If you are selling private medical insurance the key selling point is, arguably, peace of mind. That is, treatment when you want, where you want and by whom you want.
Not surprisingly, the problem with such an ideal scenario is cost. PMI is expensive for some, so for the provider the challenge is to juggle cost with the level of cover. Hence the introduction of budget PMI.
So how do you keep costs down and what cover do you limit or exclude?
In terms of keeping premiums down, there are four main options open to the customer taking out a budget policy:
• The banding of hospitals available for treatment
• Six-week maximum wait for treatment
• Limits on out-patient treatment • An option of paying an excess charge or of accumulating a no claims discount.
As far as the first three are concerned the most popular option for those taking out budget PMI is for a limit, or in some cases exclusion, of out-patient treatment. The main thinking behind this is that the priority must be for in-patient treatment.
Out-patient treatment is still available from the NHS, and the wait for this treatment is traditionally shorter than that for in-patient treatment. But if you are not prepared to wait, you could always opt for private treatment if the costs are not too prohibitive.
Les Curson, general manager at Clinicare, stresses the point that out-patient exclusion is seldom across the board. “Serious out-patient treatment such as radiotherapy and chemotherapy is included in our budget PMI policies. The main priority for customers is quick inpatient treatment. You have to remember that the NHS provides a safety net and in serious cases outpatient cover will be provided by the PMI plan.”
Richard Esler, commercial manager at BCWA, does not see budget PMI as a growth market: “As far as the abolition of tax relief on PMI for the over 60s is concerned, the expected rise in cancellations has not happened. Most people have continued cover but taken on an excess to reduce their increased costs as a result of the tax changes. This has been the preferred option. Very few have downgraded to budget PMI to reduce costs.” Esler adds that in general the budget PMI market will remain relatively static. “It is not a growth market. When people know what they are buying they inevitably veer towards comprehensive and not budget cover.”
David Potter, UK boss of OHRA, is also highly sceptical of budget PMI: “Some people are becoming aware that they are being sold products which are limiting. There is often restricted choice on the hospitals and doctors available. Also some of the restrictions on out-patient cover are extremely dangerous.” Some clinical procedures can be carried out on an out-patient basis, so many on budget plans lose out because of policy limitations. He continues: “We had a straightforward budget plan called the Young Family Policy which I didn’t like and which has since come off the market. The problem with most budget plans is that they do not make it clear to people what they are and are not covered for.”
To try and overcome the problem, OHRA introduced the Medios Optional Policy which is a comprehensive policy with a outpatient exemption option. Everything is explained in the brochure and any opt-out of the comprehensive policy is purely down to the individual. As Potter explains: “It adds armour to the broker’s back. If the customer complains further down the line that they do not have the cover they need, the broker can turn around and say `you ticked the box saying you didn’t want it.”’
A false sense of security?
Transparency is all important as far as Potter is concerned and this was the thinking behind the Medios policy. But he believes there are still too many people being lulled into a false sense of security by not having budget policies fully explained to them: “I don’t really believe in budget schemes particularly when they are being sold to those on lower incomes who think they have cover when they haven’t. Those on higher incomes should be targeted by PMI providers, with the spaces they leave behind on the NHS lists going to those on lower incomes.”
Potter is also scathing about policies that only cover out-patient treatment if it is followed by in-patient treatment. His view is not shared by David Bryant, head of public relations at BUPA: “The choice is down to the consumer. If they choose this particular method to lower costs then that is their perogative. At the end of the day so long as the product is explained to them, and in the case of our Central Care Plan this is what happens, there is no problem.” Potter does believe there is scope for expansion into the budget market but not necessarily for those in the blue collar sector. Those who are not worried about how long they wait but by whom and where they are treated would suit budget PMI plans. As an example he cites ethnic communities who in many cases may prefer to be treated by doctors who share and understand their cultural background and practices.
In terms of transparency and future budget PMI sales, Curson sees a somewhat different picture: “I think the insurers have really cleaned up their act when it comes to the literature they send out to customers. I think people are now understanding exactly what they are getting for their money. At Clinicare we ask customers to call us if they need to make a claim so they receive advice on how they should procede before any costs are incurred.” Curson also believes that the scope for expansion is most notably at the bottom end of the market and he believes costs can be kept down to allow those on lower incomes at least the option of budget PMI.
