Private Medical Insurance in the UK

I’ve recently been in the market for private health insurance or private medical insurance (PMI) as it’s called here. While I was undertaking my own market comparison, I thought I’d take a peek at the broader business performance of UK PMIs given that the risk rated, predominantly employer funded UK PMI market is somewhat foreign to me, having come from the community rated, largely B2C Australian market. Here’s what I found.

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Notably, the UK has very low rates of PMI penetration relative to markets such as Australia, Ireland, and the US. It’s still sub-20% penetration despite the recent boon in demand from a terrified public consciously uncoupling from the NHS. Unlike other countries, the UK PMIs have been spectacularly unsuccessful in lobbying government to implement legislative carrots and sticks to ‘entice’ the more affluent population into PMI. The UK also has high rates of self-pay for private treatment, which is a sign that a significant segment of the population favour self-insurance over purchase of PMI. This is not altogether surprising given that in UK healthcare, unlike other types of insurance, if there is a catastrophic event, then you’re likely to end up in an NHS hospital in any case. Nonetheless, neither of these data points are indicative of a market that sees enormous value in the PMI product, notwithstanding the disappearance of the NHS round the metaphorical u-bend.

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The crudest measure of value in PMI is the loss or payout ratio. Whilst this very term may induce you to instant coma, it does measure what proportion of premium income that a PMI receives from its customers is spent on hospitals, doctors, medical devices etc. ?In Australia, the loss ratio for most private health insurers sits between 85-90%. The insurers spend about 8-12% of their premium income on administration and selling costs. Some, like Bupa Australia and Medibank Private are for profit and make profit margins usually in the 5-7% range, while others are not for profit. In the US, the government mandates a minimum loss ratio of 85% for most health funds. If the fund has a loss ratio below 85%, they are required to rebate premiums to customers. This ensures a minimum value threshold for the product, assuming of course that the health fund is competent at negotiating efficient rates from hospitals, doctors, and pharmaceutical benefits managers. ??

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In the UK, the historic average loss ratio for PMIs has sat around 65%, substantially lower than any comparable OECD market. Less than two thirds of every premium dollar received is paid out for care. If the UK average loss ratio was say 85%, in line with other markets, then an additional ￡1 billion would be spent by PMIs on treatment (assuming ￡6 billion in annual premium income for the industry in aggregate). To put that into perspective, this would fund an additional 70-80,000 joint arthroplasties, or more than 300,000 cataract surgeries, or more than 10 million GP appointments. Alternatively, the PMIs could simply lower their premiums materially and maintain existing margins (this would attract more of the self-payors to PMI and boost margins in the longer-term).

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Given the ridiculously low loss ratios in the UK, you’d assume that the UK PMIs would be running their businesses from yachts anchored off the coast of Capri. Sadly, for those owning and working for UK PMIs, this is not the case. In fact, profit margins for UK PMIs are relatively skinny and they’re currently in the midst of hiking premiums significantly to pay for rapid growth in claims (more on this later). The question is, where’s all the money gone? The simple answer is on administration and selling costs, which in the UK have historically been at or above 25% of premium income (the Management Expense Ratio). Each requires some attention.

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To sell their products, the UK PMIs are beholden to an army of brokers and middlemen that work with employers. Commissions paid to these intermediaries, both upfront and trail, are significant yet I struggle to believe that any real value is being added when the products on offer from the various PMIs are so homogenous (also more on that below). If instead, employers offered their employees choice of PMI via an online exchange I’d bet my house that 1) the employee would be happier; and 2) premiums would come down over time.

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The UK PMI market is inefficient from an administration perspective. Not only is the preauthorisation process royally painful for all concerned, but the claims processing system is mired in the dark ages. It’s somewhat inconceivable that Bupa UK isn’t looking at its larger and more profitable cousin down under and wondering why they’re able to process nearly 100% of hospital and medical claims and over 90% of allied health claims electronically with rich, consistent, and comprehensive data sets, while the UK business is miles off the pace. The unnecessarily and inordinately expensive administration process in the UK detracts directly from the value of the product for customers.

