ALONG WITH the fancy sports car, that little Gucci number and the second home in the sun, private me...
ALONG WITH the fancy sports car, that little Gucci number and the second home in the sun, private medical insurance has always been seen as a status symbol - a luxury for the well-off and successful.
However, with NHS rationing and waiting list problems becoming increasingly severe, the case for the person-on-the-street arranging PMI is becoming stronger and, unlike perhaps Gucci or Porsche, providers are desperate to capture this market.
Yet while the public may appreciate the need for PMI, cost remains prohibitive for most. As a result, product development has focused on reducing the cost of cover and, in so doing, has tried to broaden its appeal and jump-start the market.
Cost-cutting
Over the years providers have introduced many plans that aim to make the product more consumer-friendly by doing one of two things - cutting costs by reducing benefits or restricting access.
In the early 1990s, six-week wait plans became particularly popular whereby diagnostics and consultations were included, but treatment was only covered if the NHS waiting list for this exceeded six weeks. However, the idea did not take off and the majority of plans fell by the wayside.
Scott Meikle, principal at specialist PMI broker Sherwood Healthcare, explains: "The NHS was often unable to carry out treatment within six weeks and, as a result, policyholders were claiming on the plan frequently and prices had to increase to cope with the claims experience."
As the price differential between six-week-wait plans and standard plans lessened, it was no longer feasible for providers to offer them.
Last year PPP healthcare introduced a variant on this theme, Perfect Sense, which operates in the same way, but with a 12 rather than six-week deferred period. Fergus Craig, commercial director at PPP, says that the plan can pass on savings of up to 20%-30%, but due to the long waits that may be involved it may not be suitable for people who, for example, cannot afford to take a long time off work.
He says: "The core market for this product is retired people. On a full refund product people can end up paying for healthcare twice, but this plan just provides cover against the group's main concerns - long waiting lists."
Providers have also been looking to contain costs by placing restrictions on benefits. But Alison Platt, deputy managing director at BUPA, says that in some cases customers opting for budget cover only recognise the implications of reduced benefits when they need them most.
"At the points of buying and using the scheme customers have different needs," she says. "When buying the plan cost is the issue, but at the point of use PMI is no longer about financial services, it is about healthcare. It is easy for providers to cut the costs of PMI by removing benefits, but this passes a huge burden of responsibility and understanding onto the policyholder."
Hospital networks
Tampering with benefits can only have a limited effect on cost as so much of it is determined by the charges made by the healthcare supplier. BUPA has addressed this problem through the development of its hospital network. By limiting the number of hospitals available to Local Care policyholders, BUPA is able to monitor clinical quality more closely and, by increasing throughput, negotiate better rates.
Platt says: "The network allows us to take the discount the purchase deal gives us and pass this on to customers."
Other policies such as WPA's Maple scheme and Norwich Union's Trust Care cut costs by limiting treatment to NHS trust hospitals.
David Ashdown, communications director at WPA, says: "When people use a private bed in an NHS hospital charges can be up to 20% lower than in private hospitals and this is reflected in lower premiums."
As well as cutting costs, these products may also attract people who may have had moral objections to PMI and to those keen to continue supporting the NHS, says Louise Zucchi, media relations manager at Norwich Union Healthcare.
She says: "Policyholders have no wait for their treatment but they are still in an NHS hospital and putting money back into the system."
Norwich Union Healthcare has also tried to develop the partnership between the private sector and the NHS with the introduction of Fair and Square, which pays out £250 a night to policyholders opting for NHS treatment.
"Through this we are trying to attract new people into the market and those who want comprehensive cover but had previously had found it too expensive," says Zucchi.
All insurers are looking to attract young and healthy individuals. However well supply charges are managed, overall costs will be higher for insurers with an older, less healthy risk pool.
No insurer has demonstrated this more clearly than WPA, which is targeting the internet generation through the launch of XS Health. Available over the web, policyholders under 60 pay an excess of £1,500 before any costs are met. More a stop-loss insurance than conventional PMI, the plan is a lower cost alternative for people in good health who think they are unlikely to make frequent claims on their PMI and resent paying over the odds to subsidise those that do.
