Buck Bond Group
Healthcare: A benefit at a premium

Healthcare: A benefit at a premium

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Medical inflation is still rising

Prior to the pandemic, medical inflation had remained broadly stable, hovering at around 5 or 6% for several years.

This picture has now changed substantially. In March this year, we wrote about increasing medical inflation (at that stage running at circa 9%) and the impact it was having on scheme premiums. We also stated that this trend was, in our view, ongoing.

Six months later, and unfortunately our expectation has proved accurate: we are now looking at medical inflation well into double figures, with insurers currently quoting between 12% and 18%. Our independent view is that inflation is currently at the lower end of that bracket, but we could still see it continuing to grow.

Inflation isn’t the only problem…

In our article in March, we talked about early indications that capacity issues within the NHS are causing a significant increase in scheme utilisation (i.e. the number of members who are making a claim, and the number of claims each member is making). While at the time it was too early to analyse the data, we can now very clearly see this pronounced trend in increased scheme utilisation.

Five or so years ago, there would be a reasonable expectation that circa 20% of scheme members would make a claim. At the end of 2022, this had risen to circa 27%. Now, as we approach the end of 2023, providers are reporting the highest level of claims authorisations they’ve ever seen on a month-by-month basis.

Unlike a sporadic high-cost claimant, who can be factored out of claims experience, utilisation is a much more problematic dynamic. Once utilisation starts to increase, underwriters will have a tough time justifying why they believe utilisation will fall.

Of course, it is not solely the cost of actual claims that drives premiums. As the UK has seen a significant increase in general inflation, it is not surprising that insurers are looking to increase their administration charges to cope with increased running costs.

Capacity issues aren’t restricted to the NHS

With an unprecedented proportion of treatment running through the private system, there has been an inevitable impact on service. The higher level of claims flowing through insurers’ systems has also been compounded by recruitment challenges and increased sickness absence, as well as Cigna exiting the UK PMI market. This has resulted in most insurers taking on an unusually high number of new clients.

As a consequence, some insurers struggled to offer the level of service expected. Members have reported waiting on hold for hours as they try to get through to a claims administrator.

Even if a member has been lucky in being able to speak to a claims advisor quickly, they may well find that moving on to later stages now takes longer. Wait times to see a specialist or book in for surgery are increasing – though as you would expect, this is geography and specialism dependant.

What does all of this mean for our scheme?

The increase in utilisation, coupled with these much higher medical inflation levels and higher general inflation, is driving higher than usual rate increases. A year or so ago, a well-performing scheme on a large corporate contract could expect to receive anything from a held rate up to circa 8% rate increase.

It should now be considered that – for the time being at least – rate increases of between 10% and 18% could become the norm. It’s also important to note that this is even on good claiming schemes; we are seeing vastly higher increases being proposed by insurers in the event of claims exceeding funds.

How are companies reacting?

It would be easy to assume that all businesses would be looking to put cost containment measures in place, to minimise premium increases. However, this has not proved consistent across our corporate clients so far.

Crucially, healthcare is not an isolated benefit: among other areas, it impacts on absence costs, recruitment, productivity, employee wellbeing and DE&I agendas. Companies recognise this wider value, and don’t want to risk escalating costs or negative outcomes in other areas in order to save on upfront healthcare premiums.

In fact, over the past 12 months we have noted a marked movement towards increasing outpatient benefit from an annual limit of £1,000 to £1,500, and a small increase in the number applying a full refund basis. This is likely a reaction to employees struggling to access NHS treatment, and also demonstrates recognition that £1,000 of out-patient benefit will buy significantly less treatment than it did even just two years ago.

A cost containment mechanism which has seen an increase in utilisation, however, is in excess application. This is a means of reducing initial premium costs while leaving core benefits intact, and will only impact members when they come to make a claim. Therefore it can assist in mitigating the P11d impact on the healthy scheme members who will hopefully never need to use the scheme. It is also a relatively simple (though not usually welcome) aspect to communicate, given that most people are familiar with the concept of applied excesses, such as to their home or car insurance.

We have seen the proportion of members covered on a nil excess basis shrink by some 9% over the last 12 months. In addition to the introduction of new excesses, we are also seeing a significant shift to higher levels. While £100 is still the most common level, the proportion of members who have excesses exceeding £100 applied to their cover has increased by 9% over the last year.

What to do when it comes to renewal?

We need to be realistic about the fact that this is a challenging time for healthcare and benefits; budgets will need to need to stretch somewhat if the objective is to preserve current benefit limits. Here are some actions that organisations can take to optimise their health benefits spend:

  • We recommend that schemes be tested against the market regularly, in order to ensure that best possible rates are negotiated.That said, the market is currently not taking a significantly commercial view to pricing, due to the volatility of inflation, so there may be fewer competitive options on the table than you will have seen in prior years.
  • We would also suggest that now is a good time to step back and look at the benefits you offer, and asses whether any overlap could be removed to reduce costs.
  • Consider where marginal gains that could be made through more effective benefit design, which could contain spiralling costs without impacting core benefits too heavily. For example, assessing how easily members can access and utilise treatment, or perhaps mandating pathways.
  • As always, the best way to reduce claims costs is to have a population with healthy lifestyles, who hopefully won’t need to use the scheme. Therefore, a comprehensive, well communicated, and engaging wellbeing programme is a key long-term mitigating factor.

We all need to buckle up and expect a bumpy ride for a while to come. However, this is now all the more reason for organisations to implement the best practices which will stand them in good stead for the long term, with accessible, effective wellbeing and healthcare benefits in place.