100th issue supplement – Healthcare benefits 1998-2005

Edmund Tirbutt attributes stagnant company healthcare benefits to an unattractive tax regime coupled with a boost in government investment in the NHS. One deviation from that trend is the popularity of healthcare options offered through flex

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While it would be nice to report that in the eight years since the launch of Employee Benefits magazine the group risk and healthcare market has experienced a revolution, nothing could be further from the truth.

Demand for healthcare products has been wholly unspectacular, as has innovation from providers. A highly penal tax regime certainly has not helped the cause, with Insurance Premium Tax (IPT) being raised twice during the period, and employers’ national insurance (NI) contributions being extended to benefits-in-kind in April 2000.

Providers have also had to contend with the introduction of two new regulatory regimes for general insurance – the General Insurance Standards Council (GISC) in July 2000 and the Financial Services Authority (FSA) in 2005.

John Dean, sales and distribution director at HSA, says: "Overall the healthcare market hasn’t really changed, there has been no real increase in competition or in ideas within the sector and there is still far more talk about consumer benefits than action. FSA regulation is a big issue in terms of cost but the biggest dynamic is around tax.’

"A premium of £1,000 can cost the employer £50 in IPT and £128 in NI and can result in a £400 P11D (benefit-in-kind) liability to higher rate tax employees, generating tax equivalent to over 57% of the benefit," adds Dean. "There is no tax incentive at all to provide healthcare benefits, so it is not surprising that the market cannot go forward."

In addition to ensuring that no tax breaks are available for private healthcare provision, over the last eight years the Labour government has overseen a considerable increase in expenditure on the NHS, from £32.9 billion in 1996/7 to £76.3 billion in the current financial year. This has led to at least some improvement in waiting times and therefore arguably a reduction in the need for private medical insurance.

In March 1997, the total NHS waiting list for inpatient treatment was 1,158,004 and the number of people waiting over six months was 283,866. By February 2005 the figures had reduced to 845,200 and 60,400 respectively.

In some respects, therefore, the fact that the numbers covered by group private medical insurance (PMI) actually rose at all during the period can be heralded as a minor success. According to independent analyst Laing & Buisson, 4.28 million employees were covered by company-paid schemes in 1997 compared to 4.68 million in 2003. The numbers covered by non-insured schemes run by third party administrators increased from 330,000 in 1997 to 880,000 in 2003.

These increases are in marked contrast to a substantial decrease in the numbers covered in the individual PMI market, but they were achieved during a period of sound economic growth and low unemployment, which is ideal for the group market.

In the large group PMI market no insurers have seriously threatened the stranglehold enjoyed by Bupa and Axa PPP Healthcare, but at least these two insurers have been notable for helping to curb costs by condensing business into small hospital networks and trading volume for price. In 1997, Axa PPP Healthcare used to provide private treatment via around 1,000 NHS and private hospitals but now it uses only around 300.

However, this has still not prevented PMI premiums from rising by around 10% a year during the period because medical advances are continually resulting in ever newer and more costly methods of treatment.

Another significant trend in the large group private medical insurance market has been an increasing interest in setting up healthcare trusts to shield members of non-insured schemes from incurring P11D liabilities at the claims stage and to avoid IPT.

The group healthcare cash plan field, which had previously been dominated by specialist mutual organisations, can at least boast a significant increase in players during the last eight years as most major medical insurers have got involved. But both the group income protection and group critical illness cover markets, although enjoying growth in scheme member numbers (see table below), have actually contracted in terms of provider numbers. Neither currently has more than half a dozen serious players.

The critical illness cover market, in particular, remains pitifully small and neglected in terms of product design, but at least income protection providers have not stood still.

During the last three years especially, income protection insurers have started to promote products with shorter payment periods of two, three or five years, and UnumProvident and Bupa now offer a version that pays a lump sum at the end. This new approach has been brought about primarily as a result of employers seeking new ways of dealing with ill health early retirement due to the closure of so many large defined benefit pension schemes.

Income protection insurers have also been placing a markedly increased focus on rehabilitation programmes to help claimants back to work, with particular emphasis on early intervention. Their activities, in this respect, have often become part of an integrated approach to absence management that spans a number of group risk products together with occupational health departments and employee assistance programmes (EAPS).

David Cross, partner at London-based employee benefits consultancy Watson Wyatt, says: "I can recall talking to businesses about sickness absence in the mid 90s and they were so blinkered in not understanding it as a real cost to the business and in not realising they could take action against it. It is important to understand this cost and to appreciate that the area is fraught with potential litigation. If an individual is off for a period of time, the processes you implement risk infringing areas such as data protection, disability discrimination and medical confidentiality." The growing problem of stress in the workplace – and the numerous tribunal cases relating to this – has been a primary driver of sickness absence management programmes and the growth in EAPs in particular. In Employee Benefits‘ own 2004 Healthcare Research Survey 65% of employers regarded EAPs as an effective tool for controlling sickness absence, compared with only 4% in its 2002 survey.

A further significant trend involving a range of different health insurance products has been a marked increase in the popularity of flexible benefits schemes. In 1997 these were largely paper based but technological developments have made them considerably more attractive, especially as NI contributions can be avoided via salary sacrifice.

Andy Dean, director of Towry Law Healthcare, says: "Flex has been the big plus of the last eight years. Companies like it because it can link the benefit spend on an annual basis to wage inflation and can help communicate the overall benefits package. New technology has demystified it and made it easier to administer."