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In Focus: Large corporate healthcare schemes
Employers that self-insure their medical expenses are well aware of the flexibility and cost savings that non-insured schemes enjoy. But with providers leaning towards more profitable insured arrangements and smaller intermediaries still reluctant to take the plunge, will the market ever move forward? Edmund Tirbutt reports
November 2008 Features
Some things never cease to amaze. Employers with large corporate private medical insurance (PMI) schemes – of above 1,000 members – continue to try just about every trick in the book to cut costs and extract the maximum possible value from their healthcare arrangements, yet most of them still overlook the opportunities presented by the seemingly biggest ‘no brainer’ of them all, namely by self-funding via a healthcare trust.
Such arrangements can avoid the need to cough up for either insurance premium tax (IPT) or an insurer’s margin and – more importantly – can provide total control over the nature of scheme benefits, even enabling chronic conditions to be covered, if required. Claims volatility should not be a problem if a scheme is of a certain size -which, depending on which expert you speak to, is normally somewhere between 1,000 and 2,000 members – and, in any case, it can always be safeguarded against by taking out stop-loss cover.
Furthermore, the potential downsides of trusts never seem to fill one with unmitigated dread. Some companies apparently do not like the idea of paying for legal advice about them while others are still preoccupied with that old chestnut of a possibility that the Treasury could close the tax loophole in the future (despite experts tending to stress that the tax advantage is not the main attraction). There is also a tenuous case now being made for being able to budget with absolute certainty during the economic downturn via the insured route – even though an experience-rated insured scheme effectively just defers increased claims cost for a year.
There no longer seem to be any spokespeople who even attempt to argue that large group schemes are likely to be better off being fully insured than self-funded via a trust, and most commentators waste little time in insisting that trusts are normally likely to win hands down.
Adrian Humphreys, managing director of corporate business at WPA Protocol, says: “Frankly you need your head examined if you are not in a corporate healthcare trust if you have over 2,000 employees. It’s crazy to look for insurance when there is a very low volatility of claims.
“We are finding schemes of 250 or less are joining pooled insured arrangements as they are seeing large claims coming through of £50,000 to £60,000 and, if premiums are only £12,000, they will rocket upwards. But on very large schemes of above 2,000 claims, volatility evens out by the law of averages.”
One hundred per cent of employers with schemes larger than 2,000 that ask WPA to quote request quotes on a trust – although around 10% ask for quotes on insured terms as well. But this situation is more a reflection of the fact that WPA itself is primarily focused on trust business in the large group market.
With the major two large group players, however, the situation is very different. Bupa estimates that 20% to 30% of its large group business is written via trusts, while AXA PPP healthcare estimates its corresponding proportion to be somewhere between 30% and 40%.
CIGNA HealthCare, the third largest player in the large group PMI market, is unusual in reporting that over half its large schemes are self-managed (although not all are actually in trusts). But some fringe large group players volunteer only miniscule involvements. For example, Norwich Union Healthcare still has less than 5% of its large corporate book in trusts and PruHealth, which only introduced a trust arrangement two years ago, has so far had the facility taken up by two employers with around 1,000 scheme members each.
While the specialist third party administrators (TPAs) do not do any insured business, their share of the large group PMI market as a whole is still extremely small. Mesidure and Remedi, which are both now part of BCWA Administration Services (a non-Financial Services Authority regulated division that is completely separate from BCWA’s PMI business), have only 110,000 scheme members between them. Healix Health Services has only 50,000 members and Revelation Healthcare has so far only done business in the medium-sized and small markets (see box on page 26).
Research by independent analyst Laing & Buisson confirms that there is currently no great impetus in the direction of trusts. Its Health & Care Cover UK Market Report 2008 reports that while self-insured schemes administered by TPAs and insurers experienced strong demand in the opening years of the 21st Century – with trust schemes rising by 85% since 1999 – the period between 2005 and 2007 has seen only marginal growth.
Although the major insurers claim to promote trusts – they argue that they benefit from the fact that they free up capital for them to use elsewhere – one is always left with the feeling that they are more intent on selling inured business on the grounds that it is more profitable. It might therefore require IPT to rise substantially above its current rate of 5% if trusts are ever going to account for the majority of large group schemes.
