One of Margaret Thatcher’s favourite sayings was “You can’t buck the markets” and among her most enduring legacies has been the marketisation of British society. Under her successors this has continued, now reaching the very heart of collectivism, the NHS, in the form of public-private partnership deals and the “internal market”.
Odd, then, that private medical insurance (PMI), one of the British left’s biggest bogeymen, is so dominated by not-for-profit provident associations. What’s going on?
Everywhere else in financial services, capital has ruthlessly hunted down the inefficiencies of mutuals and other collectively-based structures. First it was building societies. Dozy old organisations – apparently run more for the benefit of self-perpetuating boards of grandees, not turning the profit they should – have largely been swept away. In their place are aggressive, shareholder-value driven lean machines, such as Halifax and Northern Rock, that deliver better priced products to consumers, and achieve much higher profits.
Then it was the life companies. In the early 1990s experts told me it just wasn’t possible to carpet-bag life companies. Post Norwich Union, Scottish Widows and Scottish Amicable, it is now clear that was rubbish.
It didn’t stop there. A few years ago I called the head of PR at the Automobile Association, and asked how the organisation could be demutualised. He blustered about the nonsense I was talking. A year later it demutualised and sold out to Centrica. Yet more confirmation of Malcolm Muggeridge’s saying that PR is simply organised lying.
As a fairly new observer of the PMI market, I’m driven to ask why it has such a peculiarly odd organisational structure, and how long that can last. I don’t believe the hype of the free marketeers that we are all better off if capital is allowed to roam unfettered. But the market is, however, a phenomenally powerful force. So I’m intrigued that Bupa, in particular, has so successfully bucked the market.
It’s not just Bupa, to be fair; Western Provident Association, BCWA and a clutch of friendly societies also feature strongly in the PMI market. When recently I asked Bupa and WPA if there was any chance they could be demutualised/carpetbagged/sold off, my question was greeted with hoots of derision.
Providents are not the same as mutuals. They are companies limited by guarantee, with no shareholder capital. Policyholders are not members, and could not individually benefit if the structure was changed to a plc. If a provident becomes a plc, the only beneficiary can be a charitable trust, such as that set up by PPP when its status changed in 1996.
True no doubt, but to me it sounded like the man from the AA. Open a corporate PR’s mouth and his tongue is silver – yesterday’s axiom becomes tomorrow’s anachronism.
The next question, then, is what are providents such as Bupa for? They are not for shareholders or members. Are they just run for the staff, or perhaps just the board?
Both Bupa and WPA firmly told me that they are in the business purely to serve customers. Every pound they make in profit goes straight back into the business. But that’s where the similarity between the two biggest providents ends. WPA’s spokesman told me how it does not see its principal role just to keep expanding and growing. Bupa, though, has set itself precisely that target.
It might explain why Bupa has expanded so aggressively in Spain and elsewhere despite the fact that it was set up for the benefit of British patients. Or why it bid – unsuccessfully – for the Community Hospitals group.
Is the market dominance by Bupa a good or a bad thing? The competition authorities certainly need to keep a close watch on the organisation. In recent weeks rivals have moaned to me about how Bupa, as both an insurer and hospital services provider, can effectively control pricing in the marketplace.
Bupa dismisses this as nonsense. “If only it were the case,” says Stephen Flanagan, Bupa’s sales director. He admits that Bupa dominates in the big corporate market of the UK’s biggest 500 employers. “But we make next to no money from that. We may make a big play of winning the Unilever account or suchlike, but we hardly make any money out of it. Our personal customers are much more attractive on a profit margin basis.”
But surely Bupa can stitch up competitors with predatory pricing? I had been told that was precisely what it is doing in the SME sector. Again, I was put to rights. “We have only got 70% of the market share in the SME sector that we had four or five years ago. If anything, our competitors are engaging in predatory pricing in that market,” he says.
The scrutiny issue still nags me. Without members or shareholders, who really watches how a big provident behaves? Bupa has audit committees, and external representatives on its board – but they don’t have to face AGMs or the occasional rigour of a re-election battle.
Like Standard Life in the pensions market and Nationwide in mortgages, it is vitally important that the mutual and the provident remain as a powerful force. But both Nationwide and Standard Life will admit that their demutualised rivals have forced them to ask important questions about what they are for, and to become more efficient and communicative about their aims and goals.
Mutuality is not protection in itself, as policyholders at Equitable Life know all too well. For now, Bupa is cash-generative, having emerged strongly from its financial problems in the mid-1990s. The competition authorities are at bay, probably taking the line that if it ain’t broke, don’t fix it. But in the absence of shareholder activists and investment analysts poring over its practices and accounts, it is worth remembering that this market is dominated by a peculiar entity, and peculiar things could therefore happen.