PRINT PAGE

In focus: Private hospitals

Britain's private hospitals have enjoyed private equity investment and increased business from the NHS over recent years. But with health service work and self-pay revenue looking less secure, could the insurance industry be set to benefit? Edmund Tirbutt investigates

January 2009 Features

It has to be said that if the NHS Choose and Book scheme was everything it is cracked up to be, the case for paying for private medical insurance (PMI) could start to seem extremely tenuous to many policyholders who find themselves strapped for cash during the economic downturn. After all, since April 2008 NHS patients have in theory had the right to opt for treatment in virtually any private hospital.

Bupa’s 2008 Health of the Nation survey reveals that 73% of people consider clean hospitals as a key reason for buying PMI but, if NHS treatment is available in private hospitals, cleanliness ceases to be an issue. So does the ability of PMI to provide a private room, which will normally be available to those treated in a private hospital on the NHS, together with free parking, a decent staff to patient ratio…. and the rest.

While the PMI route should prove quicker, if all NHS treatment was carried out within the intended 18 week “beginning to end” timeframe, the financial savings available for enduring a brief episode of masochism could seem attractive. Furthermore, the fact that the NHS does not offer a choice of consultant to those treated in private hospitals no longer represents quite the cataclysmic handicap that most insurers would like policyholders to view it as.

When conducting research prior to the launch of its Guided Option in 2006, Standard Life Healthcare found that over half of people preferred the idea of having the consultant – and hospital – chosen on their behalf in return for a premium discount. Furthermore, some PMI policies are no longer covering fees in full for the more expensive consultants and the marketplace is awash with tales of consultants being delisted by insurers for no satisfactory reason.

Penny O’Nions, principal of The Onion Group, a financial, medical and legal advisory service based in Iver in Buckinghamshire, says: “In the current economic climate people will be looking to save money, and those who have paid premiums for years without having a claim and those who have had claims denied may have lost confidence in PMI. On our legal side we are coming across a growing number of people who are finding that the consultant they have seen is no longer available to them because the insurer decides to delist them.

“The insurers themselves are clearly feeling the pinch as they are enjoying poor investment returns, and this is impacting on their overall strategy towards benefits. We have come across commercial practices which are confusing to subscribers who understood that the flexibility of PMI allowed them to choose their hospital, consultant and time of treatment.”

REASONS TO BE CHEERFUL

Fortunately, however, the Choose and Book story, which dates back to 2004, does not seem to be having any significantly adverse impact on demand for PMI. Around half of all first referrals from GPs are made via Choose and Book and the numbers that have ended up in private hospitals have increased tenfold in little over 12 months to over 3,500 a month. While this undoubtedly represents progress, its implications for the private sector are still minimal.

Julian Ross, head of policy communications at Standard Life Healthcare, says: “Although the Choose and Book figures certainly show a significant uplift [in the number of NHS patients treated in the independent sector] it is important to remember that we are still only talking about around 20 patients per private hospital per year. So it’s really only a tiny proportion.”

There would seem to be a long way to go before the tie-ups between the hospital groups and the NHS prove any serious threat to the perceived value of PMI, and the current indications are that this situation is unlikely to ever arise. Even if Choose and Book continues to progress in leaps and bounds, it is likely to be counteracted by a slowdown in other NHS/private work.

According to Laing & Buisson’s Healthcare Market Review 2008-2009, the NHS is the second largest funding source for the hospital groups, having generated an estimated 19% of revenues in 2007 – up from only 10.5% in 2004. But feedback from the market suggests that this momentum has not been maintained during 2008 and that, with private hospitals also experiencing a decrease in demand for self-pay operations, they are suddenly beginning to be terribly nice to private medical insurers.

Mike Izzard, chairman of the Association of Medical Insurance Intermediaries (AMII), says: “I have picked up anecdotally that NHS business with large groups is decreasing and hospital groups are cosying up to medical insurers to plug the hole. So we may start to get better deals now that the pendulum is swinging the other way.

“Medical inflation is running at 8% to 9% and, if you strip out the high-end cancer drugs, most increases are driven by the hospital chains and by consultants. So it is a good thing that various insurers are saying that hospital groups are talking to them purposefully again and are proving easier to negotiate with.”

Importantly, this “cosying up” is not just being confined to Bupa and AXA PPP healthcare, who have become synonymous with grandiose announcements about how their economies of scale enable them to secure more attractive rates than their smaller counterparts – who have in turn prided themselves on their ability to bridge the gap through more pro-active and streamlined claims management.