With government borrowing now beginning to spiral embarrassingly out of control, who would bet against such a tax increase? But, by the same token, if a rise in IPT created a flood of trust business then it could possibly backfire by at last providing the Chancellor with a genuine incentive to close the tax loophole for trusts – which to-date has clearly never appeared significant enough to make such a move worthwhile.
Steve Desborough, senior consultant at national employee benefit consultants Watson Wyatt, says: “There is certainly more money to be made [for insurers] from a fully insured arrangement but it’s down to the buyer and the intermediary to find the right solution. The insurer will offer a suite of products and if it can push forward a fully insured contract because it suits client circumstances it probably will. But nowadays around three quarters of large group schemes use a specialist intermediary and are therefore more aware of the advantages of trusts. As most of the larger specialists use a fee-paying basis, there is no incentive for them to promote the insured route instead.
“The need for the Chancellor to raise money could mean that IPT rises to anything up to 17.5%, and this would definitely encourage more companies to look at healthcare trusts. But you should never look at trusts just for tax reasons because they are primarily about the control of benefits they enable companies to enjoy.”
INSURED SCHEMES
Any significant rise in IPT would almost certainly have to be born directly by client companies because large group insurers operate on such slim margins that absorbing the cost of such an increase by reducing prices further would seem to be out of the question. Although it is hard to actually prove – because virtually all schemes at this end of the market are bespoked and meaningful price comparisons are therefore hard to make – it is difficult not to suspect that the major players set out to make an underwriting loss on many schemes in order to secure cross-selling opportunities for group risk and wellness products, and to achieve economies of scale for the purposes of negotiating attractive discounts with hospital groups.
Bupa, which did significantly harden its rates two years ago, denies that it ever indulges in loss-leader pricing and claims that it aims to make a profit on all its large group schemes. AXA PPP healthcare, on the other hand, admits that it only aims to break even from the medical scheme itself.
Dudley Lusted, head of corporate healthcare development at AXA PPP healthcare, says: “We then get the volumes of business necessary to negotiate discounts to make money on SME and individual business and we also cross-sell other products and services. One of the reasons why the smaller players struggle is that you have to have volume in all three markets. You need a reasonably balanced book between large corporate, SME and individual. Having a sizeable large cap book is the most cost-effective way of getting volumes and, because other smaller competitors don’t have one, they don’t get the same spin-offs.
“But we wouldn’t set out to make a loss on a large group scheme at outset, although it could happen if claims were adverse. I could honestly say we would cut our losses if business wasn’t sustainable, and I’ve seen competitors crow about business gains when we are pretty certain they won’t make money on them. “
Justin Crossland, head of health and risk consulting at national employee benefits consultants Towers Perrin, feels the major insurers do make money from long-standing large schemes but that there is a higher probability of them not doing so if they only hold onto the business for a year – and, with the credit crunch having created a very definite trend for shopping around, this could become quite a significant issue.
Marcia Reid, director of employee benefit consultants Lorica Corporate Consulting, says: “Historically large groups would stay with providers for a very long time but with the economic downturn employers are becoming more open to change, so it helps to reduce complacency.
“I think the large group market is a bit like the school system in the sense that you must choose the right school for the right child. While the large healthcare providers may be the best cultural fit for some corporates, other players can also represent good value in certain cases.”
TIME FOR REAPPRAISAL
In addition to questioning the competitiveness of current providers, the economic downturn has made employers start to analyse exactly what they are covering and why. The cost pressures brought about by expensive new cancer treatments is invariably an issue, and CIGNA HealthCare has even come across cases of companies which have decided to leave out cancer cover altogether.
Alex Bennett, head of healthcare at national employee benefit consultants Aon Consulting, says: “It may not lead to prompt actions but at least employers are starting to ask the questions.
“Just as we have seen a shift in the pensions market towards defined contribution schemes to introduce certainty and fixed liability, the same principles can apply to corporate healthcare. So we could see a trend towards restricting elements of cover that benefit individuals as opposed to companies.
