Private medical insurance in need of radical surgery

Private healthcare could cost UK businesses £1.1bn over the
next five years, but rather than stopping its provision, sensible planning by
employers can lead to lower costs and more effective insurance policies

Our research made headlines earlier this month by predicting that UK
businesses could face an additional £1.1bn bill for Private Medical Insurance
(PMI) over the next five years – a 70 per cent increase for employers.

HR budgets are under significant pressure in the current economic climate,
and a rise in PMI costs will be a difficult pill for most companies to swallow.

Just as final salary pension schemes have become a victim of spiralling
liabilities, there is a very real danger that PMI may go the same way.

Providing a company pension, car and PMI has become the norm. However, for
most companies, the latter has tended to remain a ‘perk’ benefit for senior

HR managers have always considered PMI to be a vital part of the employment
package and crucial to the recruitment and retention strategy. Finance
directors are also beginning to recognise the importance of getting people back
to work quickly and reducing sickness absence. But it is becoming a juggling
act for HR to provide attractive employment packages without committing
resources to unsustainable levels.

The cost of providing PMI has caused significant strain at one time or
another on the benefits budgets of almost every company. The problem is that
cost inflation for PMI plans has consistently outstripped both RPI and average
earnings. There has not been a time in my 15 years in the industry when medical
insurers’ actuaries and pricing departments have not factored in increases of
around 10 per cent for underlying risk costs.

The major contributor to PMI inflation is the steady increase of claims as
demand for medical services continues to grow. PMI providers’ response to this
has been the introduction of cost containment strategies – such as restricted
hospital networks, agreements with consultant specialists and using nurses to
provide managed care services.

These have placed some downward pressure on costs as have competitive
pressures in the market place.

But during the past five years, consolidation among insurers and a swing
from not-for-profit to commercial insurers, has reduced the opportunities for
cutting costs by switching providers.

HR clearly recognises the importance of PMI, but it is also very highly
valued by the individuals and families who are fortunate enough to have cover
provided by the employer. Anyone who has used their PMI to access private
treatment will appreciate the convenience and speed it offers compared with the
NHS alternative. But there is a price to pay.

If costs continue to escalate at historical levels while insurers can only
tinker at the margins of reducing them, the sustainability of providing the
benefit in its traditional form must be in question.

To avoid a knee-jerk response to rising costs, employers must consider
strategies for limiting their liability to future PMI risk costs. There are a
number of potential solutions, and HR directors need to sit down with senior
managers and thrash out what is best for their company and staff. Options may
involve employees playing a greater part in selecting and contributing to their
PMI benefit through flexible benefit arrangements, or even offering more
flexible choices within the PMI plan.

Others may involve more traditional methods of introducing excesses, and
changing insurers or funding methodologies to maximise reductions in cost and
taxation. Direct funding of ‘return-to-work’ programmes could be introduced,
and integrating occupational health assessment into the process of paying for
treatment could also be a cost and tax-effective method for some employers.

Whichever strategy is decided upon, the planning needs to be done now, so
that in five years time this benefit will still be available and affordable.

By Paul Ashcroft, Senior healthcare consultant,
Buck & Willis Healthcare           

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