Howard Hughes, head of marketing at Bristol-based PMI provider BCWA, says: “The hospital groups are clearly realising that it’s in their interests to give some support to smaller players to avoid the duopoly we used to have. Over the last year or so the hospitals have certainly been keen to talk and we are having very positive conversations with them.”

In addition, if Choose and Book business starts to significantly outweigh other joint NHS/private business it could actually spell good news for hospital groups and insurers alike. Hospital groups enjoy more flexibility through Choose and Book because, instead of having to block book, they can merely use the NHS when they have vacancies that need filling. Making more efficient use of their hospitals should hopefully enable them to offer more attractive deals to insurers.

A nurse at the BMI Hospital Meriden. The 52-bed facility in Coventry is the latest addition to BMI’s nationwide chain – the largest hospital network in the UK

Such a development would be music to the ears of anyone concerned about medical inflation. Although the emergence of hospital groups to replace a vast range of individual independent hospitals has led to insurers benefiting from a more professional negotiation process, it is questionable whether it has resulted in them enjoying better value. The fact that some of the hospital groups are backed by private equity organisations which require a significant return on capital is, in particular, considered a major problem.

VIRTUOUS CIRCLE?

Another potentially important development could be the efforts being made by Circle to become a major hospital group. Its revolutionary approach could work wonders for medical inflation but although the company has talked the talk it has not yet walked the walk.

Circle, which entered the UK market in 2004, currently has four hospitals that are operational, eight potential hospitals that have received planning permission and a further half a dozen pending planning permission. Its aim is to build around 30 hospitals in total during the next four or five years.

The key difference from other hospital groups is that Circle is co-formed, co-owned and co-run by its clinicians. Consultant partners commit to bringing a percentage of their private practice to their Circle hospital, once it has opened, for an initial period of two years and they contribute to the planning and design of the hospital to reflect the procedures and equipment that they and their team require. Consultant partners without significant private practice are also able to receive shares for contributions to developing and delivering services, clinical governance and further partnership development, and all GP partners are allocated shares in return for a commitment to the group.

Ali Parsa, managing partner of Circle, says: “We basically created the group because we felt that the provision of public and private care was fundamentally unsustainable. The hospitals the others are using are around 30 years old on average so no wonder the costs of healthcare are going up, and most of them are three star hotels at best. We have built a series of five star boutique hotels to redefine expectations and the first ones will be starting in November 2009.

“Partnership is our DNA. We believe that the collective intelligence of a network of many will always be smarter than any small group of executives, and we are committed to enabling clinicians to contribute to the future of healthcare. Like other professional services, healthcare should be run from the bottom up and ownership of the decision making process should lie with the professionals who are closest to the patients. The infrastructure and technology used also need to be redefined.”

Parsa continues: “What we are doing could eventually help the costs of PMI because we are creating lower-cost hospitals that create better value. But we don’t believe PMI costs are sustainable under the models currently used by the other hospital groups. Unless they change their cost bases there is nothing insurers can do, and the hospital owners can’t do anything because they are mortgaged to the hilt and locked into very high prices.”

THE MAJOR PLAYERS

There are now some significant new names among the major hospital groups, due to acquisition as opposed to the achievement of any earth shattering rates of organic growth. Nevertheless, BMI Healthcare, which acquired seven hospitals from Nuffield Hospitals in February 2008, continues to be the largest group with private hospitals in 58 UK locations.

Spire Healthcare has now claimed the number two spot with a 36 strong hospital chain, thanks to an aggressive acquisition programme conducted by private equity firm Cinven Partners. Having originally acquired 25 private hospital from Bupa Hospitals in 2007, it gobbled up 10 Classic hospitals in February 2008, followed by the acquisition of the BMI Gerrards Cross Hospital two months later.

Australian group Ramsay Health Care UK, which currently has 24 hospitals and 10 independent sector treatment centres, is the other significant newcomer, having launched in the UK in November 2007 with the acquisition of Capio Healthcare UK; while Nuffield Health is the result of a Nuffield Hospitals rebrand in July 2008 following the acquisition of Cannons Health & Fitness eight months earlier. The other major player is HCA International, which focuses exclusively on London – where it has six central London-based hospitals and a joint venture with University College Hospital.

There are whisperings in the market that we could soon see Bupa remerge as a major player, despite its previous decision to dispose of its entire hospital chain. The conjecture follows the company’s somewhat surprising decision to purchase the Cromwell Hospital in central London in March 2008. But Bupa is adamant that it has no regrets or second thoughts about selling its hospitals and that the Cromwell acquisition does not represent the beginning of a major strategic U-turn.