“There may even be a trend towards co-payment. One or two large employers have certainly been considering co-payment and asking major insurers who don’t normally offer it whether they could bespoke cover. I feel it will inevitably happen in the next few years and could become the norm eventually. In fact I think you will find that we all move to some kind of co-payment system across the board both on the NHS and privately.
“I also think there is a greater involvement of occupational health professionals in trying to understand how large group PMI schemes can help meet their objectives,” continues Bennett.
“Occupational health is often managing claims to ensure that employers get back to work as quickly as possible and can direct options very differently from how the individual would have chosen.
“Medical inflation in the large market is still around the same levels as normal at 9% to 11%. So the impact of the costly new drugs hasn’t really kicked in yet but my understanding of current claims patterns suggests that it would be no great surprise if it starts being reflected in premiums next year. Additionally, increased interest by hospital groups in the role they play is just starting to happen, so we may get large employers wanting to negotiate with hospital groups in parallel with insurers, as happens in the US. I am aware of proposals and discussions to this end that are currently in progress.”
OTHER NEWS
Observations on other developments at this end of the PMI market remain few and far between, although Towers Perrin’s Crossland observes a trend in the direction of insurers trying to communicate ancillary benefits or discounts as a result of trying to compete with PruHealth – which estimates that it now has between 15 and 20 schemes with more than 1,000 members and has already this year picked up three clients with schemes of over 3,000 members.
Dave Priestley, sales director at PruHealth, says: “We are being successful now because we have a very solid track record in terms of service and the big players won’t touch you until you have achieved that. Now virtually all the benefit consultancies have placed business with us, and large employers have become frustrated at the lack of ideas being shown by the existing providers.
“Big companies are now very well informed and are therefore looking for new ideas, and we are able to demonstrate a track record behind our Vitality concept and show the impact it has in gaining employee engagement. We can also provide a high degree of flexibility. For example, an employer may want money paid to personal health funds as opposed to receiving cash back payments.”
This April, Bupa expanded its Quality Assured MRI network by a third, giving customers access to even more quality-assessed scanners across the UK and further reducing scan costs by 20%, and CIGNA HealthCare is also noteworthy for the excellent patient feedback it is now reporting in response to its change of stance on mental health protocols. Normally referrals to cognitive behavioural therapy (CBT) can only be made under a PMI scheme by a psychiatrist, but CIGNA HealthCare has been allowing direct referrals from occupational physicians and GPs.
Ann Dougan, marketing director at CIGNA HealthCare, says: “The approach has been working well and achieving very good results. By cutting out the need for psychiatrist referral you save time and money and you also get people back to work more quickly. We could possibly extend this approach to other areas like diagnostics because GPs are doing direct referrals in the NHS, so why not follow this example?”
Otherwise, spokespeople invariably try to turn the conversation into yet another discussion about integrated healthcare. But, unlike a couple of years ago, at least there are now some genuine mitigating circumstances. Previously the integrated healthcare revolution was virtually all talk – or, to be strictly accurate, waffle – but now it is accompanied by a fair amount of action. Indeed, intermediaries who can only advise on PMI could start finding themselves at a huge disadvantage.
Mike Izzard, chairman of the Association of Medical Insurance Intermediaries (AMI I) and managing director of Premier Choice Healthcare, says: “I would like AMII members to think about doing large corporate schemes but they must offer a different perspective and give advice on group healthcare products across-the-board. Many small PMI intermediaries are out of their depth on group risk issues but it’s possibly time for them to start investing time and resources in expanding into offering a broader service.
“Today’s SME scheme could possibly be tomorrow’s large corporate scheme. All these products are grouped under the same regulatory category, so if an intermediary calls themselves a health insurance specialist and doesn’t know about group risk they are in danger of losing the client. As clients grow they need to grow with them.”
There is certainly much to be said for those with no experience of group risk initially learning their trade in the SME and mid-market before taking the step up to the large group arena. In addition, with income protection insurers, in particular, making a big effort to work with intermediaries in the smaller corporate markets by bringing out innovative new products and online systems, it should now be easier than ever to get started.
Unfortunately, however, such a broadening out of experience will teach little about the one area where knowledge in the large group PMI market seems to be most sadly lacking, namely self-funded schemes – and, in particular, their non-IPT related benefits.