The six-week maximum wait schemes, (used as part of budget plans) have proved a bad idea as far as the insurers are concerned. The schemes have proved disappointing on the grounds that insurers have looked at loss ratios because waiting times in many cases were 14-16 weeks not the set maximum six.
Restrictions and banding
Restriction on the hospitals available to the patient for treatment is also an effective way of reducing costs. By this the insurer only has contracts with a certain number of hospitals with agreed special rates. But, as Curson points out, Clinicare is fundamentally opposed to restrictions: “We have not gone along with this idea of restrictions. What if you go and see a specialist and it turns out you can only use a certain hospital and that specialist then turns around and says `I don’t work at that hospital’– how do you get around that?”
But of course when it comes to banding – the level of service is banded according to cost– there will inevitably be restrictions on hospitals available for treatment if, for example, your cover is under band D but the hospital only covers A and B.
In terms of budget plans, reducing the level of service under the banding scheme can significantly reduce the price. There are two schools of thought on this. There is the argument that all the extras like private room, TV and video, flowers, daily newspapers, daily food menu are over, that they are expensive frills that make no difference to the medical treatment you receive. On the other hand, if you can afford it, why not make your time in hospital less stressful by paying for a few home comforts? As far as budget plans are concerned, the lower bands just mean the extras are reduced but the inpatient treatment is the same. You are paying primarily for prompt treatment without all the bells and whistles.
Rising costs, rising premiums
On first inspection things look pretty bleak. Premiums have in some cases risen by 17% over the last year as the cost of treatment, equipment and capital costs continue to rise. The NHS remains strapped for cash and the Labour government is giving no indication that it is going to provide a blank cheque to solve all the problems. In reality, waiting lists have actually gone up over the last six months. The pressure on those who can afford it is to go private.
But if costs and premiums continue to rise, isn’t there a danger that budget plans will no longer be budget plans and will have effectively priced themselves out of the market?
This is not the case, as Les Curson explains: “If you go back five or six years the average increase in premium was 25%, whereas now you are looking at 12%. It is always the case that insurers will find innovative ways to keep costs down so long as the market is out there. In our own case we have kept premium increases from 1st January 1998 to 8%.”
One of the most effective ways to keep costs down is by good claims management. “We scrutinize claims closely. It is never a case of just paying out what the hospital is charging. We will check every claim for overcharging or as happens frequently, charging twice. There are the same bureaucratic problems with private hospitals as with those in the NHS. Mistakes are made.”
The over-60s market
One of the first changes the new Labour government made as part of its first budget was to abolish tax relief on PMI for the over-60s. The government’s theory was that most over-60s with PMI policies were predominantly well off and therefore did not warrant tax relief.
Curson believes the impact of this has been negligible. “The PMI industry advised government in the first place not too introduce this tax relief because it would not increase PMI sales. We have always said that if you want to encourage PMI sales you should give tax relief to lower age groups. There has not been a heavy drop-out rate since this tax relief was scrapped, it is not even up to the 5% mark. The over 60s are not dropping out because most had bought PMI before tax relief was even there. We have not even seen a significant number of these customers scaling down to budget plans.”
Tim Baker, commercial director at Norwich Union Healthcare, is optimistic that in the current climate PMI sales will improve. “Given the problems with the NHS, we do see a significant gap between what the public want and what the NHS can deliver. As this feeds through, we will see an increased demand for PMI, especially budget PMI. I think prospects are good for this market.”
The role of the IFA and specialist intermediary
So if budget PMI is to prove a growth market what role must the IFA play? Firstly, budget PMI is almost exclusively associated with the individual and not the group market and given that the specialist is primarily in group sales, the onus is clearly on the IFA. Traditionally, IFAs have written huge volumes of pension and life/term assurance business but have not always been that keen on diving into the PMI market on the grounds that it is complicated and a relatively difficult sell. But as Curson explains, the message is beginning to sink in that the market is ripe for growth as the public becomes more aware of what exactly PMI is, and the various plan options open to them. He says: “If you look at the figures, only 20% of PMI sales are through intermediaries. So whether you are looking at budget PMI or individual PMI generally, there is huge potential for growth.”