The healthcare cash plan (HCP) market has reached a critical point, fuelled by increasing intervention by the Financial Services Authority (FSA) and large insurance companies moving into this sector for the first time.
The healthcare cash plan is an insurance hybrid with 19th-century roots. The movement came about in the 1870s to improve the way that hospitals – voluntary at the time – were funded. There were many diverse local and regional funds formed with one common thread: workers paid a small contribution each week from their wage into a fund, and this would allow them access to hospital treatment when it was needed. Pay day was on Saturday at that time – hence the rather curious generic term “Hospital Saturday Funds”.
The modern healthcare cash plan pays for expenses incurred for a wide variety of healthcare and medical treatments. The premiums are low and, providing that the policyholder continues with payments, cover is for life, with no increase in premiums irrespective of age or claim rates.
There has been steady growth in this market, driven by the growing realisation that people will have to make some sort of self-provision for their healthcare as pressures increases on the NHS and the growth in alternative treatments, which must be paid for. There is a pressing need for more professional organisations providing HCPs in this specialist market.
This is a fact recognised by the regulator, the FSA, that is keen to see fewer organisations, that are large and professionally-run, provide HCPs. At the moment, there exist about 28 traditional healthcare cash plan providers, with about six large players dominating the industry.
Like all areas of the financial services market, consolidation will be the way forward. Banks, building societies, insurance companies and related sectors have all seen a busy period of merger and acquisition over recent years. In order to survive and flourish, HCP providers will have to go the same way.
The Healthsure Group was created through the merger of a number of these Hospital Saturday Funds. The smaller Healthcare Alliance of Northampton and Norwich merged with the Manchester and Salford Hospital Saturday Fund in September 1999 to form one of the largest HCP providers, with 200,000 policyholders.
A changing market
Smaller organisations will struggle for a number of reasons.
The sector has changed gradually from a non-competitive regional market to a highly competitive national market, and smaller companies will find themselves in direct competition with highly organised, aggressively marketed organisations, offering benefit-laden products, added value service and a variety of additional and related products.
In addition, the growing claims culture in the UK is set to have a dramatic effect on the market. Every day, TV advertisements encourage consumers to claim for accidents. This will affect all claims-based industries and there can be no doubt that the rate of claims in the healthcare cash plan market will rise greatly in the future.
Some companies that have not structured their products accordingly may find the environment increasingly harsh, and regulation by the FSA will place a financial and administrative burden on HCP providers. Again, smaller organisations will find the costs prohibitive and the administration difficult to manage.
With companies like Royal & Sunalliance, Boots and Legal & General entering the healthcare market, we can be sure of two things: the sector has grown up, and aggressive competition will be the name of the game.
The smart Saturday Funds are looking to align themselves with companies that can compete on a national level and yet still offer a high level of service.
The industry will also have to brace itself for a “harder” type of company entering the arena. Traditionally, companies operating in this sector have been very ethical, and established close links with the NHS. For example, the Healthsure Group donates a substantial amount of its annual fund surplus to the NHS and related charities. Newer entrants to the market may not adopt this practice.
Knowing your field
There are some factors that work in favour of the long established funds. The importance of critical mass cannot be underestimated – the cash plan can only ever be viable when a large number of people pay into the fund regularly. These people need to be recruited vigorously to avoid the danger of an ageing and ever reducing profile to the fund.
The new entrants to the market may not understand the needs of the consumers as well as the traditional Saturday Funds do. They know their policyholders and they have their trust – which, in today's competitive environment, is not always easy to achieve.