Self-pay as you go

Private medical insurance (PMI) has never had good press regarding cost. No more so than for the over 50s market. Ironically, this is an age when finances are looking a little healthier, yet costs of providing for private medical insurance are increasing. The argument this creates is a convenient balance between need and affordable cost and holds little sway with clients seeing their premiums rising to £2,000 plus a year.

There is a hardening in attitude among individual consumers to renew traditional PMI cover. The number of individual PMI policyholders fell from one million to 1.2 million, according to recent statistics from independent analyst group Datamonitor, which also reports an increase in premiums for individuals of 6.9% in the five years to 2000.

'We are noticing a resistance to premium increases in PMI, which is more marked in the higher age group,' says John Hainsworth, an IFA with Rickman Tooze IFAs. 'While the percentage increase in premiums may be across the board, if you are already paying £2,000 per annum in premiums the increase means more in cash terms.'

'The PMI market has shrunk by 3%-4% in recent years and it is reasonable to assume that most of the shrinkage is in the over 50s market from the price point of view,' says Iain McMillan, national sales manager, intermediary sales division at Standard Life Healthcare. 'PMI is expensive,' he adds.

Not surprisingly, there is a demand for alternative and more affordable means of paying for PMI ' basically this alternative is taking the form of clients paying for themselves. While this may sound like a signal for the financial adviser to pack up their pencils and go home, for both the specialist PMI adviser and the more general IFA the changes in the PMI market present a real challenge.

Paying less for PMI has been possible by taking an excess option such as paying the first part of a claim, agreeing to certain hospital grades or locations, agreeing to NHS treatment within a certain time scale, usually six to 12 weeks, or paring down cover, for example, outpatient treatment. However, an increasing number of individuals are rejecting the insurance route altogether and paying for their medical care themselves.

Standing out

According to Peter Fuermoy, communications manager for the Independent Healthcare Association, there has been a 100% growth in the self-pay market in the last four years. 'Four years ago 100,000 people paid for their own medical treatment. In 2000, this increased to 200,000.'

Given that, according to WPA, 90% of the operations it pays for cost less than £7,000, this would mean a client with £7,000 to invest would have a nine in 10 chance of needing an insurance company to pick up the excess. However, Standard Life Healthcare has paid out £250,000 on one cancer treatment. It is this catastrophe cover that PMI really stands for in the self-pay market.

Product providers have begun to respond to this trend of self cover by providing what is an extension of the excess option, thereby providing individuals with a more palatable means of taking out PMI. This allows them the flexibility to pay what they can if they can, but also provides a safety net if meeting medical costs is a problem.

WPA and Standard Life Healthcare, offer self-pay options with their respective Self-Pay Protect and Choices plans. According to WPA, aside from the element of self-pay, the premiums it levies are lower due to the flexibility self-pay offers in terms of negotiating the best price for treatment. Standard Life Healthcare's treatment information service will help clients negotiate a competitive price if no fixed 'package price' is available.

Depending on the cash they have available clients can choose to meet up to £5,000 of their medical treatment under Standard Life Healthcare or up to 60% under WPA.

Hainsworth believes clients should opt for the maximum excess they can afford. 'We have had clients who will not pay £120 per month for traditional PMI, but they are prepared to pay £60 for one of these £5,000 excess plans.'

To put the costs into perspective, the typical insured cost of a cardiac by-pass is between £10,805 and £13,207, according to statistics from WPA. Under a self-pay plan the cost would be £11,500. If a client opted to meet 25% of the cost of treatment themselves, WPA would reimburse them for £8,625 of the treatment bill. The client would have paid £2,875 for their treatment.

Taking the WPA example, if the client had opted to meet 50% of the cost themselves, WPA would reimburse them for £5,750 of the treatment bill, leaving the client to pay the remaining £5,750. For a 50-year-old client the premium they would pay would fall from £199 per month to £61.69 per month if they selected to meet more of the cost of cover.

Something to bear in mind is that under WPA the client must make the initial outlay for treatment before WPA will reimburse them, while Standard Life Healthcare will pay the hospital bill excess. Your client will therefore need to meet the whole cost of treatment for some time. Depending on your client's attitude to risk, the more cash they have available the higher the excess they should opt for.

Investment opportunities

The available cash aspect of the self-pay option brings us to another key opportunity for the adviser to offer advice and increase business from the PMI market. The self-pay option assumes either a lump sum of expendable cash, or a commitment to save for the PMI contingency fund. Whichever way, the added attraction of the self-pay market for IFAs is the opportunity it gives them to offer investment advice to clients.

'There are lots of specialist PMI advisers not looking at the bigger picture for clients,' says John Hainsworth, a London-based IFA. 'But for those looking across the board these are exciting products. If you are an IFA advising on investment across the board you can build self-pay into the financial portfolio of your client.'

Hainsworth says it is not unusual for a client to approach him with a lump sum in the region of £100,000 to invest.

'We would always advise a client to set up an emergency fund, for example, to put £5-£10,000 in an instant access fund. This emergency fund could be viewed as cash to self-pay private medical treatment if they need it.'

Hainsworth is the first to admit that from the advisers point of view, self-pay products are unlikely, on their own, to produce much in the way of commission.

'The commission is next to nothing on the PMI product in isolation,' he explains. 'Where the business is viable for the adviser is in going across the board in giving advice. Say, for example, you had a client with a lump sum to invest who also wanted PMI. If you advise them to set aside 5% into an emergency fund, you would then get commission on the other 95% of their investment. If someone comes in with £100,000 to invest we would receive 3% of that which would cover the cost of the exercise.'

Hainsworth also explains how other products dovetail in with self-pay products. 'The client could invest their £5,000 in an investment bond which would produce income sufficient to pay the premiums for PMI.'

Individuals who want to reduce their PMI premiums but need to build up an emergency fund need not ignore the self-pay option. 'Most people select an excess of £1,000-£2,000,' says McMillan. 'These are the cautious ' they are dipping their toe into the PMI pool, in some cases giving themselves time to build up a health fund to enable them to increase their excess.'

Standard Life Healthcare claims its self-pay premiums are 80% lower than comparable policies with no excess. Assuming this percentage, if your client is paying £1,000 pa in PMI premiums, opting for the self-pay option would save them £800 in premiums ' cash they could make work for them.

Cutting costs

Some clients will always want the security of a traditional PMI plan. But there are still ways to cut costs.

'Your client needs to ask themself if they need outpatient treatment, or could they cover, for example, a £70 consultation fee and £200 worth of tests,' says Hainsworth. A lot of claims go on outpatient treatment that never lead to inpatient treatment. If self-pay is not for you, maybe traditional PMI only covering inpatient treatment is the way to get premiums down.'

Another option for those who are about to retire is to find a policy which will offer fixed price cover. BUPA's Heartbeat plan, for example, lasts five to 10 years, so the client has the security of knowing that the premiums will not increase year on year.

The self-pay option is to be welcomed for the flexibility it offers to individuals who want PMI cover, but at a lower cost and want their cash to work for them and not disappear on insurance premiums.

Self-pay may also be the saving of the PMI market as a way for traditional PMI companies to open up a new category of clients, either those who have never wanted to pay up for PMI or those reluctant to continue. And for financial advisers, in the 1% world of stakeholder pensions, self-pay offers the opportunity to build or increase their PMI business as part of their clients' over all financial investment portfolio.