MT SURVEY OF SURVEYS: Medical Insurance

This £3 billion sector is struggling for growth in a market sapped by the rare virus of inflation. With take-up of individual policies falling, providers are looking to company schemes, but to progress they need more efficient insurance structures.

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Last Updated: 31 Aug 2010

The NHS is a laudable institution, but at this time of year the hundreds of cracks that have been papered over in the five decades since it was formed start to show. The challenges of winter can threaten to bring the nation's public health service - always stretched - grinding to a halt, as hospital admissions soar and the latest exotic imported viruses do their worst. Surgical schedules go out of the window as emergency cases take priority and queues for non-critical operations such as hernias and hip replacements extend round the block.

No wonder that those who can afford it go private. And for the past 30 years the stock way of making sure that you can afford it has been to take out private medical insurance (PMI). For a fixed monthly premium, you and your family get a fast-track to the best medical brains in the country, with no hanging around and no chance of being gazumped by a nasty accident on the ring road the day before your operation is due.

For insurers, this has proved a lucrative area. PMI took off in the '70s when employers started to hand out expensive perks such as company cars and health insurance to get round the then Labour government's pay-rise capping Incomes Policy, and it has flourished ever since. Last year, premiums generated income of nearly £3 billion in 2002, with the top outfits - the trinity of Bupa, AXA PPP and Norwich Union (now a subsidiary of Aviva) - controlling 71% of that market.

But there are clouds on the health insurance horizon. Rising premiums (the cost of an individual policy has increased by 54% in the past five years) and stalled market penetration - which refuses to advance much beyond 12% of the population - have made for a static market. In 2002, the only change in the way the top 10 providers divvy up the market was Bupa's poaching of 1.5% of market share from AXA PPP. The individual PMI market (where risk is assessed separately for each person covered) has shrunk by 140,000 lives since 1997 as average premiums of £1,218 have driven more and more people to 'self-insure' - the industry's euphemism for paying hospital bills themselves. Add to this the poor stock market performance of recent years - insurers have long used the return on their share portfolios to boost income - and things look pretty grim.

In the group market, where company schemes are provided as a benefit to employees and risk is assessed across all scheme members, the situation is slightly better. With average annual premiums half those in the individual market at about £600, membership of group programmes has been increasing.

In 2002, 4.7 million lives were covered by group schemes, compared with 1.2 million covered by individual policies. Yet even here the PMI salesman's bete noire - medical inflation - has been sapping the business. The annual increase in the cost of providing treatment is running at some 15% a year, even though the retail price index is at its lowest level for years. 'Costs are an issue for us; we have to manage them better,' says Steve Flanagan, director of sales and distribution for corporate PMI at Bupa. 'It's a characteristic of economic downturns that PMI claims increase.'

Bupa's approach is to pool risk by seeing PMI as part of a company's overall risk profile, and it looks for the best-value outcome in a holistic way. 'There's a huge opportunity in the group risk market. It should lead to an actual drop in premiums,' adds Flanagan.

Not all smaller operators agree with the assessment that medical price rises are a cyclical phenomenon. 'There are no cost controls,' protests Adrian Humphreys, director of corporate clients for Western Provident Association. 'The user is completely disconnected from the payer and there's nothing to stop the user going for the most expensive treatment every time. No-one ever boasts about how cheap their operation was.' WPA, the sixth-largest provider, with 4% of the PMI market, advocates shared responsibility, with users agreeing to pay a certain proportion of their bill up to a capped maximum of, say, £1,000 a time. 'If PMI is free to the user, it has no perceived value,' argues Humphreys. 'If we can make people appreciate what the cost is, they will start to value it. It's about turning PMI from a free perk into a valued benefit.'

Another increasingly popular trend is the healthcare trust. This is a form of corporate self-insurance based on the idea that for groups of more than 500 employees, annual health costs are highly predictable. If your company health insurance paid out £1 million last year in claims and you have the same number of employees, it will be about the same next year. So instead of paying a premium to an insurance company, it's cheaper to put that sum aside and pay an administrator to handle claims on it.