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The lack of sophisticated coding and data is also a major business impediment. For example, even the DRG coding system has yet to surface in the UK private healthcare system. At this rate, it will be another century before value-based purchasing emerges. In this regard, the UK PMIs have relatively low leverage over the private hospitals as the volume of public patients that many receive from the NHS reduces their reliance on PMI funded business. Major enhancement of coding and data, a prerequisite to a sophisticated private healthcare system, will take a grand bargain between payors and providers yet its difficult to see where the leadership or incentives will emerge from currently.

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In order to mitigate the claims growth and margin dilution conundrum, we’re likely to see commensurate growth in the use of preferred provider networks, where specialists and even hospitals will take a bath on their fees in exchange for volume being steered their way by the PMIs. This is bread and butter for the US health funds. Steering is feasible via marketing to members by the PMIs and by the carrot of lower premiums for selecting the product with the narrower network. ?The issue here in the UK is that the paucity of granular data makes preferred provider network construction challenging. As we well know, unless there is adjustment for acuity (already embedded in the DRG coding system), it is complex and potentially misleading to compare cost, outcomes, and experience metrics of providers. Expect some major arm-wrestling between the PMIs and providers on this. ?

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As sure as night follows night (at least for 6 months of the year in the UK), customers will eventually demand more value from their PMI and we’re seeing this now with a material spike in private healthcare utilisation. In some respects, this will be a net positive for UK PMI as the higher utilisation inevitably leads to lower customer lapse, but this will only be realised if premium increases are manageable for consumers. The current round of above-trend price hikes demonstrates that the PMIs need to reduce their administration and selling costs to fund the growth in loss ratio.

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Some of the recent spike in claims is likely due to post-Covid catch-up, both in terms of volume and acuity, but some of it is ‘self-inflicted’. PMIs are absolute masters at replicating the tactics and strategies of their competitors, to the point where their value propositions are largely indistinguishable. So, for example, as one offers a ‘free’ private video GP service to customers to capitalise on declining NHS GP access, then all have followed suit. The only issue here is that a much greater proportion of the member base now starts the care pathway via a private GP which leads to a higher volume of consults with a private specialist, and, inevitably, higher volumes of members admitted to private hospitals.

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There are other levers that the UK PMIs could potentially pull to improve their position, especially with regard to their product architecture. In risk rated PMI systems such as the UK, there tends to be a uniform product with pricing varied by the age/risk of the customer and breadth of the provider network. If you want London hospitals, pay more. If you want a broad doctor network, pay more. In a community rated system such as Australia, there is uniform pricing (everyone pays the same for the same product regardless of age or risk) and variability by product. You want cover for joint arthroplasty, interventional cardiology, and inpatient psychiatry, then pay more. Between these two contrasting systems, there must be an opportunity for UK PMIs to introduce a stripped-down, no frills product to attract more people to PMI, especially those in the self-pay market, and especially via B2C channels. At the moment, however, the only thing on offer is three variations of vanilla.

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As long as the NHS remains on life-support, I don’t expect that the catalyst for change in UK PMI will be sufficiently strong. Inevitably, however, there will be a reckoning at some point. In Australia, where government is almost solvent, there was a decade of public hospital capacity building where the quality of the new public facilities competed favourably with the privates. This led, in part, to a progressive multi-year decline in PMI penetration in Australia, until Covid hit in 2020. Whilst this is unlikely to be replicated in the UK in my lifetime, an analogous scenario could occur if there is reduction in NHS wait times through greater utilisation of assets (who knew that hospitals could run on evenings and weekends?), a rapid acceleration of NHS ambulatory surgery, or indeed, as the prospective Labour government is signalling, greater outsourcing to private hospitals. The impact on PMIs, especially if the latter occurs, could be problematic. Why pay for PMI when the patients in the adjacent private hospital rooms are NHS patients? Further, any softening of the economy and labour market may lead to employers reconsidering the value of PMI as an employee attraction and retention tool.

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In any scenario, the UK PMIs should be doing the work now to remedy the deficiencies in their administration and selling cost base, in their industry data, and in their product architecture. If they fail to act now, while the sun is shining, the issues will be manifestly worse when winter inevitably arrives.