Premiums at a tipping point
Rising healthcare premiums could be pushing the group PMI market to a tipping point. Sam Barrett ponders the future
Concerns are growing in the medical insurance market that, as inflation pushes up the cost of cover, premiums are getting close to tipping point. This, some fear, could spell the end of the corporate medical insurance market.
“Medical inflation is unsustainable,” says Mike Izzard, managing director of Premier Choice Group. “Growing demand for new drugs and treatments coupled with inflated bills from some specialists as well as inefficiencies at some hospitals means premiums are rising sharply. It can’t go on.”
Competition among the insurers is adding to the problem. Debbie Kleiner-Gaines, managing director at Best Health UK, is concerned about some of the pricing being used to win business. As an example, by playing the incumbent insurer off against a competing insurer, she was recently able to reduce a renewal premium from £160,000 to £90,000. “We explained to the client that the premium would probably increase significantly the following year and there would be problems moving if there were any major claims but they were happy to make the saving,” she explains. “This can’t be the true price for this scheme.”
And, while consolidation in the market may put a dampener on this type of activity, other threats to the sustainability of group medical insurance are on the horizon. This year insurance premium tax (IPT) has already risen from 5 per cent to 6 per cent and many see this as a soft target for further increases. Some predict it could creep up to 8 or 9 per cent in the next few years.
Cutbacks in the NHS are also putting pressure on medical insurance. As NHS waiting lists increase and some minor treatments cease to be offered, medical insurance claims volumes will increase. As a result, premiums will also rise to reflect the increased claims costs.
Employers are also likely to feel the squeeze. From October 2012, auto-enrolment is introduced, requiring employers to enrol employees into a workplace pension and pay in at least 3 per cent of their salary. This may put pressure on some employers’ budgets and force them to rethink their employee benefit packages.
As costs rise, the sustainability of medical insurance will be under threat. “It’s the perfect storm,” says Izzard. “As premiums increase, employees will look at their P11d bills and, unless they’ve made any claims, will leave the scheme. This will leave behind those who do make claims and premiums will escalate further. It’s what’s happened in the individual market and this is often an indicator of how the group market will behave.”
While the tax recommendations, that are included in the Sickness Absence Review may offer some respite, their implementation is not certain.
While the warning signs are out there, action now could prevent these predictions from coming true. Charlie MacEwan, corporate communications director at WPA, says his company has spent the last few years helping its clients ensure cover remains affordable. “We’ve worked with clients to make sure they only have cover they use. For instance, if a company doesn’t use the travel insurance option on its plan, we’ll remove it,” he explains. “It’s about designing your premium.”
Certainly there are plenty of tweaks that can be made to stem premium increases. Excesses can drive through savings although this can often only be a short-term measure. Kleiner-Gaines isn’t a fan. “A £100 excess will only save an employer around 5 per cent on their premium but it can act to discourage employees from claiming. This is fine if the employer wants to reduce claims but many will question why they pay for healthcare and then discourage employees from using it,” she explains.
Co-payment can be more effective. This approach is championed by WPA with its Shared Responsibility option. With this the employee pays 25 per cent of the claim up to a set limit. This means that even if they make a small claim they’ll receive some benefit from the insurance.
It can also drive significant savings. For instance with a £150 shared responsibility limit, employers save 5 per cent on the premium; at £250 this is 10 per cent; rising to 50 per cent with a £5,000 limit.
Six week options are also available to control costs. Depending on the scheme benefits, employers can reduce their premiums by up to a third according to Paul Moulton, sales and client relationship director at Axa PPP Healthcare. But, this level of saving could be short-lived. With NHS waiting lists creeping up, six week plans may start to pick up the tab for more and more treatment.
Rather than add in these types of pricing mechanisms, Kleiner-Gaines prefers to introduce a cash plan to run alongside the medical insurance. This can then pick up some of the claims, for instance specialist consultations, MRI scans and physiotherapy, which would traditionally be made on the medical insurance. “Employees could use the cash plan for the initial consultation then move on to their medical insurance if they need treatment,” she explains. “It keeps claims down and, because some treatment is picked up on the cash plan you can reduce the benefits on the medical insurance. It does need to be communicated carefully though to ensure employees understand how to use the two benefits in tandem.”
Redesigning the benefits on a medical scheme can also reduce claims without necessarily restricting cover. John Russell-Smith, client director at Lorica Employee Benefits, says that introducing more NHS cash benefit can help to change behaviour. “If using the NHS doesn’t mean the employee will be off work for longer than if they went private, why not encourage them to have their treatment in the NHS?
Employees like this approach and it can greatly reduce the cost of claims that go through the medical insurance.”
This approach is also common at Healix Health Services. Its sales director, Richard Saunders, says that more and more trusts are using NHS cash benefit to change claims behaviour. “Why pay for private treatment when the NHS provides a good level of service in some areas?” he says. “By offering a cash benefit you’re not taking away the employee’s right to private treatment but you will drive down costs.”
As an example, he says some trusts uplift the NHS oncology cash benefit to encourage employees to opt for NHS treatment. Others offer employees a percentage, typically 25 per cent, of the amount saved by taking NHS treatment.
Some insurers are also moving to have tighter control over where treatment is delivered. Axa PPP Healthcare has its Corporate Health Plan Pathways, which was introduced in May 2010, and Bupa is rolling out its Open Referrals process to its Corporate Select customers in January 2012.
With both of these products, when an employee makes a claim, rather than their GP refer them to a named specialist, they obtain an open referral. The insurer then directs them to their preferred provider. “By offering this we’re not restricting the benefit, just where it’s delivered,” says Moulton. “Savings do vary but are typically between 5 per cent and 20 per cent.”
Trusts also remain a cost-saving option for larger employers. Although an employer would pay VAT on the administration service, they would save the IPT they would pay for an insured scheme.
Not all employers can move to trusts though and Saunders says a company would need to be paying claims in excess of £100,000 a year to benefit from a trust arrangement.
While there are several ways to manipulate costs, it could also be as simple as enforcing the rules of the scheme. Mike Blake, compliance director at PMI Health Group, says that some schemes can run up claims costs as a result of relaxed joining criteria. “Define who is eligible for cover and stick with it,” he explains. “You don’t want to allow people to join just so they can make a claim. Allowing this will simply push up the premium by creating selection against the employer and the insurer.”
In particular, enabling dependants to join a scheme can be a thorny issue. Although some employers like to extend cover, others prefer to view medical insurance as a means of keeping employees healthy and reducing absence. “It’s tricky,” admits Blake. “If you are going to allow them to join, you might want to insist they pay for themselves. But, if you do this, you might find you only attract those who are likely to claim and, unless you can keep their claims fund separate, this will also push the premium up.”
Communication is also essential, both to the employees and the employer. Russell-Smith says it’s important to remind employees that they need to use the plan prudently. “This, coupled with mechanisms such as NHS cash benefit and coinsurance, can really help to change claims behaviour. I’ve seen this have a significant impact,” he says.
Employer communications can also make a price rise easier to stomach. Blake explains: “Even if premiums do hit £1,000, it’s still a valuable benefit. If it reduces the time an employee is off work waiting for an operation, it will quickly pay for itself. This might only take a day or two for professionals such as solicitors or accountants but even for those on lower salaries, an extra week in the office rather than at home will cover their premium. It still brings real value.”