'There's no risk. It's assurance, not insurance,' says Humphreys. But just to be on the safe side, you can buy stop-loss insurance for a modest sum to cap corporate liability at, say, 102% of the claims fund's value.

Whatever happens, it's unlikely that the business of private medical insurance will stay the same for long. 'Companies buy what's available, and the market has not been challenging in the past,' observes Flanagan. 'Now it's up to us to give them more room for manoeuvre.'

TOP 10 PRIVATE MEDICAL INSURANCE COMPANIES

Subscription Market Annual

income share growth

£1 Bupa 1,113m 38.5% 1.5%

2 AXA PPP Healthcare 675m 23.5% -1.5%

3 Norwich Union 255m 9% 0%

4 Standard Life Healthcare 173m 6% 0%

5 First Assist (formerly

Royal & SunAlliance) 136m 5% 0%

6 Western Provident Association 109m 4% 0%

7 Cigna 96m 3% 0%

8 BCWA 62m 2% 0%

9 Exeter Friendly 25m 1% 0%

10 Simplyhealth 15m* <1%* n/a

SOURCE: LAING & BUISSON PMI REPORT 2003 (*FIGURES RELATE TO 2001)

 

 

PMI PENETRATION BY REGION % POPULATION COVERED

South-east 20%

London 18%

East 17%

South West 14%

NW & Merseyside 11%

East Midlands 11%

Yorks & Humberside 11%

West Midlands 11%

Scotland 8%

Wales 8%

North East 6%

TOTAL 12.8%

SOURCE: LAING & BUISSON PMI REPORT 2003

 

COMPOSITION OF PMI MARKET 2002

Subs income Lives

pounds covered

Company-paid schemes 1,470m 4.7m

Individual-paid schemes 1,402m 1.2m

SOURCE: LAING & BUISSON PMI REPORT 2003

 

 

PMI PENETRATION BY SOCIO-ECONOMIC GROUPING % HOUSEHOLDS COVERED

Professionals & managers 18%

Self-employed 14%

Junior non-manual 12%

Intermediate non-manual 8%

Retired 8%

Skilled manual 6%

Semi/unskilled manual 6%

Unemployed 5%

All households 9%

SOURCE: OFFICE OF NATIONAL STATISTICS

 

 

TOP 10 PRIVATE HOSPITAL OPERATORS

Hospitals Beds Share of

total beds

1 General Healthcare Group 45 2,303 24.2%

2 Nuffield Hospitals 44 1,728 18.1%

3 Bupa Hospitals 35 1,639 17.2%

4 Capio Healthcare 22 864 9.1%

5 HCA International 6 762 8.0%

6 Medical Services International 1 150 1.6%

7 Covenant Healthcare 8 144 1.5%

8 British Pregnancy Advisory Service 8 127 1.3%

9 United Surgical Partners 2 121 1.3%

10 Hospital Management Trust 3 113 1.2%

SOURCE: HEALTHCARE MARKET REVIEW 2003-04

 

 

COMPOSITION OF PRIVATE HEALTHCARE MARKET

Pounds

Long-term care of elderly and disabled 9.9bn

Acute care (surgery, psychiatry,

screening, rehab etc) 3.9bn

Dentistry 1.9bn

Learning disabilities 1.8bn

Non-acute mental illness 516m

General practice 405m

TOTAL 18.5bn

Proportion of total UK healthcare spend 18.4%

SOURCE: HEALTHCARE MARKET REVIEW 2003-04

 

 

PROJECTED UK HEALTH SPENDING (% GDP)

2002-03

NHS 6.6

Private 1.2

2003-04

NHS 6.9

Private 1.2

2004-05

NHS 7.2

Private 1.2

2005-06

NHS 7.5

Private 1.2

SOURCE: HEALTHCARE MARKET REVIEW 2003-04

 

 

EUROPEAN HEALTH SPENDING 2001

(% GDP)

Germany 8.0

Iceland 7.6

Sweden 7.4

France 7.2

Denmark 7.1

Norway 6.8

Czech Republic 6.7

Portugal 6.3

UK 6.2

Poland 4.6

SOURCE: OECD HEALTH DATA 2003

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