Saving private treatment

Last month the newspapers reported the story of an NHS consultant who was asked to perform an operation using an item of kitchen cutlery. Despite his requests for appropriate medical equipment he was presented with a dessert spoon to perform a hip operation.

And this is just one of a litany of negative stories about the NHS that includes patients dying on trolleys and rising waiting lists. Of course, an additional £40bn is to be pumped in to revive the creaking system, but few expect a significant turnaround.

In the light of these troubles one would expect the private medical insurance (PMI) market to be booming. But the reality is markedly different - stagnation being a more apt adjective.

Healthcare consultancy Laing & Buisson says that in 2001 the private medical insurance market grew by only 1%, compared with 3.5% in 2000. Corporate PMI was the source of this growth, rising by 3% in 2001 while, the individual market withered by 2%.

Each year about 500,000 policyholders give up their PMI cover. Consumers are switching from traditional PMI products to corporate schemes, cashplans and critical illness cover. PMI policies cover 11% of the UK population; cashplans now cover 10%, and 11% have critical illness cover, which saw a growth of 17% in 2001.

Cash settlement
Consumers are also increasingly opting for self-pay. This market has grown by over 200% in the past three years. Over a quarter of private hospital bills are settled in cash - amounting to almost three quarters of a billion pounds.

Affordability is cited as the main reasons for the desertion from individual PMI. Laing & Buisson reports that premiums have risen steadily for the past 12 years: in 2001 they increased by 4.6% and in 2000 by 12.5%.

These increases have partly been driven by rising medical costs, but also by what some have referred to as the "PMI death spiral". This is where claims costs increase due to a deteriorating risk pool. As premiums rise the young and healthy give up their cover, leaving the sick and the elderly - the people who claim. This pushes up premiums further, encouraging more people to leave.

Laing & Buisson also warns that demand for corporate policies may also come under pressure due to rising premiums and the growing trend for self-insurance. Last year Buck & Willis Healthcare predicted a 70% increase in corporate premiums over the next five years, although Laing & Buisson suggests that it will be only half this figure.

It is clear that PMI providers need to change their approach if they are to revitalise the flagging individual market and continue the growth in the corporate sector.

In last June's IT2 Health supplement, Healthcare Navigator's Roger Hymas charged the industry with the task of engaging in some original thinking and developing innovative products, or face the prospect of continuing stagnation.

One year on, has this been achieved and what is the prognosis for PMI?

Accurate pricing
In the individual market, insurers have been very active in their efforts to develop new products. Innovations have centred on making PMI more affordable and adapting the products to changing consumer needs.

Health-on-Line managing director Mark Martin says: "Consumers want flexibility and choice. They want simple products they can understand and value and compare with other products on the market."

AXA PPP Healthcare is looking at ways of achieving more accurate pricing. Distribution and development manager Nye Jones says that this would help to make the products more affordable by limiting the need for continual premium increases.

"In the past the PMI market has been over simplistic in its pricing - you could get a quote based on age alone. But look at the number of rating factors used to price motor insurance.

"Insurers would benefit from taking more factors into consideration - and this will become more prevalent as insurers seek to develop more sustainable pricing."

Modular policies offering consumers a selection of benefits are seen by some as the way forward for PMI. Healthsure and Health-on-Line for instance have both introduced this type of product.

Martin says modular policies provide a number of benefits. "If people take an interest in the product that they are buying then they value it more. They also help to solve the problem of rising premium by allowing people to reduce the cover that they purchase."

The fact that consumers have not simply been re-creating traditional policies demonstrates that they value being able choose the benefits, says Martin.

Other insurers have also used restrictions in cover to reduce premiums. Bupa's heart and cancer plan, Heartbeat, covers only heart and cancer conditions. The risk is lower. So is the premium.

Shared responsibility, whereby consumers accept a proportion of the claim, is another area that insurers are increasingly looking at as a way to address the issues of pricing and flexibility.

The traditional excess is one form of shared responsibility, with policies such as Standard Life Healthcare's Options offering the choice of £1,000, £2,500 and £5,000. National sales manager Claire Ginnelly says: "The policy is designed to attract self-payers: they can choose a £5,000 excess, so that in the event of a big operation the policy will kick in. It is also suitable for those who simply want to increase the excess to reduce the premium. It allows people to budget very carefully."

Shared responsibility
WPA spokesman Charlie McEwan is also a strong advocate of high excesses. McEwan argues that a shared responsibility approach is a vital step to controlling claims costs and ultimately premiums. "Low excesses are self-defeating. People pay the excess and then see the treatment as free - and anything that is free is undervalued. As soon as they reach the excess they start claiming."

McEwan argues that patients should have a real financial interest in the cost of the treatment if private healthcare is to operate efficiently. "High excesses introduce a financing model into the equation."

Expanding on this idea, WPA launched Flexible Health in April 2002. This gives the policyholder the option of taking 25% co-insurance with a maximum liability of £1,000, £3,000 or £5,000. In turn, a premium discount of up to 55% will be received, depending on the limit of liability.

According to McEwan 50% of customers have taken this option and claims figures have shown "massive reductions".

The central theme of many of these new products is the concept of tailoring. Consumers do not want a `one size fits all' approach to PMI. They want to be able to adapt the policy to their own specific needs.

