Health & Wellbeing: How to rein back private medical insurance costs

Private medical insurance is a highly-valued perk, but escalating costs are forcing employers to find ways to pare down their premiums, says Sally Hamilton

With the cost of a company-paid PMI policy averaging £768 per employee in 2008 – 7.7% higher than a year earlier, according to Laing & Buisson’s Health and Care cover – UK market report 2009 – advisers, brokers and providers report increased employer nervousness about PMI bills. Martyn Swann, senior healthcare adviser at consultancy Enrich Reward, says: “Every conversation with a client about PMI at the moment centres on how they can reduce their costs. It can be a case of either they cut £100,000 from the budget or lose two heads.”

Although a number of employers are talking about removing the perk and some smaller organisations are closing schemes, most are striving to maintain cover in some form because of its value as a recruitment, retention and absence management tool. “They do not want to sacrifice the benefit altogether,” says Swann.

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Chris Rofe, head of client relationships at Axa PPP Healthcare, adds: “Blunt tools such as increasing excesses, capping benefits and removing cancer from the cover have always been available, but employers that would never have contemplated these before are using them now.”

Tougher negotiations on premiums

Reducing benefits is one way to trim costs, but more subtle tactics can also bring savings while keeping the benefit intact, such as tougher negotiation on premiums or fees at renewal, or by switching insurer. Adrian Norris, managing director of health and productivity at Buck Consultants, says: “It is the softest rebroking market I have seen in my 20 years in the business. There is room to move on premiums as insurers tend to take a pessimistic view of likely claims.”

Some insurers are taking the initiative by introducing lower-cost plans. Axa PPP Healthcare, for example, reports more interest in a policy that covers only medical conditions that prevent employees carrying out their normal duties. This plan also costs less because it excludes dependants’ cover.

A common quick fix for premiums is to apply an excess, which shifts the cost from the employer to the employee. “A £100 excess per person per year typically reduces the premium by 7%,” says Norris.

Excesses easy to accept

This approach is also relatively easy for staff to accept. Steve Desborough, senior consultant at Watson Wyatt, says: “They are already used to paying excesses for other types of individual insurance, such as motor or travel.”

Similar in its effect is co-insurance, where the employee pays a proportion, such as 10% of each claim, up to a ceiling, beyond which the insurer foots the bill. Providers say this can save up to 15%. Claims costs are also controlled because staff act more responsibly when they have to dip into their own pocket.

Another way to push down premiums is to ask the insurer to underwrite scheme members, thereby excluding pre-existing medical conditions. “It is difficult to implement underwriting for existing members who are used to being covered for everything, so employers tend to do this for new members only,” says Desborough.

Less paperwork in underwriting

In some cases, insurers used to shy away from underwriting partly because of the paperwork involved. But Rachel Riley, managing director at WPA Protocol, says: “It is now possible to do it electronically, which makes it more appealing.”

Removing cover for cancer beyond initial diagnosis, although potentially unpopular with staff, is being used increasingly to cut PMI premiums. As a compromise, some employers cover treatment for a set period, for example, a year. Whatever the situation, insurers encourage employers to sweeten the pill with the message that the NHS is the best place for cancer treatment. Some insurers, such as WPA, provide alternative top-up plans, which can be used for cancer drugs. “Cancer claims are the most expensive, so taking it out [of the plan] saves money, but organisations can then put in top-ups for drugs not covered by the NHS,” says Riley.

Asking employees to use cheaper hospitals can also reduce premiums, and pre-arranged rates for treatments can be agreed between insurers and hospitals.

Self-insurance can be risky

Self-insurance also offers cost-cutting potential, but this can be risky and is not necessarily cheaper than buying a PMI policy, especially if claims end up exceeding predictions. Employers that self-insure can limit their risk by buying a stop-loss premium to cover themselves against sky-high claims. This is also used by larger organisations that set up corporate healthcare trusts. These in themselves can save money because they do not attract 5% insurance premium tax, and each can apply its own rules to contain claims, whether it be excesses, cost-sharing or excluding certain treatments.

Employers should check what fees and commission are charged. There is no legal obligation on advisers to reveal commissions, but they must tell customers who ask.

One fees-only broker says: “Customers can see what they are getting for their fee and negotiate from there. We hear of other brokers that take commission which might not be justified for the work they do.”

Typical commission rate

The typical PMI commission rate is 5% and brokers suggest fees should work out about the same. Most fees also include two or three meetings with the employer, as well as several reports on relevant industry issues. By reducing the number of meetings and reports they require, employers can trim the fee.

So employers that are battling with rising PMI costs do not need to suffer in silence. A number of cost-cutting options are available that can make it much less painful to continue offering the benefit to staff.

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Tips to reduce private medical insurance premiums

• Negotiate harder at renewal, including broker fees.
• Apply an excess (£100 per person can save 7%).
• Exclude expensive hospitals (save up to 15%).
• Exclude pre-existing medical conditions (save up to 40%).
• Smaller employers could switch from claims to an age-related scheme to avoid the impact of large individual claims on premiums.
• Remove benefit for family (save up to 40%).
• Exclude cancer (significant savings).
• Cap annual benefit by member or condition (save 20%).
• Cover essential treatments only (save up to 50%).
• Share claim costs with employee (save up to 15%).
• Switch from a PMI scheme to a corporate healthcare trust (save up to 20% plus).

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Case Study: Unipres

Sunderland-based Unipres, a supplier to the automotive industry, has provided private medical cover to all its employees since the firm was set up in the early 1990s. Over the years it has taken steps to control the escalating cost of offering the benefit to its 500 staff.

Graham Baines, director of finance and administration, says the first significant step was taken 10 years ago following big increases in PMI premiums, which prompted it to move to a corporate healthcare trust, administered by insurer WPA. “This gave us immediate savings, including not having to pay insurance premium tax, and also gave us more control over the scheme,” he says.

Unipres found that costs inevitably started to increase again, so four years ago it introduced a ‘shared responsibility’ element, with employees paying 10% of the cost of a claim up to a maximum of £100 a year and family members contributing 25%, up to a maximum of £250. Although excluding dependants altogether would have saved more money, Unipres is against doing so.

Cancer care

“We are family-oriented and it is a valued part of the employee package,” says Baines At the same time, the company removed cancer cover after the point of diagnosis. “The generally accepted view is that the best place for cancer care is the NHS,” Baines adds.

However, the scheme has the discretion to cover the cost of cancer drugs such as Herceptin if an employee cannot receive it on the NHS. More savings have been made by capping certain treatments, such as a £10,000 limit for psychological conditions.

Unipres says its bills have fallen as a result of all these initiatives. But the continuing pressure on corporate budgets has again focused attention on the scheme, and the company is now considering excluding pre-existing conditions for new members.

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