Medical insurance is facing something of a crisis. With medical costs and consumer expectation increasing, premiums are outstripping inflation and leaving employers facing tough decisions about providing cover.
The extent of the problem can be seen in the statistics. Although Laing & Buisson noted a slight uptick in company paid medical cover in 2011, up by 1.2 per cent, this followed falls of 3.3 per cent and 4.7 per cent in 2010 and 2009 respectively.
Part of the problem is down to the design of the product. On other forms of insurance it is easy for the policyholder to appreciate the value of their cover as a monetary amount is connected to every claim. But this isn’t the case with medical insurance. “The costs of treatment are really opaque,” says Mike Blake, compliance director at PMI Health Group. “The insurer will pay what’s customary and reasonable but even the serial claimers won’t understand how much this might be.”
Because of this disconnect between the person using the policy and the treatment costs, there is no incentive to shop around for better value. Without this incentive, treatment costs, and therefore claims costs, can creep upwards.
The other significant downside to this is that without an appreciation of the amount of money their cover has saved them, the employee does not necessarily value it.
Empowering the consumer
Consumer-directed healthcare, where the disconnect between the insured individual and the cost of treatment is removed, is being mooted as an answer to this conundrum. Rather than provide an employee with an insurance policy that takes care of the bulk of their healthcare costs, they are given a pot of money to take care of smaller and more routine bills with a high excess plan in the background in the event of any significant treatment expenses.
This approach is common in the US where individuals use health savings accounts to build up a pot of money, rolling anything they don’t spend forward to future years. To make it even more attractive the money earns tax-free interest, providing it is used for healthcare costs. As a result this form of healthcare is offered to around 10 per cent of employees in the US.
Dr Katie Tyron, head of clinical vitality at PruHealth, says it is an interesting concept but isn’t sure it would translate well to the UK. She explains. “There are definitely benefits to doing this but the US healthcare market is very different to the UK and it would be complicated to replicate it here.”
In particular she sees difficulties in accessing the necessary information to select a treatment provider. “The information just isn’t available,” she says. “You can get hold of mortality rates but these can be misleading, especially when some of the best surgeons tend to operate on the cases with a lower probability of a successful outcome.”
Consumer choice in action
But, while it may be difficult to go as far as the US, already there are several examples of products where consumers are given more of a say in how they spend their money. Westfield Health’s Hospital Treatment Insurance allows policyholders to access a range of non-urgent surgical and medical procedures, choosing whether to have the treatment in a private hospital or take a cash benefit if treatment is delivered through the NHS. The only financial constraints are a cap on the treatment cost (£10,000 on level 1, £25,000 on level 2 and subject to a maximum of three operations a year) and a lifetime limit (£100,000 and £250,000 respectively).
Freedom Health is another example of a medical insurer encouraging the policyholder to shop around for treatment. “You can decide whether to be treated on the NHS or privately, receiving a cash benefit if you go for the NHS or having the option to keep any surplus or top up if you decide to go private,” Tim Smithers, healthcare manager at Healthcare Partners explains.
The incentive to use the NHS can be quite chunky. For example, if someone receives a hip replacement on the NHS, they would receive a benefit of £5,516.50 from Freedom Health. In comparison, while other insurers do offer an incentive to take NHS treatment, this tends to trigger a daily payment of up to £300 a day.
Some of the cost control mechanisms also require employees to play a more proactive part in their healthcare choices. As an example Charlie MacEwan, corporate communications director at WPA, says that its shared responsibility mechanism makes employees more efficient consumers. “With shared responsibility, because the employee is contributing to the cost of their healthcare, they appreciate how much it costs and can shop around or negotiate if they like. This has benefits for both us and the employer,” he explains.
There are also instances where insurers are incentivising their customers to make health improvements, especially where these result in lower claims costs. A prime example of this is PruHealth with its Vitality programme and more recently the launch of its offer of cashback up to the value of 15 per cent of annual premium for smokers and non-smokers.
Cash plan choices
Cash plans also rely to an extent on the policyholder deciding how to spend their claims fund. Benefit limits do reduce the flexibility they have but, providing the treatment is covered they can chose where they receive treatment. For example they might decide to plump for an NHS dentist and have all their treatment costs covered rather than go for a more expensive private one and meet the potential shortfall themselves.
One provider, Engage Mutual, has taken the concept a step further on its cash plan, the One Fund. With this rather than impose benefit limits, employees can access a single pot of money, deciding themselves how they would like to spend it.
As an example, for £20 a month, they would have access to an annual claims fund of £1440. Then, once they’d paid an excess of £40, they could decide to use as much or as little of this claims fund on each of a standard range of cash plan benefits such as dental, consultations, counselling and therapies. Optical and health screening benefits are also included but these are restricted with a benefit cap of £300 a year on the £20 a month plan.
As well as giving choice over where money is spent, Smithers says the cash plan design could be developed further to become part of a consumer directed healthcare model. “We’re already seeing cash plans being used to mop up some of the claims that would normally go through the medical insurance plan,” he explains. “This helps to reduce claims costs and keep the medical insurance for the more expensive treatment. This more diluted form of medical insurance could form the back-up in consumer driven healthcare.”
Going all the way
Whether the UK medical insurance market is able to take the next step and move to the consumer directed healthcare model common in the US is uncertain.
Blake says that much hinges on the outcome of the Competition Commission’s investigation into the private healthcare market. This was launched in April 2012 and among the features the Office of Fair Trading highlighted for investigation was the lack of easily comparable information available to patients on treatment costs and quality. He adds: “If the Competition Commission makes it mandatory to disclose treatment costs then consumers will have a better idea of prices and be more likely to shop around. They would need some form of incentive to do this though, perhaps in the form of a financial reward, otherwise why wouldn’t they just shop around for the most expensive treatment covered by their policy?”
But, even with more transparency, consumers could still be thwarted in their attempts to access lower cost healthcare. Dr Tyron says that insurers are in a better position. “We’ve got the scale to access better deals but we can also negotiate with a consultant over the cost of planned treatment. It would be very difficult for an individual to do this so I think any choice should be a supported one,” she explains.
It may be possible to replace the insurer and its bargaining power with a treatment sourcing service such as Medical Care Direct. This identifies the choices available and then negotiates costs on its customer’s behalf.
But, even with this type of facility, not everyone is convinced a consumer directed model would translate well to the corporate market. While individuals may appreciate a financial incentive to shop around for treatment, there are usually other motivations behind an employer’s decision to purchase medical insurance. Smithers explains: “One of the reasons employers provide their staff with medical insurance is to help them access treatment quickly and return to work. They want them to be able to ring up a number and be sorted quickly. If they had to shop around for treatment this could slow the process down. Additionally what would an employer do if someone’s health fund was depleted at the point they needed treatment? It needs to be carefully constructed.”
But while there are clearly factors that will slow the take-up of consumer directed healthcare in the UK, the benefits that such an approach offers mean it’s something that insurers are likely to be mindful of during any product development discussions.