On a shoestring

If there is one element acting as a brake on the individual private medical insurance (PMI) sector it is price. The most up-to-date figures on the sector come from analyst Laing & Buisson. Its UK Market Sector Report 2002 states that while there was no cost inflation for company PMI in 2001, individuals with PMI were subject to a real terms price increase of 7.2%. This has led to penetration of individual PMI dropping to 3.4% of the population, the lowest figure since 1984.

Many of those who used to have individual PMI, or who have just left a company that had a scheme in place, may still wish to use private healthcare, but no longer feel PMI premiums give value.

Laing & Buisson has therefore noted a large increase in self-pay since 1997, stimulating the private hospital sector into actively marketing care direct to patients.

Pay your way

Between 1998 and 2000 BUPA saw a 30% rise in self-pay, and more recently BMI Healthcare reported a 13% increase in self-pay customers between May 2001 and May 2002.

Insurers are in broad agreement that self-pay is not necessarily a poor idea, and should not be dismissed out of hand.

Charlie MacEwan, head of communications at Western Provident Association (WPA), says: 'If, as a 21-year-old, you were to set up a bank account for your health fund, then statistically you are likely only to need the money in your 40s, and there would be a nice pot. The problem is that people do not think about these things until they reach their mid-30s, which is where medical insurance comes in. If you are sensible and think long term, then it is possible to self-fund cheaply. After all, what insurers do, in simple terms, is assess risk, do a bit of administration and charge a premium.'

Neil Armitage, group marketing director at Exeter Friendly Society and self-pay medical services sourcer for Go Private, agrees: 'Self-pay can work out cheaper in the long run, depending on how much treatment you need and keeping the capital available. If you look at the costs of someone being insured for 20 years, then it normally works out cheaper to self-pay. But it is all about risk and peace of mind, which is why people insure.'

There is a niche for insurers to utilise their experience of purchasing healthcare. The problem of searching for services from an individual's perspective is that it can be quite a complex process and without experience it is unlikely people would get best value.

Armitage says: 'It is not hard to research the market, but people tend to have an emotional dimension. When you need to source healthcare you are generally not feeling that well. Do you want to negotiate with a surgeon who is about to cut you open? How can a member of the public tell if any quote given is value or not?'

It is likely that self-pay is a viable option for those with the capital, but it must be considered with eyes wide open.

Self-pay may not remain cheaper and you should ensure adequate reserves are in place to cover future illness. People needing a hip operation, for example, have to be aware it is realistic to expect it to be re-done in 10 years and they should keep funds ready for this eventuality.

Self-pay is a growing sector because PMI is too expensive. Therefore, as prices grow there will be even less buyers. As more people self-pay, it is the job of insurers to make PMI more affordable.

Sharing responsibility

The majority of market providers offer a choice of budget schemes and schemes with an excess. One company wandering from this path is WPA. Its Flexible Health plan is a traditional menu-driven PMI but with the option of shared responsibility ' where the customer pays 25% of any costs up to a set annual maximum, reaping lower premiums in return. This plan has benefits in keeping the costs involved with individual claims down.

MacEwan explains: 'People demand more when they are insured than they would normally expect if they were self-paying. This results in medical inflation being ahead of the retail price index and the only way to control it is to link the patient to the cost of the treatment. Shared responsibility dramatically reduces claims, as the client is not only asking about the quality of the treatment but how much it will cost. This concept has been a huge success, with over 50% of people taking out the plan opting to take up the shared responsibility option.'

However, high excess policies are proving to have limited market appeal. AXA PPP healthcare has a policy, Healthy Outlook, with a £5,000 lifetime excess, intended to develop loyalty. After the customer has paid £5,000, AXA pays 100% of the costs. But it has not been plain sailing.

Nye Jones, distribution development manager at AXA PPP healthcare, says: 'What we have found through experience is sales of high excess policies can be disappointing. People like the concept, but there are high-spec budget products at comparable prices. For example, we have launched a budget plan, Assure, which is comparable in costs to an excess product. People are willing to take on about £1,000 worth of excess, but any more and they start backing off. For some it defeats the object of insuring in the first place. This is why we are focusing on budget private medical insurance.'

Andy Sampson, head of planning and resource at Legal & General, says the provider's experience is similar.

He says: 'There is definitely greater acceptance of high excess policies nowadays, and we are writing more business. However, the public still sees £500 as a high excess, let alone £1,500 or £3,000. I would lean towards a budget scheme as a form of catastrophe cover. Private medical insurance is still bought for peace of mind and quality.'

The fitter and healthier you are the more reasonable it is to take an excess. There are some fairly substantial premium reductions via this route, but the client is taking on more risk. However, at the end of the day, the NHS is free at point of need for everyone, so treatment not covered by budget plans is covered automatically by the NHS. To prevent problems at the claims stage though it is important clients taking out budget schemes are appraised on what they are and are not covered for.

Where insurers differ slightly is in the direction they believe the individual PMI market is to go in the future. Armitage sees the public taking on a greater element of risk.

He says: 'At the moment, the insurance companies tend to take all the risk and individuals are paying the premiums, but as we move forward we are likely to see more in the way of shared risk products coming onto the market.'

Keeping costs down

Jones points to more accurate pricing as a means of keeping costs to a minimum. 'AXA has moved to much sharper pricing, becoming more aggressive in distinguishing the regions. We now price at postcode level to more accurately reflect the costs of treatment around the country. We see more accurate pricing as the only way towards sustainability in the future. We also have to ask if continuing to price by exclusion rather than inclusion is the way forward. We would argue not,' says Jones.

Product innovation is likely to continue, as current products have, in the main, been around for about 30 years.

Sampson says: 'We are noticing that people are saying, 'I want that bit, but not that.' We need to offer more choice and perhaps greater marriage with the NHS as well, taking away from the NHS the parts which cause it problems and leaving the parts that it does well, such as heart attacks and terminal conditions.'

There is no doubt partnership products are something the industry may look at more closely. However, if the experience of excess policies is anything to go by, it is important that, whatever the plan, the public understands and agrees with the concepts of any new schemes.