Benjamin Franklin said the only two certainties in life were death and taxes. But now, private medical policyholders have discovered a third – premium increases.
Over the past decade premiums have increased at more than twice the rate of general inflation, as PMI providers struggle to keep their books balanced.
So far, most policyholders have decided to live with the increases – and the total PMI market has remained relatively static, fluctuating around the six million persons insured mark. But if rates go on rising unchecked, significant numbers could choose to let their cover lapse.
Now, however, medical insurers have devised a range of strategies to contain their costs.
And even if they cannot eliminate premium hikes altogether, they at least hope to keep the increases to a minimum.
Graph 1 (right) shows how premiums for Norwich Union”s Personal Care, a typical mid-range PMI policy, have changed over the past five years.
In March 1993, a family of four would have paid £33.95 a month for band C cover. Today, that would cost £55.70 a month – a 64% rise. A couple aged 55 would have seen their monthly premium rise by 78% over the same time period.
Over the same period, premiums rising in line with the Retail Price Index would have gone up by roughly 21%.
Norwich Union’s premium rises are indicative of market trends as a whole. And while some insurers have managed more modest increases, some have been forced into bigger rate rises. And all have seen their prices steadily creeping up.
Government action has not helped insurers keep premiums low.
The time period illustrated in Graph 1 includes the introduction of Insurance Premium Tax, which added an extra 4% to the price paid by customers.
And the abolition of tax relief on PMI premiums for the over-60s on policies sold after July 1997, prompted a one-off 30% jump in prices for this significant PMI customer group. The move cost the average pensioner around £7 extra per week, according to BUPA.
If insurers are to succeed in keeping premium rises under control, they need to understand why their costs are rising. Dr Adrian Bull, medical director of PPP healthcare, says: “There are three potential drivers for increasing costs; medical inflation, increasing claims frequency, and the changing nature of treatments in the private sector. All could have an impact on premiums.”
However, insurers are not all affected in the same ways. Take medical inflation, the rate at which hospital and doctors’ charges are increasing. Bull says: “The term medical inflation is something of a misnomer and is often misunderstood. For PPP, unit costs have been flat in actual terms which means that in real terms costs for a given treatment have actually fallen.”
However, Rob Walker, provider contracts manager at Norwich Union Healthcare, says: “We’re finding that hospital prices are going up. A hip replacement is costing more today than it did four to five years ago.”
Robin Payne, general manager (business development) for Exeter Friendly Society, reports an experience somewhere between the two. “Medical inflation is not the problem,” he says.
“Yes, the price of a hip replacement has been increasing, but for us the rises have been more or less in line with general inflation.”
Geoff Bern, marketing manager for Nuffield Hospitals, explains further: “People talk of medical inflation as if it were one thing. In fact, our prices are made up of lots of different elements, some of which have been rising and some of which have been falling. For example, the price of consumables – drugs, bandages disposable equipment – always seems to go up.
“But there are moves in the other direction too. The `hotel’ costs of staying in hospital are falling all the time as more and more treatments can be handled on an out-patient basis. Almost 50% of Nuffield’s operative procedures are now day cases.”
So, if “medical inflation” is not the main problem, what is?
For one thing, insurers are now routinely paying for far more complex treatment in private hospitals. “Ten years ago, private medicine was about standard procedures: hernias, cataracts, hysterectomies, etc,” says Bull.
“The more complicated treatments were left to the NHS. Major cardiac surgery, for example, was confined almost exclusively to the big, teaching hospitals. But the private sector has developed. Coronary by-pass surgery is now in the top 10 treatments by value of claim for PPP.”
As Table 1 (right) shows, these more complicated procedures are also the more expensive ones. Heart by-pass surgery cost 10 times as much as wisdom tooth extraction.
Another factor pushing costs higher is the general ageing of the population. Not only are there more elderly people, but a higher proportion of them can now be safely treated. “Surgery has become less destructive and anaesthetic techniques have improved,” says Bull. “Those for whom surgery would once have been considered too risky can now get treatment.”
The single largest impact on costs has come from the growing demands of customers on insurers: “While both claims frequency and medical inflation are responsible for the increase in PMI premiums, we think the former is having the greatest impact,” says Mandy Blanks, spokeswoman for Prime Health.
And at Norwich Union, Walker explains: “We don’t want to prevent our customers from having the best treatments at the cutting edge of medical technology, but there is a price for that.”
NHS trusts and GPs face similar increases in demand from patients, which in itself can add to the burden on insurers. “NHS trusts and fundholding GPs want to protect their budgets,” says Payne.
“That means they are keener than ever to encourage those patients with private insurance to claim. I have seen. claims where a patient has been admitted to a hospital as an accident and emergency case, and the casualty bed has been re-designated as a pay bed so that the cost can be passed onto the insurer.”
With so many different pressures on cost, insurers have to tackle the problem in a number of ways.
Already, many PMI providers have radically overhauled their business relationships with hospitals, trying to squeeze out cost.
Benn says: “We have switched from billing insurers on a per-day basis, to a per-episode basis. Each year we agree a price for a treatment, and then we will handle that treatment in the way and place which best suits both us and the customer. It has streamlined the paperwork.”
And insurers are also trying to direct an increasing number of their policyholders into fewer hospitals. They hope to benefit from economies of scale by increasing volumes of business in these hospitals. Prime Health, for example, offers a 15% discount on premiums at the point of sale if the policyholder agrees to restrict their choice of hospitals to one of the company’s list of 97 preferred locations.
PPP has gone furthest down this route with its network concept. Over the next two years it wants to see virtually all its policyholders treated through one of its network hospitals. Hospitals tender competitively to be part of the network, promising both keen prices and set quality standards.
“With our network we’re trying to make sure that a dose of market forces both keeps costs down and quality up,” says Bull.
George Connelly, principal of PMI broker Health Care Matters, says: “Restricting choice via a network is a reasonable idea as long as the buyer knows what they are losing by taking it. But this trend can go too far. A network not only restricts customer choice, it can restrict access to certain consultants and specialists who don’t work at the network hospitals.”
Another option for insurers is to try and persuade policyholders to take bigger excesses in return for a premium discount.
Prime Health will trim standard rates by 10% in return for a E100 per claim excess and by 25% for a £250 per claim excess. Others are even more generous. On some plans, BCWA will cut rates by 40% in return for a £300 a year excess.
Connolly says: “The excess has to be worth taking and, frankly, I’m often ambivalent about them. Many claims are actually quite low in value, with maybe only one or two consultant visits and perhaps an X-ray charge. A per-claim excess can really eat into that.”
A third strategy has been the rise of the budget plan, where benefits are restricted to a core, and “luxury” extras, such as private ambulances, are forgotten. These have grown in popularity as some customers have found the full-price cover too much to bear.
Payne says: “The abolition of tax relief in 1997 prompted a significant number of our customers to trade down to budget plans. The trade-down rate in the first half of 1998 was 50% up on the previous year.”
Budget plans vary widely in the scope of cover they give. Both insurers and brokers need to do a better job of explaining what budget plans really offer to ensure the customers’ expectations match what they will actually get. But, if they can handle this challenge, budget plans offer one of the best hopes for keeping PMI within reach of significant numbers of buyers.
Insurers may well find that this back to basics route is the best way forward,” says Connolly. “Perhaps it’s time to ask seriously whether open heart surgery really ought to be included in a PMI policy?”