Bupa head of actuarial and risk management Fiona Harris says that PMI means different things to different people. Some people will want a traditional PMI policy with all the benefits and a low excess.

Others will want a limited level of cover for only the most serious medical conditions and will use their own assets to fund less serious treatment - the self-pay option.

"PMI is now just one part of people's healthcare solutions; they will have a range of products that fit together," she says.

Lump sums
Moves towards hybrid products can be seen as further acknowledgment of this. Health-on-Line is planning to launch a product that combines PMI and lump sum payments for serious illnesses. The money can be used to fund private treatment, or for other uses if the person wishes to be treated under the NHS.

Merging PMI and cashplans is another option, according to Legal & General's Sampson. "The cashplan market has been growing. The attraction is that they are simple, easy to understand, with set benefits that cover everyday things such as optical and dental treatment as well as more serious conditions."

But despite consumers' interest in mixing self-pay and PMI, they may not be ready for more sophisticated approaches to this. Eighteen months ago Legal & General tested a combined savings and PMI plan. "We found that consumers weren't ready for this; they didn't understand the savings element," says Sampson.

Norwich Union (NU) Healthcare takes a different perspective on how to evolve PMI. Head of business development Carolyn Derrington says: "[Given that the individual PMI market is not growing] you have to question whether there is something fundamentally wrong with the proposition. There will always be a niche for traditional PMI, but we believe the focus should be on keeping people healthy rather than just paying for illness."

Derrington says that NU is testing Personal Health Manager, a web-based facility that offers personally tailored advice and information on a wide variety of health matters: this includes a 24 GP help line, symptom diagnosis and health planner.

"Healthcare products should be there to fix you when you are ill and also help you to stay healthy," says Derrington.

A similar change in focus is being seen in the corporate PMI market. In this arena PMI is changing from being merely an employee benefit to a tool for managing employees' health.

" Employers want to look after employees' health. They want a healthier workforce that is more productive," says Ginnelly.

Standard Life Healthcare, for instance, has recently launched a package with health management company Vielife. This provides a standard corporate healthcare package alongside a health monitoring service which can identify problem areas so that preventative measures can be applied.

Corporate PMI is, therefore, taking on a business support role, with insurers marketing it as a way for business to become more efficient and profitable.

Royal & SunAlliance is taking this one step further with the launch Values for Business. Designed for SMEs, it combines a PMI plan with employment protection and health and safety support services.

Business development director Chris Jones says: "Our research has suggested that providers need to do something different. The plan is more to do with helping businesses to survive rather providing an employee benefit."

Product innovation
So insurers are working hard to innovate and develop products that will drive the PMI market forward. But are they succeeding?

Association of Medical Insurance Intermediaries (AMII) chairman Larry Bulmer is sceptical: "Insurers are desperately trying to innovate. How good these are could be called into question. The fact that they are trying so hard suggests they haven't cracked it.

"A lot of supposedly innovative products are not in fact innovative; they are simply being marketed innovatively - that is not innovation."

Churchill director David Hiddleston is also critical. Churchill was considering entering the PMI market, but decided otherwise. Hiddleston says he was less than impressed with the insurers' current offerings. "There was no innovation. I couldn't see any great new products."

Insurers are of course quick to defend themselves. "For a number of years it was true that insurers were rehashing old ideas. But in the past three years that is not true. There have been some very new and very different products and consumers have responded," says Harris.

What therefore is the prognosis for the PMI market? Can it look forward to healthy vibrant future, or does a hospice beckon?

Insurers are not surprisingly bullish about the market's potential, particularly in relation to company policies. "There is massive potential in the market," says Jones. "And the individual market will pick up, but only in small movements."

Brokers too are positive about the future. In a survey commissioned by Health Insurance magazine, 68% of intermediaries said that the individual market would grow in the next 12 months, and 70% said that the company market would grow.

It remains to be seen whether new products will inject a welcome adrenalin boost into the flaccid individual market.

Can cashplans fill the gap?
The appeal of cashplans is growing. Healthcare consultancy Laing & Buisson estimates that 10% of the UK population are covered by a cash plan. This is mainly due to their affordability but also the rising cost of dental and optical treatment which is not covered by the NHS.

People are starting to switch to cashplans from PMI policies, or are using them to complement high-excess PMI plans. And they appeal to people who fall outside the traditional PMI consumer base.

Not surprisingly, insurers are becoming increasingly interested in these schemes. Standard Life Healthcare national sales manager Claire Ginnelly: says that the company may be looking at broadening their distribution network through affinity arrangements and voluntary company schemes.

"There will definitely be continued growth in the forthcoming year. It is very important market for us."

Will cashplans take over from PMI? Bupa sales and marketing manager Cathy Gilbert thinks not.

"There is a need for both. Cashplans are often bought by people who have not had PMI, and the benefits structure is not as extensive as under PMI policies. "

But despite this enthusiasm for cashplans a big problem that insurers face is lack of awareness among consumers. "Not enough people understand what a cash plan is," says but HSA chief executive Des Benjamin.

A further problem is that cashplans are low ticket products and it can be difficult to make a profit on them. It is for this reason that Royal & SunAlliance healthcare business development director Chris Jones is less than enthusiastic about them.

"A lot of people talk about it being a big growth area. But in our experience profitable growth is not freely available. Some providers see it as an alternative to PMI, but it will not be - it will be an extra."