As private medical insurance premiums for individuals climb, the alternatives have never looked more attractive to those seeking the peace of mind cover offers. As a result, PMI providers face challenging times ahead, says John Hancock
September's private medical insurance report by Mintel found that those seeking individual PMI cover face steeply rising premiums, up by nearly 50% in the past five years - an extra £368 a year for the average policyholder. Not surprising then that the take-up of individual PMI policies does not represent a flood of new business, despite the public's general concerns over the NHS.
Similarly, in August, Datamonitor's analysis of statistics from the Association of British Insurers revealed that steady growth in the total of corporate PMI policyholders masks and offsets a slow decline in the numbers for individual policyholders (see figure 1).
Several reasons have been given for this reluctance to do for one's own healthcare provision what the state seems only partially and sporadically able to achieve. Growing numbers of employees choose to include the PMI option in the group benefit package of selected menu items offered by their employers and, of those, some are cancelling individual plans at the same time. Also, there was a one-off reduction in individual PMI holders following the removal of tax benefits by the incoming Labour government in 1997.
Of those retaining their individual schemes, the ones who have not claimed for some years may feel aggrieved by fellow policyholders who have made significant claims. Clive Kent, commercial director at Rubicon Health, believes: "This group is key to the market because if they move to a provider that 'cherry picks' the best clients, the price will go up for the rest." Others are looking around the market and, seeing the cash plan schemes on offer, take the view that a fixed value for a lower premium is a good bet in most circumstances. And there is also a reluctance by some to 'pay twice' for healthcare. Having already paid for the NHS through income tax, why should they take out schemes on which the government allows no tax relief and, indeed, charges insurance premium tax?
Still, while premiums are rising, there remains a lot of price competition - although comparisons are difficult. Figures from healthNow show a variety of costs (see table 1) but, as the compilers themselves caution, the table is not intended to compare levels of cover. What it does show is the range of pricing possibilities.
However, several factors continue to stimulate demand for individual PMI - if not to the extent providers would wish. Nagging doubts about whether the NHS can cope with healthcare provision - especially in light of an ageing population threatening a double whammy: increased longevity and the steady loss of care home places, which could overwhelm the NHS.
Add to that a sense - however disproportionate - that increasing numbers of immigrants are jumping the queue for free treatments to the detriment of those whose queue they jump and it is easy to see the attraction for people of controlling their own healthcare provision. Also, for those who would prefer to time their treatment to suit their lifestyle, do not want to queue, or would be concerned about the environment in which they are treated, PMI will remain attractive.
But there are significant restraining influences on the market. As always, price is a big issue. Figures from the Laing and Buisson's UK Market Sector Report on PMI show that the average subscription income per subscriber to individual PMI plans rose from £742 to £1161 between 1997 and 2002, with increases in every year - except 1998 - well in excess of inflation.
Price rises may be an inevitable consequence of the availability of more treatments for a growing list of complaints, but individual premiums are now more than twice as expensive as group premiums (see figure 2).
Putting off the decision
In addition, when politicians promise that the NHS will get better tomorrow, there are still people who believe them and put off any decision to make their own provision pending an improvement in the state service. Then there is the worry that PMI cover will only extend to acute conditions so that, anybody with a chronic condition will, in any case, have to rely on the NHS. There is also the possibility that the regulator will take up the cudgels against moratoriums related to pre-existing conditions.
Independent financial adviser Brian Lentz makes the point that if no moratorium is allowed, insurers will simply refuse to cover pre-existing conditions without being able to offer policyholders the prospect of a review or the possibility of cover after the moratorium period is over.
Perhaps more serious in the long term is the fact that PMI is not the only game in town for those seeking to take control of their own healthcare standards. While they are not PMI products, healthcare cash plans and even critical illness products are often viewed as offering alternative solutions to PMI.
Cash plans - originally a means to offset the indirect costs of a stay in hospital - if sufficient, may well cover the cost of time in a private hospital and offer the additional benefits of assistance towards the costs of optical and dental care - likely to be everyday health concerns for many people. Peter Maskell, chief executive of cash plan provider BHSF, finds that: "Our biggest growth area is in business via intermediaries from both groups and individuals who may be unable to afford PMI."
