NHS.
Other alternatives being adopted include health cash-plans, which provide a cheaper alternative to PMI. Cover is limited to a set amount per year per person which makes it more affordable for insurance providers who are able to manage their risk and pass it onto the customer. "Unlike PMI, where premiums can rise depending on claims experience, healthcare cash-plans are there to cover the costs of everyday healthcare, from visits to the dentist, optician and even stays in hospital," says Peter Lauris, sales and marketing director for health cashplan provider Medicash.
One organisation that has adopted a more flexible approach to benefits is management consultants Lane4. Last year, working with PMI broker The OvalGroup, Lane4 implemented a flexible benefits package on top of its existing Bupa cover and pension plan. "The previous scheme was limited and I don't think people knew what they were entitled to or how they could get it," says HR director Ruth Cavender.
WILL YOU STILL GIVE ME PMI WHEN I'M 64?
According to a recent survey from financial services specialist Zurich Financial, two thirds of UK workers are considering working beyond the age of 65. The recent increase in the age the state pension kicks in will have had some effect despite it not coming into force until 2044, but other factors such as lack of adequate pension provision also play a part.
This increase in workers over the age of 65 could pose a serious problem for employers offering health benefits, according to City law firm Reynolds Porter Chamberlain (RPC). Geraldine Elliott, head of the employment group at the firm, says research carried out by RPC revealed that above a certain age Permanent Health Insurance (PHI) is not obtainable at all and PMI becomes increasingly expensive.
This becomes a problem for companies if they are employing people above the age of 65 and not providing them with the same health benefits as other staff because of the cost. This could be seen as discriminatory on the grounds of age.
Some companies may feel the rising cost of health cover offers some defence for excluding older employees, but Elliott advises caution. "An employer cannot be confident that citing economic reasons as a defence for not offering health cover is going to be adequate," she says. At the moment the number of age discrimination claims are relatively low, she adds, but that may well increase in the future. "I think it is early days yet. This is an area where claims could be made and employers need to be cautious."
STAFF MAY HAVE TO PAY MORE
One answer to the rising cost of PMI could be that employees start contributing more towards their own health cover. According to Mercer, over half of European employees make no contribution to their company health schemes. Whatever the future holds, experts agree PMI is no longer a benefit that can be taken for granted by employees or employers. Companies will have to make sure they do all they can through wellbeing approaches to bring down premiums, while staff may have their commitment to PMI put to the test and be asked to put their money where their mouth is.