Ashdown says: "We now have to look at ways we can hold onto the market as costs rise and, unfortunately, it is the healthy policyholders that leave. Research has suggested that most people can afford £1,500 for an operation and by combining this with the cost savings the internet gives us, we can slash the premium right down."
The most recent area of innovation in the market has come from BUPA's fixed price cover which allows customers to purchase five or 10 years' cover with a guarantee that premiums will not rise within that period. Platt says that this product is particularly suited to older customers.
"When policyholders are carrying out their retirement planning they recognise that they can afford PMI now, but are worried that they may not be able to a few years down the line," he says.
Stephen Walker, principal at Medical Insurance Services, welcomes this move. He says: "It is pointless taking out a policy that the holder will not be able to afford later in life."
This issue is more acutely addressed by OHRA and Exeter Friendly, which do not include any age-related premium increases.
"It acts as a built in loyalty bonus - the longer people remain in the scheme the more reason they have to stay," says Walker.
Robin Payne, business development manager at Exeter Friendly Society, says that this is achieved by spreading the cost of insurance over the insured's life.
"Most plans start at a low price but then climb steeply over the time frame. People who start our scheme young pay a relative surcharge at outset, but the rate does not climb as much. A 60-year-old that entered the scheme at 30 will still be priced as if they are 30."
As a result, lapse rates on the Exeter Friendly scheme are extremely low, with only 5.5% of policyholders terminating their policies in 1999.
Corporate designs
In the corporate market, innovation - in addition to cost reduction measures - has focused on adding value to the employer.
"Schemes tend to be personally tailored to the employer in the corporate market," says Platt. "Clients not only want us to manage their PMI but they want us take on their occupational health problems too."
This stance has also been pushed by PPP, which carries out workplace health screenings and employee assistance programmes. Yet such comprehensive schemes are regarded as a white collar perk, so to help companies manage the absence across the workforce, PPP has introduced Back to Health.
PPP's Craig explains: "The plan provides a full refund for in and outpatient treatment, but it will only pay out when the NHS cannot provide treatment straight away and when the condition keeps an employee off work."
So far large companies, particularly those with a high number of employees in physical work, have noticed big cost savings. For every £1,000 spent in premium a company can save £2,000 in identifiable absence costs.
Clearly, providers have gone to great lengths to make PMI more palatable, but it seems brokers are still happier selling traditional comprehensive PMI. But while many of these plans may look good on paper, their value is questionable.
Meikle says: "Companies producing these plans tend to be the insurers whose standard comprehensive plans cannot compete price-wise."
Walker agrees and says that many plans become too expensive as they contain too many costly and unnecessary benefits and their removal could be an effective way of solving many of the industry's problems.
He remarks: "Medical insurance is used to pay for the treatment and cure of injury and illness. If the policy provides this cover then what is the point of a £100 maternity benefit for example? Companies need to look at the core benefits and do away with the remainder."
Providers, however, do not necessarily agree. Platt suggests that insurers need to develop a relationship with their policyholders by offering integrated health services, otherwise young healthy individuals are unlikely to see a need for PMI.
She says: "Affordability must be a priority on any new product, but we also need to offer value. It is no longer just about paying claims when people are sick, it is about looking after their health."
Flexibility is also an issue, according to Meikle, who says that in future we could see the development of menu-driven plans such as Royal & SunAlliance's Values plan and WPA's small company scheme, Enterprise. Such schemes operate by giving policyholders a choice of benefits and, as a result, they only pay for benefits that are useful and relevant to them.
While comprehensive products will always be the preferred choice for the consumer, expectations of the product will have to change in order for PMI to have mass market appeal. According to Craig, this can be achieved through working in tandem with the service already provided by the NHS.
"Fully comprehensive PMI will always be expensive. While some can afford and want this, we need to find a way of helping people get the treatment they need without building a system that completely replaces the NHS. We need to look at the gaps in the NHS and design cover that addresses them."
Rachel Williams is a staff writer