Few go so far as to predict the demise of PMI but, for several reasons, the product is at a crossroads. And there are more than a few ideas as to which direction it should take from here.
The simplest approach is to limit the benefits available under a PMI plan. This can be done by capping its value, although such a scheme might run into moral and ethical difficulties should the provision run out at a critical stage of a procedure. However, if a PMI plan were combined with a cash plan, the policyholder could use the PMI scheme to cover the cost of major procedures, while using the cash plan to cover or defray the costs of longer-term therapy or aftercare.
Quite a big market
Other ideas include AIG Group's healthNow insurance that covers only the most common conditions with long NHS waiting times. IFA Frank Dolan believes there would be "quite a big market for a policy that only paid when the NHS could not deal with a patient in a short time or in a pre-determined period."
Diana Thorpe, senior healthcare consultant at Mason Warner Healthcare, believes an innovative approach is called for. "To help address the falling numbers of individual policies, insurers need to look at ways of improving the product and service offering, with benefits such as loyalty discounts for lengthy scheme membership or a 'no claims bonus' - perhaps in the form of a free health screen in each year they do not make a claim."
Another way to control costs is to apply higher excesses, which can be acceptable where a PMI scheme accompanies critical illness insurance.
This secondary protection may well be able to cover the excess in the event that the condition requiring treatment falls within the CI plan's definitions. Indeed, someone who has reasonable financial means and so could afford the excess might be prepared to accept a higher level in exchange for a lower premium. The PMI plan might also not cover certain conditions for which the NHS is deemed competent, or it might not cover the full process of treatment, which, in turn, could be covered or defrayed by a simpler cash plan.
While there will always be demand for comprehensive PMI benefit plans, the area identified by market commentators for growth is the composite plan assembled from several product types in proportions that best suit the customer's circumstances. For example, Standard Life Healthcare's chief executive Mike Hall explains that the insurer offers a range of plan designs to potential policyholders, "from traditional PMI to a PMI scheme that offers cash where a patient chooses to use the NHS and a health cash plan that will pay towards therapies related to the main treatment and the usual optical and dental care."
Entering the retail PMI market in early 2004 will be PatientChoice, which designs and promotes health insurance products that, as the company's chief medical officer Dr Thom van Every says, "are designed to make PMI products more accessible to individual clients and give greater patient choice". The schemes allocate a certain amount to be paid for each condition and, if the policyholder can get their treatment for less than that amount, they retain the difference. This treatment purchase plan is a hybrid between traditional PMI and a cash plan. Although the scheme only activates after a consultant has referred the policyholder, the amount will be set to cover that cost retroactively. It will also be appropriate for use with hospital fixed-price packages devised for self-pay patients. Should complications occur outside the fixed price package, PatientChoice will meet those costs.
More structural tools to manage the cost aspects of PMI and, therefore, to manage the main component of premium price rises, are better underwriting and claims management. Underwriting is always improving as technology enables underwriters to extend their experience and retain better records.
Claims management is probably the fastest-growing tool in the product provider's kit, but it should not be seen as a means to avoid claims.
It is a methodology to ensure the best and most appropriate treatment is delivered in the most beneficial manner and that costs are properly managed for the benefit of all. For instance, providers will usually negotiate price deals with hospitals based on the volumes of business the insurer can place.
The best treatments
Also, experienced claims managers will be aware of the best treatments around, such as the use of keyhole surgery where full intervention would once have been the procedure. Such techniques not only reduce the discomfort and risk to the patient, they also reduce the time in hospital, which both saves money and improves patient morale - very important when dealing with conditions such as cancer.
Looking to the future, schemes such as the health passport proposed by the Conservative Party could pave the way for a whole new range of top-up PMI plans at very affordable prices. However, there have been a few false dawns in this market and so we may be some way from the ideal position.
As Tim Osborne, director of healthcare at Groupama reminds us: "Everybody is seeking the magic formula that will stimulate the private healthcare sector."
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