No longer stigmatised as the poor man's private medical insurance (PMI), sales of healthcare cash pl...
No longer stigmatised as the poor man's private medical insurance (PMI), sales of healthcare cash plans have continued to grow over the last year. This trend looks set to continue in the future as an increasing number of people are finding PMI too expensive.
Cash plans provide cash benefits to contribute towards the costs of primary care, expenses associated with hospital treatment and aftercare. They do not cover the total cost of treatment, usually paying a set amount or a fixed percentage of the cost. As they do not indemnify people against the total cost of medical treatment, they are considerably cheaper than PMI. Traditionally, the product has been marketed at the blue-collar workforce but spiralling PMI costs has meant that cash plans now appeal to a wider audience.
The low premiums mean that it is an attractive product for those on lower incomes and for younger people who may not have bought health insurance before and are not convinced of the need for PMI. Andy Sampson, head of planning and research at Legal & General, says: "The cash plan market has definitely been growing over the last couple of years. It is an obvious product to put together for first-time buyers of insurance. PMI used to be the bastion of A, B, and C1's and cash plans were more for C2 and Ds but there are now breaks in these sociological barriers."
According to the UK market sector report 2000 by Laing & Buisson, the penetration of cash plans increased to 12.5% of the UK population by the end of 1999, up from 12.2% at the same time in 1998. And the proportion of existing contributors who allowed their cash plan policies to lapse in 1999 was half that of new business at 16%, which indicates a growing satisfaction with products.
However, providers are uncertain what effect the increasing level of regulation in the industry will have on future growth. Cash plan providers already have to submit annual returns to the Financial Services Authority (FSA) detailing profit and loss accounts, revenue accounts and balance sheets. The General Insurance Standards Council (GISC) now oversees the mechanisms for redress, the suitability of policies sold, and ensures that policyholders are fully informed about the price and extent of cover before they buy. But there are plans for further regulation this year, including the insurance ombudsman which will deal with arbitration, and further compliance demands from the GISC. Peter Green, chief executive of Bolton & District Hospital Saturday, says: "While, on the whole, regulation is good we must ensure that it is appropriate to the unique nature of traditional cash plan providers."
It is hoped that regulation will make providers more accountable and boost consumer confidence in the products. However, there are some concerns that regulation could have a negative effect on the competitiveness of the market and reaction to it has been mixed. David Ashdown, communications director at WPA, says that regulation could be a good opportunity for the market. He says: "The GISC has said that from 1 April it wants providers to be members. We believe it is a positive move and we have had a tremendous response. The timing is right, the public is now much more discerning and we have got to gain its confidence."
There are concerns about the financial implications of regulation for the smaller regional providers. If the providers fund arbitration costs then there could be situations in the future where the cost of mediation could actually be more than the initial claim because most cash plan claims are quite small. This would have more of an impact on the smaller providers because they do not have the level of financial resources that larger insurers have. Mike Gilbert, chief executive and company secretary of PHS, says: "The insurance ombudsman will be funded from case fees, which could cause a dilemma because the case fee may exceed the amount in dispute on occasions. The option is then whether to incur costs way beyond necessary or to pay claims that companies think are ineligible. The FSA has said that if the company is very small then they may be able to pay annual fees rather than case fees, but it does pose problems for those small companies."
Despite these fears it is anticipated that regulation will ensure higher service standards across the industry. Richard Sear, chief executive at Healthsure, says: "We do not want the smaller companies to be damaged but there needs to be tighter controls and they need to be properly managed. Cash plan providers were historically managed by the elderly or people working part time, but the FSA takes a dim view of this and it wants to see more consolidation. Ironically, providers will in effect be more competitive the fewer there are. In this market, the more intense the competition, the more benefits there are and the lower the running costs. The smaller companies will be scrabbling to catch up with the economies of scale."
It is inevitable that the critical mass needed for providers to operate efficiently is going to expand due to the increase in bureaucracy, but despite this, Green says that this will not be the beginning of the end for smaller providers. He says: "The role of the smaller, traditionally geographical providers of cash plans is still important. We believe that we are able to provide a personal service that distinguishes us from other providers."
Historically, cash plan providers have concentrated on supplying regional demand but as the number of distribution channels increase, there is a danger that the core consumer base of traditional providers may be eroded unless providers can adapt. But, the increased use of technology and the internet could help the smaller providers to compete and maintain their independence. Green says: "It will enable us to deliver the cash plan without the need for costly national sales teams, keep costs to a minimum and benefits to the max- imum which, as a not-for-profit provider, is the whole ethos of the organisation."
If the smaller providers can manage to survive the effects of regulation then the future for the market as a whole looks promising. Perhaps the main reason for this is that the demand for PMI is now quite static, and a high claims experience has meant that premiums have continued to rise whereas cash plans are seen as more reasonably priced. Ashdown says: "The PMI market has been declining rather than increasing in many ways, and it seems that cash plans are often much more affordable. The public sees that they have benefits that it will use, such as optical and dental care ."
Gilbert agrees: "PMI is quickly becoming a product that everyone wants, but not everyone can afford. Whereas cash plans are relatively inexpensive, price stable and universally acceptable."
As margins in the PMI market continue to be squeezed, the number of providers moving into the cash plan market has increased, and there has also been an increase in the development of new products that include more benefits over the last two years. Additional benefits now include infertility diagnosis from BUPA, fracture benefits from Bolton & District, and prescription benefits from the Health Shield Friendly Society. There is now also a number of telephone helplines, and other non-cash benefits available from some providers.
Presently, most cash plans are sold through direct sales. The Laing & Buisson report shows that only an estimated 2% of total sales in 1999 were through intermediaries. One of the main reasons for this is because it is a low cost product and the commission levels are not particularly attractive, but Table 3 in the survey shows that commission rates are increasing.
However, Sampson is confident that intermediaries will start to pick up on cash plans in the coming years, because it is a good product to introduce clients to the health insurance market. He says: "It is traditionally sold off-the-page but is a good product to discuss with clients. It is a good entry product, as it does not ask to commit much money and the benefits can be seen quite quickly. The market for cash plans remains fairly buoyant, but we would like to see more advisers selling it. It still gives an element of choice of private healthcare, but clients are not penalised if they use the NHS. With the introduction of stakeholder it is an obvious second-stage product, especially for blue-collar workers. It is a good way of getting into marketing products to groups."
Corporate demand for cash plans has been growing in recent years. The rising demand for employee benefits linked to the rising costs of PMI may actually fuel the move towards cash plans. Ashdown says: "I see opportunities in the corporate market. A lot of companies are saying that they cannot afford PMI. PMI has always been for senior middle management, but cash plans are very much appreciated by the workers. It is also going to be more popular with small businesses and the self-employed because it gives them an opportunity to have physiotherapy or similar therapies at a time that suits them. It is a good add on to PMI to cover the smaller things."
Increasing consumer awareness of the importance of health and the well-publicised pressures on the NHS mean that more people are realising they will have to make their own healthcare provision in the future. And although PMI is seen as the superior health cover product, rising PMI premiums mean that the relatively stable premium rates and an increasing range of benefits available from cash plans, makes them an attractive alternative.
