Rising demand for healthcare services should buoy demand for cash plans over the coming years. However, as Paul Robertson discovers, it is the onset of regulation that will be at the forefront of providers' minds
These are challenging times for the cash plan market. The recent announcement by the Treasury that the Financial Services Authority (FSA) is to regulate general insurance will include cash plans.
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 fixed percentage of the cost. As they do not indemnify people against the full cost of medical treatment they are considerably cheaper than private medical insurance (PMI). Traditionally the product has been marketed at the blue collar workforce but spiralling costs of PMI have meant that cash plans should now appeal to a wider audience.
This has led to healthy sales of cash plans over the last few years, but growth seems to have stalled. According to a UK market sector report 2001 by Laing & Buisson (L&B), the latest statistics on the market show cash plan penetration was 11.6% of the population at the end of December 2000. While this is a fall from 12.3% in 1999, the report's projections estimate this will recover to 12% in 2001.
Economist Phillip Blackburn, author of the report, says: 'The demand for health cash plans stalled in 2000 on the back of a gradual upward trend since 1997 and it appears providers are struggling to increase penetration. However, the foundations for growth in the market remain encouraging with scope for new business associated with a low cost product, particularly in the corporate sector.'
Traditionally cash plan providers have focused on direct sales. According to L&B only 3% of all cash plans were sold through IFAs in 2000. Sometimes this is because the provider does not think the product is suitable for IFA distribution, but also because of cost factors, however, there are signs that this is changing.
HSA Healthcare a market leader in terms of sales, is not so rigid. David Pullen, head of sales and business development at HSA, says: 'IFA sales are not a highly proactive feature of our business model at the moment, but should increasingly become so. The main thrust now is to structure arrangements with the main intermediary organisations.
'IFAs are a diverse and scattered group, operating in different ways, and tend to require a lot of management and information. IFAs are looking at commission rates and as a mutual we are not well positioned and as we do not pay renewal commission. This acts as a deterrent, but it is considered that it is not in the best interests of our contributors with our mutual status, as we would need to look at our rates.'
Legal & General Insurance (L&G) offers a renewal commission option on its plans, but there is still a trend towards the corporate side of the business, where an employer allows the provider access to the employee base, because the cost of distribution is a lot cheaper.
Widening the market
Andy Sampson, head of planning and research at L&G, says: 'Our product is initially positioned for the work site channel, but we are looking at broader markets. It is a product that IFAs, as opposed to medical insurance brokers, are wary of and only sell when they are asked by a client.
'It is odd because it is an easy product to get across to the consumer and has positive benefits because, regardless of what someone's political leanings are as far as the NHS is concerned, the product is worthwhile.'
This is one of the main selling points for cash plans. There are people who are never going to buy PMI for political reasons and cash plans are a good alternative as they do not distinguish between private and NHS medicine. As it stands it is PMI that is driven by the corporate market while cash plans are driven more by individual sales.
It is also worth noting that around 11.5% of the population, according to L&B, has PMI and an estimated 5% has both. This backs claims that cash plans are not 'poor man's PMI', but are separate products in the eyes of consumers.
Mike Gilbert, chief executive of Provincial Hospital Services Association (PHS), says: 'It is easy to see cash plans as a halfway house to PMI, but I prefer to see the two sectors as completely different. There is no doubt that PMI is a product that people want but at a price that they are not prepared to pay. There is no such cost pressure on cash plans because they only make a contribution to expenses, rather than a full refund. They do not have the same vulnerability to inflationary pressures.'
Regulation
The issue occupying the minds of the smaller providers is regulation. Regulation of general insurance is due to begin in 2004, and cash plans will be included. Providers are uncertain what the effect of increasing regulation in the industry will have on future growth, although providers already have to submit annual returns to the FSA.
At the moment, these only detail profit and loss accounts, revenue accounts and balance sheets. It is inevitable the critical mass needed by a cash plan provider to operate efficiently is going to increase.
Jamie Wilson, compliance manager of HSA Healthcare, says: 'Traditionally in the cash plan industry the majority are not-for-profit organisations that have been going for a long time. HSA, for example, is more than 80 years old. These companies tend to be very consumer based and not being large enough to have a compliance officer is an issue they are going to have to deal with. It is fair to say it is a sea change for the industry.'
There are many in the industry that feel that the advent of regulation will drive a further round of mergers.
Discrimination
Gilbert says: 'We regard regulation as the biggest single threat to our subscribers well being that we face, far more than marketing pressures. There is no doubt that the one-size-fits-all regulation actively discriminates against small companies like us. It is a strain on management time. If you do not have the critical mass to afford to set up a compliance bureaucracy, you find managers serving bureaucrats rather than customers.
'I am sure regulation has a major part to play in the amount of take-overs and consolidation in the market. If you look at mergers the factors tend to be that one or both are running out of money, or are feeling the pressure of the marketplace and regulation, squeezing management.'
It is reasonable to foresee a shakeout in the market over the next few years and there are already signs of this happening. Apart from two or three deals thought to be close to announcement within the market there have been several take-overs in the past year or so.
Overall demand for cash plans, according to L&B, is based on whether the current static growth is set to be a hiccup on an otherwise upward growth pattern, or whether current pricing and consumer preference have limited the penetration of the market to present levels. L&B estimate penetration levels will be at about 11.9% of the population until around 2004, but this estimate was released prior to the Treasury's announcement of product regulation.
There is scope for new business associated with what remains a low-cost product. And although companies such as Legal & General are focusing on sales through the corporate environment, there are signs that the industry will soon be paying more attention to the IFA channel.
Cash plan sales have the potential to grow as the importance of health to consumers increases. Rising demand for NHS and private health services, combined with higher charges, is expected to drive future growth in cash plan demand. The structure of the market may also have an effect. The entrance into the market of the large insurers ' Legal & General has been in the market less than two years ' will probably lead to an increase in penetration.
Paul Robertson is a staff writer
