Can health insurance in the UK be kept alive?

Private health insurance is facing challenging times. The cost of medical care is rising faster than inflation, leading to a significant increase in claims costs. At the same time, the economic downturn is causing the public to tighten purse strings, with many cutting back on their health insurance spending. So what can be done to breathe fresh life into the dying private healthcare sector?

Bupa chief executive Stuart Fletcher told Insurance Times that the market was going through a difficult period and that changes were needed. “We feel there are things in the UK market that need to change and difficult conditions are likely to persist,” he said. In its financial report for 2012, Bupa blamed “excessive claims inflation driven by both private hospital and consultant practices, and fees” for a 23% drop in UK profits.

Towers Watson’s 2012 Global Medical Trends Survey Report shows the extent of the problem (see table). While medical inflation in Europe is lower than the global average, costs of care have risen by more than general inflation consistently over the last four years. Medical inflation levels for 2012 are expected to approach double digits in the UK.

* Projected                      

But Milliman principal consulting actuary Joanne Buckle said that increases above general inflation have to be expected. “As the majority of what makes up healthcare is wages, you would expect it to increase at higher than RPI because of wage inflation,” she said.

NHS restrictions

Buckle added that increased demand for services also drives up medical inflation, and the NHS adds to this problem in the UK. “As utilisation gets constrained in the NHS, some of that gets pushed on to the private sector,” she said. “We are seeing quite a lot of that in places where the NHS is putting heavy restrictions on some of the more elective services. That drives higher utilisation in the private sector for those people that are insured.”

However, Fletcher blamed poor competition between hospitals for driving unsustainable increases in the cost of care. “A lack of competition between hospitals and information on quality of care is pushing up the cost of insurance premiums, which continue to rise at unsustainable levels putting the future of the private healthcare sector at risk,” he said.

Competition Commission investigating prices

One area that might provide some relief for insurers is the Competition Commission’s investigation into the private hospital market. The commission is investigating whether players and processes in the healthcare market are manipulating costs to increase prices.

One of the investigation’s areas of focus is the lack of information on the quality or price of care. In a document outlining the scope of the investigation, the commission said the lack of information available to patients and insurers may “lead to consumers paying higher prices or receiving lower quality services” as there is a “reduced incentive for hospital operators/consultants to compete aggressively to attract patients directly on the basis of either price or quality”.

The commission is due to publish remedial measures for consultation in October, with a final report detailing the outcomes of the investigation set for February.

More information needed

It could be that in the meantime insurers need to take action into their own hands. Milliman principal consulting actuary Robert Parke said insurers have the ability to improve competition among providers. “It’s incumbent on the insurers to make information more widely available and to use it as part of the negotiations with the provider community,” he said.

Parke said that by sharing this information, and therefore increasing competition, it would be easier to introduce utilisation management techniques and drive down costs. “It does make it more challenging for insurers to implement some of these techniques if there is a lack of competition,” he said. “But it’s not impossible for insurers still to do some things.”

And Towers Watson revealed that insurers may have already started to take notice of this advice. Chronic condition or disease management, aimed at eliminating the root causes of poor health, was cited by 42% of respondents to the 2012 Tower Watson survey as one of the most effective utilisation management tools for reducing costs. In 2011 this method was not even on the list. These new methods may provide an innovative way for insurers to manage their rising claims costs.

Buckle added that insurers have to show their value to customers in tough economic times. “Health insurers have to work to stay relevant in an environment where most of the healthcare in this country is delivered under the NHS,” she said.

And Parke said that this was achievable if insurers extended their focus to include more on customer care. “They’ve got to move beyond being just claims payers to being managers of care and managers of quality,” he said.

So while claims costs and lack of competition are having an impact on the fortunes of health insurers, there is still much they can do to improve their performance. All that remains to be seen is if insurers will act before it is too late.