As companies confront the economic impacts of recession and plan their survival strategies, Richard Munro examines the challenges facing the health insurance industry
It is a sign of the times that the corporate market is on the look out for sharper deals in all areas of business. But while the medical insurance industry as a whole is under pressure to deliver, insurance intermediaries, for their part, face the short-term prospect of being unable to cost-effectively rebroke schemes.
Medical inflation has consistently exceeded the retail prices index in recent years, driven by mounting costs of cancer, cardiac and psychiatry treatments, and claims are increasingly rising above the rates allowed for in medical insurance premiums. To date, cost price broking has successfully kept premiums at an acceptable level but any incremental rises in costs will be hard felt by UK businesses in the current economic climate.
It is only a matter of time then before companies start to scrutinise the rate of inflation inherent in their medical schemes and begin to question how much they are paying.
Intermediaries have a role to play in devising credible cost control measures such as case management services but traditional insurer methods of reducing liabilities like building in excesses and increasing the cost burden to employees need to be re-evaluated.
Simply stripping out benefits for existing private medical insurance (PMI) scheme members will inevitably prove politically challenging because of their contractual nature but imaginative solutions from insurers to the prevailing dilemma are called for.
Reducing large claims Impact
In general, employers want to do the best by their staff and will not adopt a ruthless approach to staff medical claims. There is, however, a balance that needs to be struck for most businesses between adequate employee care and insurance costs.
To illustrate the consequences of costly medical claims, a company with a medical scheme covering 500 employees and an annual claims expenditure of around £300,000 recently faced a renewal cost rise of 30%.
Significantly, during the last 12 months, half of the company's claims expenditure was incurred as a result of just two cancer claims - a further few claims of this magnitude would have bankrupted the scheme.
Bed rates in some hospitals can amount to more than £500 a night, with claims for cancer treatment in some cases soaring to tens of thousands of pounds.
Because of the emotive nature of healthcare, companies will generally get drawn into paying for an employee's long-term medical treatment. Year-on-year premium rises of 15% or 20%, however, will eventually render a scheme unaffordable and there comes a point when this must be managed.
It is indeed possible to reduce PMI premiums without compromising cover. Where the NHS can provide treatment that matches private provision, suitable products could be made available from insurers that encourage NHS use.
Insurers have already been providing clients with a choice over the levels of cancer cover offered at varying stages of the illness and, although this can prove a contentious issue, it is one that needs to be considered seriously, both at scheme inception and renewal stage.
These, and other similar initiatives, must be vigorously promoted in a bid to safeguard the future of the industry.
If insurers are guilty of not devising and sufficiently promoting innovative methods of limiting premiums, intermediaries should also be called to account for failing to put them under sufficient pressure to do so. If there was ever a time that demanded such action, it is now.
Moreover, the breadth of knowledge and experience of a significant number of intermediaries providing health insurance should also be called into question.
This time last year, PMI Health Group's sales director Steve Langan stressed the need for employers to receive professional guidance on introducing long-term healthcare strategies. The rationale for doing this, particularly for larger companies, has become ever more pertinent in the last year. A carefully constructed and integrated healthcare programme should help to reduce business costs by improving productivity, reducing insurance claims and slashing absenteeism. In addition, it will positively position a company as an employer of choice.
Faced with the current economic downturn however, most businesses will instinctively take a short-term view on improving their bottom line, reinforced by the price comparison broking carried out by the more reactive insurance intermediaries.
The fact that PMI will provide staff with an extremely valuable employee benefit is unequivocal but, when adopted as a stand-alone product, it is unlikely to address the fundamental health issues affecting an employer's business.
It is inevitable that ongoing news of economic turmoil and fears over jobs, mortgages and pensions will result in excessive and frequently debilitating anxiety among a significant number of individuals. Consequently, many businesses are reporting higher than average levels of absenteeism as a result of a condition that some doctors have dubbed 'recession stress'.
In a bid to combat this, a skilled consultant might advise upon the establishment of an effective absence management initiative, which may include employee assistance programmes and stress management.
The billions of pounds a year lost to UK businesses as result of employee sickness absence has been well documented and, with this set to rise to unprecedented levels, the importance of good health management needs to recognised - not only in HR departments but also in company boardrooms.
Training up
Dedicated PMI consultants are generally steeped in a healthcare culture and may even be able to draw upon the expertise of in-house nurses and occupational health physicians. Intermediaries broking PMI as a peripheral offering however should still be able to offer a valuable consultancy service. Individual brokers should be given appropriate training and ongoing professional development to enable them to conduct genuine assessments of company requirements. These will depend on size, structure, risk profile, benefits provision and culture.
Extensive pre-employment health checks including clinical and ECG tests, for instance, may be an invaluable recruitment tool for some industry sectors but for others, an unnecessary expenditure.
Even smaller intermediaries, dealing predominantly with small to medium-sized enterprise schemes, should have an extensive knowledge base and broad range of services they can advise upon with confidence. And as their clients grow, they must grow with them.
In the medium to long term, there is a strong likelihood that intermediaries that can only advise on PMI will find themselves at a considerable disadvantage.
Driven by trends in the US, the demand for high level consultancy to promote the benefits of integrated health management programmes has begun to gather momentum. However, only time will indicate the damage that the credit crunch has inflicted on the corporate healthcare evolution from short-term solutions to strategic risk management.
- Richard Munro is managing director of PMI Health Group
Demand for private medical insurance (PMI), in terms of subscriber numbers, increased modestly in 2007, rising by 1.5% from 2006, following similar growth in 2006 - up 1.6%, the first rise since 2001. In the preceding four years, 2002-2005 inclusive, PMI demand fell marginally each year, down 3.9% over the period.
The number of company paid PMI subscribers continued to grow in 2007, up 2.3%, following stronger growth in 2006, up 3.3%. However, prior to this, company paid subscribers had fallen by 2% in total in the four years up to 2006. The number of 'other' PMI subscribers (individual/employee) fell by 0.5% in 2007, continuing the downward trend, but decelerating from 2006, down 2.2%.
In 2007, claims incurred by insurers grew marginally ahead of subscription income and their margins remained largely unchanged. Claims incurred grew slightly in real terms in 2007, up 1.1%, following marginal growth in 2006, up 0.9%, Average real growth over the last decade was 2.5% a year confirming that current growth is well below the long-term trend.
Historically, claims costs per subscriber have increased well in excess of general inflation, but the movements over time have been erratic. In the 10 years from 1997 to 2007, annual average real cost inflation was 2%, with a peak of 4.9% in 1999, and very marginal real cost deflation in 2007, the first since 1993. However, there have been unpredictable variations in annual cost inflation for much of this period.
