On one level, the UK private medical insurance industry looks the picture of health, so Andrew Holt takes a moment to take a look under the industry's skin

On the face of it, the UK private medical insurance (PMI) market is booming. Spending on health and care cover in the UK, including PMI, health cash plans and long-term care insurance, reached a whopping £4.4bn last year.

The good news for PMI insurers and brokers alike is that the largest portion, some £3.5bn, was spent on private medical expenses cover, made up of PMI and self-insured corporate medical schemes.

The rest is split between £440m spent on health cash plans, £316m on dental benefit plans and £114m annual spending on long-term care 'cover' products, according to a report from analysts Laing and Buisson.

Therefore, health and care cover now covers in the region of 20% of the UK, with private medical cover accounting for 12.5%; 7.9% have health cash plans; 3.5% have private dental cover; but less than 0.1% have long term care cover.

Although looking deeper at the figures, the number of people with PMI policies in the UK, or enrolled in medical schemes self-insured by employers, fell marginally by 0.4% in 2005 but held firm to be 4,164,000 at the start of 2006. This follows a small rise in demand in 2004 (up 0.6%), and overall growth of 3.7% in the last five years.

Total people covered by PMI and self-insured medical expenses schemes was 7,534,000, 12.5% of the UK population at the start of 2006.

So, while the PMI market has been underpinned by stable corporate demand for private medical cover in 2005, both traditional insured schemes and a burgeoning self-insured market, the downward trend in individual PMI demand continued in 2005 (down 1.5%), following a temporary minor recovery in 2004. Individual policyholders have fallen from a peak of 1,457,000 in 1996 to a low of 1,160,000 in 2005.

Overall, PMI revenue growth has slowed in the last three years due to a combination of some moderation in average PMI premium increases in both the competitive corporate sector and for individuals (although with increases in single figures), and a small but significant shift in the PMI product mix towards lower cost policies.

Author of the report, economist Philip Blackburn, comments: "The PMI market

continues to hold up well given the general predications of an uncertain long-term future. Key to this is the continued popularity of private medical cover and other flexible health and protection solutions with large employers and increasing interest in PMI options from smaller employers.

"However, it seems that the stability of individual PMI demand recorded in 2004 was temporary, and the familiar falling trend, which started in the late 1990s, returned in 2005. A wide array of cover choices and cost options for both individuals and companies remains a strong feature of the market."

In the long-term a public health service where waiting has less significance and where patient choice is a central theme, certainly poses some threat to the private product that already offers full consumer choice and no waiting, but at a price.

Private or public health?
As part of a driver to greater choice and greater number of customers Bupa Hospitals is offering NHS patients a wider choice of healthcare provider thanks to a new link up with the NHS.

The Department of Health has recently appointed Bupa Hospitals to the NHS extended choice network, which means NHS patients will be able to consult a specialist and have surgery at one of BUPA's 24 hospitals in England for a wide range of conditions.

NHS patients in England can currently choose between at least four hospitals or clinics when they need to see a specialist for further treatment. So patients with certain conditions will also be able to choose to be referred to a Bupa hospital by their GP.

Clare Hollingsworth, managing director of Bupa Hospitals, says: "The increased choice offered to patients means they can now be treated closer to home or work and reinforces our commitment to working in partnership with the NHS to deliver quality healthcare to patients."

Services are planned to start in November, with the contract running until at least March 2008, after which patients will still be able to choose to come to a Bupa hospital under the government's Free Choice initiative.

The Department of Health's programme is designed to extend choice to patients, increase capacity, keep NHS costs down and provide the transition to Free Choice.

So the future is likely to offer insurers opportunities to develop their private cover proposition to meet rising medical/healthcare expectations across primary, secondary and long-term health and care. The key is their adaptability and ability to innovate to meet consumer demand in the future, while keeping their products at affordable prices.

PatientChoice is one such company that offers customers the choice to have private treatment and as a benefit if the cost is less than the budget allocated for that procedure, then that customer can keep the money left over. PatientChoice offers cover for expensive aspects of medical care, namely operations and procedures. But with its new policy, PatientChoice Priority, it offers a high-value low-cost cover for companies with over 100 employees providing cover for many of the conditions that could cause major absence from work and affect employee productivity.

"Priority is a low-cost product aimed at making PMI more widely available," says Vicki Leslie, head of marketing at PatientChoice. PatientChoice is looking to boost its business links with brokers on this product.

Within PMI, price inflation has remained relatively modest and stable in the last three years, as average premium increases have moderated to some extent, and more consumers are taking advantage of lower-cost cover options.

For Victoria Hardy, head of strategic marketing at AXA PPP Healthcare, this all contributes to the added choice on offer. "Choice is important. For our part we offer a selection of policies ranging from comprehensive to budget plans."

So too is innovation. Hardy says: "We have introduced a plan - Independent Health Cover - for people who are self-employed, which combines the usual benefits of medical insurance with two business support services: to enable customers to stay in touch with their business when they're off sick and our legal advice line, which provides 24-hour access to our dedicated team of legal advisers."