Turn over to read the views of one of the most experienced consultants working in the large corporate healthcare field
THE MID MARKET
In the “good old days” the group PMI market was subdivided into three sections: large, medium and small. But, since “SME” started to become a standard business term, those sections have been reduced to two: SME and large. As many people define an SME as having up to 250 staff and a large scheme as having more than 1,000 members, this means that group PMI products relevant to companies with between 250 and 1,000 often do not receive the attention they deserve.
Standard Life’s Healthcare’s Corporate Healthcare product, launched this August, definitely has more claims to be considered mid-market than anything else. It aims at companies with between 100 and 1,000 members and borrows heavily from the insurer’s existing approach to SMEs, offering a notable degree of flexibility. Employers can pick and mix to construct a plan that perfectly suits their needs and budget, and each category of. employee can have different benefit packs built around either Core Healthcare, dental cover, health cash options and travel cover.
Core Healthcare provides inpatient and day-patient cover, larger cost outpatient scans, cancer treatment, private ambulance and NHS cash-back. It also has a range of additional modules that can be added, such as Core Enhancement, including parental accommodation and pregnancy complications, outpatient treatment, psychiatric treatment and additional therapies.
Further preventative benefits include a GP consultation line or nurse helpline, health screening and employee assistance programme (EAP). Companies can choose to extend some of the preventative benefits to include and cover the whole company, as well as two possible levels of occupational health.
Somewhat surprisingly, as many experts have reservations about the suitability of the self-insured approach for schemes with fewer than 1,000 members, there has also been an increasing involvement from TPAs at this end of the market, courtesy of both Healix Health Services and Revelation Healthcare. Healix, although quoting for all sizes of trust scheme, has been experiencing real growth in the mid market – having set up six new trusts during the last eight months, ranging in size from between 300 and 2,000 members.
It is most unusual in providing 100% stop loss cover (125% is a common basis used industry-wide) and has greatly simplified the process of moving to a trust as a result of being able to provide both a set trust document and trustees.
Although Revelation Healthcare is prepared to quote for trust schemes as large as 3,000, its largest scheme to date has 550 members. It has taken on five new trusts during the last year – none with more than 250 members and three with between 50 and 100 members.
Revelation is particularly notable for the fact that it uses an unusual procurement system which involves individually negotiating each procedure for package prices. Perhaps even more significantly, it refers to “exciting developments coming on board in the next three to six months which may revolutionise the SME private medical market”.
DAVID BATTLE, CHIEF OPERATING OFFICER, LORICA CONSULTING
HEALTH INSURANCE CAN YOU FORECAST HOW MUCH A MEDICAL EXPENSES SCHEME MIGHT COST OVER, SAY, THE NEXT FIVE YEARS? DAVID BATTLE You can forecast anything – the challenge is how credible is that forecast. If you took, say, the whole portfolio for one of the major insurers, you would be able to forecast the likely claims costs in five years time fairly accurately. You would achieve this by a fairly straightforward extrapolation of current trends and then factoring in known or anticipated changes in policy rules, development of drugs/treatment etc. However, as you bring the size of your sample down the credibility of the projection diminishes significantly.
If you project claims costs for 100,000 members then you will still have a highly credible projection. If you then cut that up into 1,000 schemes of 100 members each then the projection for each scheme will have relatively low credibility.
As to where the projection becomes reasonably credible, this is difficult to say as it will depend upon a range of factors. How stable is the past experience? What staff turnover does the group experience? How stable is the economic sector in which the client operates?
There are far too many claims being made about how accurately and over what period forecasts can be made – these are often made by people with little understanding of issues of statistical credibility.
HEALTH INSURANCE AT PRESENT, ARE ANY SUCH FORECASTS MADE BASED ON MEDICAL INFLATION CALCULATIONS?
DAVID BATTLE In a way, any projection that you make is effectively based on a “medical inflation calculation”. If you project by extrapolation of a group’s own claims then you are using the group’s own experience of medical inflation. If you use a factor derived from a whole portfolio then you are using a medical inflation factor that may or may not be relevant to the group in question.
