The outsourcing of private healthcare administration is becoming an increasingly attractive option t...
The outsourcing of private healthcare administration is becoming an increasingly attractive option to companies considering entry into the private medical insurance market and large employers with concerns about the cost of PMI.
Many insurance companies, banks and building societies have, in recent years, considered launching their own ranges of plans into this specialised market, but have been put off by its complexity and the perceived cost of entry.
Their commitment has been thoroughly tested by the thought of spending millions of pounds on a new division dedicated solely to PMI, a market that has shown little growth throughout the 1990s. Add to this the fact that the PMI industry is currently unprofitable and you can understand such reluctance to become involved.
The prospect of finding someone with the appropriate market knowledge to set up a new division and then recruit and train a team of customer service and administration staff has also deterred many. This added to the need for an appropriate computer system makes it is obvious why those who have most recently considered entering the market have held back.
Opportunity
However, consider the opportunities. Whichever political party is running the country in the coming 10 to 15 years will not be able to fund the nation's health needs at the level that the population expects. This is a worldwide problem caused by improving medical techniques, cost, and increasing life expectancy. Combine all of these factors with an ageing population in the UK and the Government is facing a huge healthcare funding problem.
The extra money that is needed will have to come from the private sector because taxes cannot be increased sufficiently to balance the books.
Market domination
The PMI market is dominated by two companies with a combined market share of around 70%, but the general insurers are becoming more involved and this must pose a threat to the others who stay out of this market. Many of the existing PMI insurers spread
doom and gloom because they are
trying to frighten off newcomers, particularly those with considerable financial backing.
Profits can be made from PMI, but it may be necessary to consider involvement in the short to medium term as a defensive mechanism or with a view to being well-positioned before taking advantage of any future opportunities.
Third party administrators
When looking at a solution to the cost of entry, the use of a knowledgeable third party administrator (TPA) may be the answer.
Some companies have tried to sell private medical insurance on the back of existing products, but this does not work if the staff who specialise in PMI are not available to provide administration and customer service. It is, however, no longer necessary for a potential market entrant to set up a completely new operation and the cost of entry need not be prohibitive.
Removing initial costs
A third party administrator can remove most of these initial costs, will have staff trained in PMI, a suitable computer system and the ability to provide a consultancy service which should enable a smooth, quick and relatively low cost market entrance, leaving the newcomer to concentrate on sales and marketing.
Large employers with concerns about the rising cost of PMI are also increasingly considering the use of a TPA. Group PMI is an investment in staff which is popular with employees, but cost is a problem for employers. The affects of the growing number of claims, their rising cost due to advances in medical techniques, coupled with the introduction of new direct and indirect taxes, are hurting.
Insurance premium tax
Insurance premium tax (IPT) increased from 4% to 5% with effect from 1 July 1999, the forthcoming addition of National Insurance contributions in respect of PMI and medical inflation at around 10% do not help.
However, it is generally accepted that many companies had taken downsizing too far in the recession of the early 1990s and today face skill shortages. These companies are now making increasing profits and are particularly keen to retain their existing skilled staff by improving their benefits package. They do not, therefore, want to remove PMI but are looking for ways to reduce costs.
About five years ago, 85% of companies in the US with 3,000 or more employees already self-insured and around 50% of medium and large companies are reported to have followed. As the cost of traditional group PMI in the UK continues to increase, more large employers here will look closely at what has happened in the US to see what savings can be made.
At the top end of the UK corporate market, particularly where over 1,000 employees are covered, some employers have already chosen to self-insure using a TPA to handle the day-to-day administration and claims payment. Most have stop-loss insurance which is readily available.
Other employers have set up a health trust as a means of avoiding the payment of IPT. Although the number in existence is currently small, health trusts are becoming more popular and this trend will continue as IPT increases towards 10% or more.
Health trusts
A health trust is a scheme available to companies and other organisations who wish to provide healthcare benefits to their employees as an alternative to providing cover under a corporate insurance plan.
The trust does not pay PMI premiums to an insurer and so avoids insurance premium tax for the cost of the cover. However, the scheme may take out stop-loss insurance and the premium on this would incur IPT.
Few employers have the in-house specialist knowledge required to administer these arrangements and again a TPA could be the answer.
In-house administration
Third party adminstrators are able
to provide an increasing number of services and these include the following:
l Plan design.
l Full membership admin (details of those covered and so on).
l Claims assessment and payment.
l Claims counselling by trained nurses.
l Managed care.
l Hospital fees negotiation.
l Management information and reports for clients.
l Claims fund projections.
l Case management.
l Setting up of stop-loss insurance.
l Literature.
l Underwriting.
The flexibility provided by TPAs also enables service levels to be agreed
and accurately monitored. Management information and reporting can be tailor-made to suit company requirements.
Negotiations with hospitals can take place at a local or national level and 'providers' can be challenged about their fees as necessary.
The benefits package can be designed on a plan by plan basis and bespoke literature provided. These are all services available from a TPA.
Active administrators
There are only six or seven active PMI TPAs in the UK although there are about 10 in total administering healthcare in respect of almost one million people. Approximately 400,000 people are covered by self-insured employer plans and between 100 and 150 health trusts are believed to have been established
so far.
The potential savings to be made from the outsourcing of PMI administration will inevitably become more attractive to large companies as the costs of traditional PMI continue to
rise and tax has an increasing impact. These companies should discuss self-insurance and health trusts with their PMI adviser.
Large client database holders who are deterred from entering the market by its perceived complexities and costs should talk to a TPA.
Les Curson is general manager at MIA Healthcare
