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Clients with pre-existing conditions may choose to pay for their own healthcare to avoid high PMI loadings and exclusions. Roger Hymas explains what advisers should know about the growing self-pay sector

Self-pay is probably almost as old as doctoring. You can be sure that as soon as word got around about Hippocrates and his invention called medicine, then well-to-do ancient Greeks were ready to trade some of their wealth for a wonder cure.

Self-pay was the prevailing way of buying healthcare for the next 2,000 years until health insurance came along at the end of the 19th century. Sales of comprehensive private medical insurance (PMI) cover probably peaked around1996. The total number of individually purchased policies started falling and today well over half a million fewer people are covered than six years ago.

Many people have also downtraded to lower coverage products ' restricted hospital networks or increasingly higher excesses.

Probably only BUPA and AXA PPP healthcare know the real impact of downtrading, so the inflation rates provided by Laing and Buisson do not really reveal the true rate of PMI price increases over the past 10 years.

High costs

The real inflation rate for individually bought PMI is well into double figures and is likely to stay that way for the foreseeable future.

The escalating cost of cover is why 88% of the UK population do not have PMI. Over 80% have never had it and despite increasing misgivings about the NHS, most of the population cannot even comprehend having it.

So people are turning to other financial products for their health insurance cover ' and the simplest of all is, of course, cash.

According to recent figures published by the Independent Healthcare Association, the number of patients paying for treatment out of their own pockets has tripled since 1997. An estimated 300,000 patients paid for treatment in the private sector in 2002, a rise of 50,000 on the previous year. This number was less than 100,000 in 1997. Self-pay is now probably a billion pound market.

Healthcare funding tends to get re-invented every 50 years or so in the UK. The next big thing looks likely to be personal health funds ' derivations of products which around the world are called medical savings accounts. Medical savings accounts are now operating successfully in Singapore, South Africa and China and are on extended test in the United States.

The pioneers in the US were Golden Rule ' an insurance company based in Indianapolis ' who in the early 1990s was looking for a better way of insuring its own employees for health risks. As the harsh control system of managed care was beginning to bite, many patients increasingly began to feel that cost control was more important to the health insurer than the quality of care.

Golden Rule came to the conclusion that claims assessors were not the best people to make decisions about individuals' health care. They felt the best solution was for the employee to start making his or her own decisions.

In the UK, self-pay has been very ad hoc up to now. Frustrated by the NHS and unable to pay for health insurance cover, many consumers have just dug into their pockets.

There are probably now many thousands of people in the UK, who without them knowing it, are running their own informal medical savings accounts or personal health funds.

Some use just cash. But others have elected to take out high excess PMI accounts to cover the potentially catastrophic financial consequences of major surgery. They have taken the decision to settle all the lower costs themselves or fall back on the NHS. And each year they get to 'bank' what they have saved from not buying full cost PMI. As their 'virtual' medical savings account grows in value, they are also in a position to increase the level of their excess cover from time to time, further reducing the cost of their PMI premiums.

Building funds

The really disciplined will, of course, ring-fence their medical savings account deposits, locking the finance up in what to all intents and purposes is a medical savings strong box.

To become a mass market product, medical savings accounts need to be formalised within other financial services products.

And this might be the real opportunity for forward-looking financial institutions to grow the healthcare funding market. Banks, building societies and other financial institutions should look at the medical savings account as part of integrated lending and savings products. It could be a component of a flexible mortgage, an investment account or a credit card. For the elderly, equity release could become de facto PMI.

The last, but one of the most important components of a new approach to funding, is the service which connects the patient or their carer to appropriate, quality, value for money healthcare. Quite reasonably, health insurance has always created a huge sense of security for the holder ' that all their troubles are over because they are covered by PMI. But the reality is that what insurance does is only provide money to settle the bills.

Advisory services

Most of the time the search for the best consultant for a particular patient's condition is down to the individual, with or without the help of their GP. This is where the new generation of self-pay advisory services come to the fore. In the US, there are organisations that are providing advisory services to those who want to bring their funds from insurance or their own financial resources to search the most appropriate medical care.

Here in the UK the self-pay advisory organisations such as Go Private, Health Care Navigator or special units within AXA PPP healthcare or BUPA are all in the market to help.

To find the most appropriate solution consumers should turn to the advisory services which work exclusively on behalf of the patient to research the widest pool of consultants and hospitals.

Once appropriateness and quality are assured, the price of the procedure comes very much into play. There are substantial variations in prices ' even at a local level ' and customers would be well advised to shop around. Again, the self-pay advisory organisations can help the patient find the best arrangement.

It is likely that the health insurance market will slowly metamorphose into a health funding market over the next 10 years. Cash will become an even more important factor in private healthcare purchasing. The tipping point will come when a broader range of financial institutions realise the value of building a health funding capability into their existing savings and lending products to create a new value-adding facility for their customers. IFAs ' never active sellers of PMI ' will also recognise that an investment product with a health advisory component would be a much more appropriate purchase for many of their customers. And more rewarding for them, too.

Roger Hymas is chairman of Health Care Navigator Ltd and a non-executive director of Rubicon Health


Cover notes

• The number of people paying for their own healthcare has tripled since 1997.

• Advisory services exist in the UK to help clients search for the most appropriate medical care.

• There are no formal medical savings accounts in the UK, but IFAs can help clients choose the best investment product to build a health fund.

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