Again, the size of the group and its similarity or otherwise to the rest of the insurer portfolio are all relevant in deciding whether to use a group’s own experience of medical inflation or whether to use a factor derived from a larger population sample size.
Additionally, in many of the “scare” claims that get made about what schemes will cost in five or 10 years time, people often fail to distinguish between medical inflation and premium inflation. There are changes introduced by both insurers and their clients that mean actual premium inflation runs at a level below “medical inflation”. For example, introduction of/increase in excesses, changes in scheme rules, benefit restrictions and changes to hospital arrangements all contribute to the process of keeping premium inflation below “medical” inflation. Just check some of the independently produced data on average premiums across the industry in a guide like Laing & Buisson and see the difference.
HEALTH INSURANCE IS THERE ANY WAY AN EMPLOYER CAN ESTIMATE THEIR POTENTIAL EXPOSURE TO HEALTHCARE COSTS BASED ON “WHAT IF?” SCENARIOS (IE “WHAT IF I REDUCE OUTPATIENT BENEFIT LIMITS?”; “WHAT IF I INTRODUCE A SIX WEEK OPTION?”)
DAVID BATTLE The impact of these is very easy to model, the bigger challenge is that you then have to apply these to a projection of future costs and the issue of the credibility of the underlying projection comes back into the equation.
HEALTH INSURANCE SHOULD ADMINISTRATORS OF LARGE MEDICAL EXPENSES SCHEMES BE MORE “TRANSPARENT” IN THE WAY THEY OPERATE? IN OTHER WORDS, SHOULD EMPLOYERS BE ABLE TO COMPARE THE PERFORMANCE OF THEIR SCHEME WITH THE PERFORMANCE OF ONE OF A SIMILAR SIZE/PROFILE OVERSEEN BY A DIFFERENT ADMINISTRATOR? WOULD THIS EVER BE GENUINELY POSSIBLE?
DAVID BATTLE The comparison is possible, the question is what does it tell us. I am aware of at least one such study for an 8,000 member scheme where the data between a past and current insurer was readily available due to a takeover in the industry. The reality is that the result was not credible due to the limitations of even a sample of that size. You can compare safely the full costs of the same procedure carried out in the same hospital but even in a very large sample the number of occurrences of same procedure/same hospital will be very limited for even the largest of clients. The only way that you can then perform the comparison for a single client is to start making further assumptions which can lead to misleading conclusions.
The only credible way that this type of comparison could really be done would be by an independent party with no vested interest having complete access to the portfolio data on all of the major insurers. This would exclude any of us who give advice in this marketplace as the information gathered would provide a competitive advantage. It would really have to be a major accountancy practice or maybe someone like the King’s Fund. I understand that one of the major insurers has shown a willingness to do this but it needs all parties to agree to it.
HEALTH INSURANCE DO YOU OFFER ANY KIND OF BRANDED FORECASTING TOOL?
DAVID BATTLE We forecast current and future years costs as a matter of routine and also model the impacts of changes in benefit structure, eligibility etc. If a client wants to understand how its costs might develop over a longer period we can work with them to help them to understand what might happen but also to help them appreciate that the outcome could be very different. We would not promote such a service or seek to derive fee income from it due to the limited statistical credibility of the forecast. Forecasting scheme costs is part science and part art. There are a number of subjective decisions that need to be made in developing a forecast. The understanding and experience of the market that the forecaster has is where true value is added.
Advice to a client also needs to be much wider than just this. For example, rather than telling your client that his scheme costs will double within a certain period, it might be more instructive to look at, say, pre-employment procedures. Dependent upon staff turnover, in five years’ time up to 40% of the staff on a scheme might not even be employed by the client yet. Looking at scheme entry rules and issues like pre-employment screening is more constructive than making alarmist comments that have the potential to turn people away from a valuable staff benefit. The same principles apply to a whole raft of other client issues such as factoring in sickness absence impact, workforce health and wellbeing, impact upon other insurances.
What do clients want – someone who tells them one of their most popular benefits is becoming unaffordable or a constructive dialogue looking at the wider context to ensure sensible decisions are made?
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