PMI in good health
The rise in the budget PMI option has led to predictions that PMI is set to rocket over the next four years thanks to greater availability of cheap health insurance.

Datamonitor states that the number of people seeking medical insurance cover will increase by over 10% by 2010 - bringing the total number of those with private health insurance to 1.2m.

James Dieppe, financial services analyst at Datamonitor, says: "Providers are attracting new customers into the market with new, sophisticated offerings, that cost the consumer less but, in return for a lower premium, offer a lower level of cover."

Even in 2004, when the low-cost market first emerged, there was a 4% growth in gross written premiums - a 1.4% increase from the previous year.

Datamonitor's view is that with the private health insurance market focusing on providing "good value for money", many price-sensitive customers seeking cheap medical insurance have been brought to the market.

On another level the "wellbeing" approach is taking hold within PMI. This is taking the welfare of an individual or workforce into account within a policy with an interventionist, pro-active planning approach to create a better understanding of an individual or workforce hopefully enabling huge good health benefits for employers and employees.

FirstAssist is the latest in this market launching a unique new service that aims to provide protection for employers as well as their staff. Designed to reduce absence, increase productivity, nurture talent, cover legal obligations and enhance the status of the company as an employer of choice, the new FirstAssist employee assistance programme, it says should be viewed by organisations as "an investment rather than a cost". Indeed, its aim is that the provision could actually reduce the risk of costs for employment tribunal cases that might otherwise be brought by employees.

This is an important point given that legislation means that organisations now have more responsibility than ever to ensure the wellbeing of their staff. The landmark case in 2002 of Sutherland versus Hatton saw the Court of Appeal rule that "an employer who offers a confidential counselling service with access to treatment is unlikely to be found in breach of duty (of care)".

There is also an obligation towards "reasonable adjustments" to a particular position. This can include modifying the structure, duties or nature of a job, or even finding a different position more suited to an individual within an organisation. Counselling services are now, therefore, an essential part of any care package for employees, and a by-product of this is legal protection for employers.

Not a passing fad
In addition, sickness absence is a real issue today, both in the public and private sectors. Careful intervention, pro-active planning and a better understanding of the workforce could, however, have huge benefits for employers and employees.

And this obsession with wellbeing is not a passing fad. Latest research by health benefits provider HSA has found that companies plan to invest more in health in the future. Its survey of 600 senior HR professionals found that 92% of companies felt they were likely to invest more in the promotion of and support for healthier working practices.

"It is clear from the findings that businesses are aware of the need to take more responsibility for the future health of their employees," comments Suzanne Clarkson, head of corporate marketing at HSA. "The overwhelming perception is that a healthy workforce is a productive workforce. This could represent a huge opportunity for benefits providers and HR benefits consultants alike."

Hardy adds that when it comes to underwriting, her company tries to reward people who lead healthy, active lives with lower premiums. "We encourage members to try to lead healthy, active lives but we are not prescriptive about how they go about doing it - for instance, we provide them with healthy living tips via our membership magazine and a more personal approach via our confidential health information and personal counselling helpline, Health at Hand."

According to the latest annual CBI/AXA absence survey, the cost of staff absence to the UK economy rose to over £13bn in 2005. 66 million days were lost across the public services at a cost of £3.4bn to the taxpayer. This shows that absence levels were 30% higher across public sector organisations than in the private sector.

CBI deputy director-general, John Cridland says: "Absence is best managed with both carrot and stick - schemes that reward the good attendees work best together with those that deter the worst offenders."

But Dudley Lusted, AXA head of corporate healthcare development, warns there must not be a heavy-handed approach to rehabilitation. "To be effective, policies to help employees back to work must be well implemented. There's still much more that employers could do especially in the public sector where, despite rehabilitation policies being more prevalent, long-term absence remains stubbornly high," he said.

On another note, spending on health cash plans in the UK reached £440 million in 2005, up 3.7% from 2004, following growth of 3.3% a year earlier. In the past five years (2001-2005) contribution income has grown strongly by 28%.

Blackburn explains: "Spending on health cash plans continues to grow in real terms despite continued marginal falls in the volume of demand (contributors) year-on-year. This confirms that contributors have been willing to pay higher average premiums for increasing cash benefits.

Health cash plans remain a strong product that has wide appeal to individuals, families, employees and employers. A key strength of the product in the future will be its flexibility to cover new benefits that consumers demand."

But there is also a worry about claims within PMI. Claims costs grewin 2005, up 3.3%, leading to a small increase in insurer margins. The PMI market has traditionally had the highest claims ratio in the industry with one in three claims on policies every year, according to Yorkshire-based health brokers, the Private Health Partnership.

Therefore with employee sickness costing British industry £13bn per year, it is essential that companies - as well as individuals - have insurance provisions in place. IT