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Insurance: Medical inflation and PMI – what employers need to know

Insurance: Medical inflation and PMI – what employers need to know

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Medical inflation is rising

We can all easily see, from the spiralling costs of our supermarket shops and energy bills, that inflation levels are higher than we have seen for many years.  Likewise, that upwards trend is also seen in medical inflation.

With medical inflation having been quoted at 5-6% over recent years, it is now being quoted at 9% and rising.

Of course, wider inflationary factors impact medical inflation, with fuel, materials, and energy price increases impacting bottom line costs for hospitals and clinics. But in addition to this, the research and development of new drugs and techniques has an impact over and above the underlying inflationary factors.

Scientific miracles

Illustrating the potential cost of new drugs, last month the BBC reported that the NHS has treated (apparently successfully, and almost miraculously) a young girl, Teddi, with the most expensive medicine ever prescribed in the UK. Teddi suffered from a genetic disease called metachromatic leukodystrophy (MLD), which means that a faulty gene doesn’t produce an essential enzyme – the result of which is the destruction of cells in the brain and nervous system.  The prognosis for MLD is frightening, with most children whose condition is discovered in infancy dying by age 5.

Teddi’s MLD was diagnosed when she was 10 months old, before the onset of symptoms, which allowed her to be treated with a therapy called Libmeldy – a treatment which extracts the patient’s own stem cells, inserts a working copy of the faulty gene, and then infuses the stem cells back into the patient. These new stem cells then start creating blood cells which contain the missing enzyme, hopefully providing a permanent cure for the MLD.

Libmeldy is a one-off treatment, rather than being an ongoing cost. However, that single cost is an eye-watering £2.875m (though NHS England has negotiated a confidential discount).  While the drug is relatively early in its lifecycle (meaning long-term outcomes and prognoses are not guaranteed), NICE, the UK body which assesses drug suitability for funding by the NHS, has stated that Libmeldy is one of the most clinically effective medicines it has ever appraised.

It is likely that the technology used to create Libmeldy for MLD treatment will also have significantly wider usages for other conditions, and research and development into this continues apace.

More people are turning to private provision

Compounding the impact of inflation on costs is an increase in the use of private medical services. This is due to capacity issues within the NHS.

While it is still early to be looking at data for this trend, insurers are telling us that they are seeing the numbers of claims rising.  There is a corresponding reduction in members opting for NHS cash benefit pay-outs over taking treatment privately – which is often an appealing option for members when they can access timely NHS treatment.

This turn towards private provision is particularly marked when looking at primary care. Digital private GP services are now virtually standard in the employee benefits market. Many insurance providers are offering them as a value-add benefit attached to private medical insurance, a group income protection scheme, or a health cash plan, to provide examples.

So what does this mean for private medical insurance?

What does inflation mean when it comes to the potential costs of catastrophically high individual claims, such as for Libmeldy and similar treatments?  Maybe not too much.

It was only a very few years ago that the private medical insurance (PMI) market was concerned about the development of CAR-T cell therapies, with a treatment cycle costing up to £400k. In response to this new treatment, many insurers chose to exclude this type of therapy as a default approach, or introduced a restricted list of “advanced therapies” which they would consider eligible under the terms and conditions of the policy.

We would not anticipate insurers rushing to include a staggeringly high-cost treatment such as Libmeldy within their approved “advanced therapies” listings, no matter how effective.  Standard scheme exclusions also often include congenital disorders, so any treatment for MLD would not be considered eligible.  Finally, MLD is thankfully a very rare disease, so the incidence of treatment of this nature would be low (as is currently the case with CAR-T therapy).

In terms of the increase in wider medical inflation, the impact on schemes, while perhaps not catastrophic, is going to be felt almost across the board.  We are seeing administration rates increase at higher percentages than previous years, as insurers and administrators respond to wider inflationary factors, and higher increases applying to claims funds.

We have also seen insurers start to reassess how they fund these “value-add” digital GP services, as usage has started to increase.  Where previously insurers have positioned their digital GP add-on as “free,” some are now suggesting that they will include the usage of the benefit in the overall claims experience, impacting the claims fund for subsequent renewals.

Where providers already separate out digital GP costs, we are seeing price increases of up to 30% for this benefit.  While still a relatively low cost per capita per annum, this is undeniably a significant percentage increase. Despite this, there is a strong argument for it still remaining good value for money, given the potential reduction in absence costs which provision of a digital GP service can support.

Increasing PMI premiums impact both the company providing the benefit and the member, who is paying a benefit in kind tax on their company paid premium, and also potentially funding the cost of cover for their dependants.

When premiums and rates rise, there is always the risk that those members in generally good health may opt out of the scheme to reduce their tax burden, leaving a smaller population who are more likely to use the scheme.  This means that claims could remain relativity static, whilst the membership has reduced, driving up the rates still further the following year.

Ok, so now what?

The ideal way to ensure the long-term sustainability of your private medical insurance provision is to have healthy members who don’t need to use the scheme.  While obviously not all of this is within our control, statistics tell us that up to 88% of the UK’s preventable disease burden is lifestyle related.

Through a robust and well-communicated wellbeing strategy, you can support your employees in maintaining a healthy lifestyle, with key areas of focus being physical activity, nutrition, alcohol use, and mental wellbeing.  Offering direct access pathways and health screenings can also ensure that members are accessing treatment as early (and therefore as cheaply and, more importantly, as effectively) as possible.

Of course, improvements in wellbeing take time to reap results and will vary between individuals. At the same time, while wellbeing support is a positive thing both personally and for your organisation overall, it isn’t the solution to everything. In the meantime, you should ensure that your scheme has appropriate risk limiting factors in place – whether this be through benefit design (e.g. restricted advanced therapies), or through ensuring that the funding mechanism you are on is fit for purpose and cost-effective.

Inflation, including medical inflation, has placed more pressure on private medical insurers, and is likely to result in higher costs for employers and PMI scheme members. There are actions that employers can take to mitigate these impacts. Where viable and appropriate, your scheme should also be regularly tested against the wider market. This enables you to ensure that you are accessing the most competitive terms available, and that you are still getting best value out of your benefit budget.