The notion that cash plans offer low-cost, high-value is well-established. But could current pricing levels prove unsustainable in the long run? Sam Barrett reports
Cash plans can trace their roots right back to the Victorian era, when they were set up to help workers pay for healthcare. But, while they have survived significant changes in the healthcare market over the last 150 years, there are concerns that current behaviours may put the sustainability of cash plans at risk.
Top of the list of potential perils is price. Always heralded as a low cost way to fund everyday healthcare, some are concerned the price may be just a tad too low.
“The £1 or less a week mentality is still here,” says Brian Hall, managing director of BHSF Employee Benefits. “Around a third of the market is very price driven and we’ve seen brokers move schemes for a discount of as little as 5p a week. It’s very short-term thinking.”
Low cost, low value
With schemes constantly on the move, it makes it difficult to benefit from a long-term relationship. On older schemes it’s not unusual for the insurer, broker and employer to work together on benefit design and marketing and communications campaigns to ensure it delivers value for money.
In addition, while pushing premiums to this level may appeal to some clients intent on getting a bargain, Dieter Clausnitzer, client director at Medical Expenses Consulting, says some clients find a low price a turn off.
“If a price is too low some clients will question whether it delivers real value,” he says. “Employers can get better value if they pay a little more and have a product that employees can use.”
There’s another unpleasant consequence of using low premiums to win market share. Carol Porter, commercial manager at The Health Insurance Group, says that with premiums trimmed right back, there is a lot more focus on annual reviews.
“Insurers are looking at the claims performance of schemes and, if they’re running at a loss, they’ll put the premiums up,” she explains. “Unfortunately a big price rise can colour an employer’s opinion of cash plans.”
On the up
Thankfully this pile ‘em high, sell ‘em cheap phase may be coming to an end. Clausnitzer says many of the providers have taken a bit of a reality check and started to push their rates up.
“Many of the providers have adjusted their pricing and I expect the market will see the insurance premium tax increase as a good opportunity to move if they haven’t already,” he says.
The cash plan providers agree, with Sue Weir, chief executive of Medicash saying that premiums are starting to turn following the recession.
“There’s much more focus on health and wellbeing in the corporate market and employers are starting to see the value of paying for more comprehensive cover,” she adds. “With lower priced schemes the administration cost is so much more proportionately. It’s a bit like the tax on a bottle of wine.”
Porter also believes advisers have an important role to play in ensuring employers appreciate cash plans.
“We’ll look at all the benefits an employer offers and tailor a cash plan to fit,” she says. “Tailoring ensures an employer gets the benefits it wants to offer but also removes the risk of duplication.”
All of the cash plan providers offer the ability to tailor their plans in the corporate space, with some dropping down to groups with fewer than 50 employees. For example Westfield Health’s Mosaic allows employers to tailor a corporate paid plan for a group of 20 or more. Bespoking in this way gives the company a unique plan and helps to support a longer term relationship.
While it is encouraging that the breadth of cover is being appreciated more, this is not always the case. Peter McAndrew, sales director at Health Shield, says that in some instances plans are sold on the back of just one benefit, the medical insurance excess cover.
“Things are improving but we still see brokers seeing a cash plan just to soak up the medical insurance excess,” he explains. “If it’s sold purely for this, retention rates can suffer.”
Even without this blinkered approach to the sale, the mechanics of excess cover still cause some eyebrows to twitch. Putting an excess on a medical insurance scheme reduces the insurer’s exposure but also changes policyholder behaviour, deterring them from making some of the smaller claims that would largely fall within the excess limit. By allowing this excess to be picked up by the cash plan, this deterrent is weakened, forcing the medical insurers to reduce the discount they offer. Given this, Hall believes providing this type of cover is unsustainable.
“Around 20% of medical insurance policyholders claim each year so I’m amazed the medical insurers haven’t stamped it out,” he says. “We’ve seen several schemes that were sold purely to cover the excess and they were all running at a loss. You can’t sell a product for £50 that pays out £100 in excess benefit.”
With a few years under their belts, it is unlikely that excess cover will be removed but it is likely that there will be developments in this area. For example, Clausnitzer points at Medex Protect, which only covers medical insurance excesses and shortfalls, as a more appropriate way to arrange this cover.
The cash plan providers offering this benefit are also adjusting their approach with an eye on sustainability. For example Health Shield has recently reviewed the way it prices its excess cover after it found evidence of an over-reliance on this benefit to sell cash plans.
“Where a PMI excess is added on a bespoke scheme we now price for it,” says McAndrew. “There’s a lot more value in a cash plan than the excess cover and this message needs to be communicated to employees.”
Technology is also putting some pressure on the cash plan providers. The introduction of online claims processes, such as that offered by Health Shield or through Medicash’s app, has made it easier to claim.
“The old days of filling out forms and sending them off have gone,” says Porter. “Removing these barriers could push up the amount paid out.”
But while this simplicity may mean more claims, the providers believe there is a balance to be struck. For example, although its claims app was only launched at the beginning of summer, Medicash’s Weir says she has not seen an increase in the volume of claims.
“You can’t stay in the days when everything was written out in copperplate handwriting: people like technology,” she explains. “In addition, by making the claims process faster, you can actually remove some of the costs.”
Although these efficiencies might mean that overall there’s no increase in costs, other providers are watching cautiously. For example, BHSF Employee Benefits has developed an app but is currently piloting this with a small number of intermediaries and employers.
“We want to monitor how the app affects claims as we do have concerns that being able to claim in this way might push up fraud,” explains Hall. “It’s our policyholders’ money and we must take steps to protect it.”
Whether investing in technology or seeing claims volumes increase, additional costs can put the cash plan model under severe pressure. The market is largely made up of not-for-profit organisations that rely on carefully balancing their books so that reserves can be kept back.
While tracking a cash plan provider’s reserves can give an indication of how they’re performing, both advisers and providers believe this is not massively important. “Advisers shouldn’t worry about reserves and margins: that’s our job,” says Hall. “Instead they should be looking for good service, claims handling, ethics and longevity of price.”
Porter agrees. She says that service is the number one consideration when recommending a cash plan provider.
“Price and value for money come into it too but you need to know you’re recommending a company that will pay claims quickly and efficiently,” she says.
But, while service may be king, reserves will become increasingly important when Solvency II comes into effect in 2016. This will require insurers, including cash plan providers, to hold more capital.
McAndrew says this will make cash plans more sustainable but warns that it could also lead to another outcome – more consolidation in the market.
“If cash plan providers don’t move price, some will find it very difficult to invest for the future,” he says. “This will create larger companies, who can benefit from economies of scale, but it will restrict choice.”
Looking ahead, this scale is likely to become increasingly important. Over the next few years, critical decisions will be taken regarding the funding of the NHS. And, as this is likely to see more services falling out of its remit, the cash plan providers will be keen to step in to help their policyholders.
But, whatever comes the way of the cash plan market, sustainability is essential. “The dynamics have to work for all parties,” says Weir. “Keeping our customers happy by delivering a good level of health cover will ensure this is decent, long-term business. Get your model right and it’s totally sustainable.”