Steven Pink, head of provider relations at Bupa, says: “There was a pretty clear case for buying the Cromwell. It was available and it gave us the chance to have a high quality provider in central London. Bupa Hospitals never had any hospitals in central London, which is by far and away one of the most important markets.”

This acquisition certainly seems a little strange in view of the reasons originally given by Bupa for selling its hospital chain. It cited a conflict of interests on the grounds that the PMI business had to manage costs by negotiating with Bupa Hospitals to secure the best prices and treatment terms. Competition law meant that both businesses had to be operated at arms length without being able to benefit from the advantages of common ownership. If this was a problem with Bupa Hospitals it is hard to see why it should not be a problem with the Cromwell hospital as well.

Bupa’s original decision to dispose of all its hospitals has been made all the more interesting by the decision of Ramsay Health Care, the largest Australian healthcare provider, to single out the UK as a market with obvious potential after reaching a size in Australia at which significant further growth was prohibited by competition issues. Ramsay is particularly notable for doing a much higher than average proportion of NHS work – 30% of its UK acute hospital business.

Jill Watts, chief executive of Ramsay Health Care UK, says: “We feel that the UK is a good strategic fit and we are very positive about it, especially as we’ve had experience of operating in a much tighter marketplace in Australia. NHS business has grown for us by over 200% in a year because our overall goal is to grow and there is limited growth in the PMI market.

Bupa bought the Cromwell Hospital in London in 2008 in a deal worth £90 m

“Insurers are becoming increasingly concerned that their product should be differentiated, and this is our goal as well. I believe that the more we start to expose people to choice between NHS and private treatment the more we might see them choosing the private route. It’s not dissimilar to making a choice between flying business class and economy class because there shouldn’t be any difference in the actual standard of treatment received and everyone should arrive safely in the end.

“Not all private hospitals want so much NHS work but we believe we can grow and invest to meet the needs for both markets. Our NHS work is not affecting our relationship with insurers although they might use it as a way of trying to reduce costs in negotiations with us. But our argument would be that the money we make from the NHS, albeit at tight margins, enhances our overall proposition and increases our ability to invest in facilities.”

SELF-PAY

According to Laing’s Healthcare Market Review 2008-2009, the faltering economic climate, together with further reductions in NHS waiting times, has led to the first fall in private self-funded hospital treatment In recent years. Self-pay spending is estimated to have fallen by £5m during 2007 to £515m, which accounts for around 16% of revenues for private medical/surgical hospitals. Demand is reported to have fallen most significantly for traditional non-cosmetic treatments, although weaker consumer spending has also dented the rise in cosmetic surgery demand after several years of strong growth.

HCA, for which self-pay accounts for 15% of overall business, purports to be bucking the trend – although it is unusual in catering for both IVF and maternity treatment, and these have proved its areas of strongest rising demand.

Chris Adams, commercial director at HCA, says: “Laing & Buisson says there is a big drop off in self-pay but I can’t see any evidence for this. General elective surgery for conditions like cataracts and hip replacements goes up and down according to how the NHS is performing and how active consultants are in any particular area. It is not decreasing but has become a little flat, and enquiries during the last couple of months have been a bit soft, possibly because people have been putting off operations as a resulting of feeling short of money or worrying that their job isn’t as safe as it used to be.”

On the other hand, Spire Healthcare, for which self-pay accounts for around 20% of overall business, acknowledges some decline in self-pay as a whole since late 2007 as a result of the deteriorating economic climate. But it highlights weight loss surgery, gastric bands and gastric bypasses as areas in which demand is rising. More surgeons are learning weight loss surgery techniques and practicing privately, and a number of celebrities have also drawn attention to the area.

The picture painted by intermediaries is far more consistent, simply because there is effectively now only one intermediary providing a mainstream service. GoPrivate (a former sister company to Exeter Friendly Society) and Pay As You Go Healthcare (a former subsidiary of AXA PPP healthcare) have both withdrawn from the market and, although Health Care Navigator is still understood to be trading, it is adopting an extremely low profile and was not available for comment. That leaves, Medical Care Direct which, although dealing primarily with non-insured healthcare trusts, handles around 1,000 self-pay cases a year.

The decline of the other intermediaries is probably at least in part due to the fact that the hospital groups have greatly improved the quality of self-pay information that they make available to the public. It has become much easier for consumers to obtain details of procedure prices over the phone and get quotes online from sophisticated websites. Malcolm Jones, managing director of Medical Care Direct, also feels that his hospital background gave him a clear advantage over the other intermediaries – which were founded by people with insurance backgrounds.

He says: “Our knowledge of hospitals and our contacts are undoubtedly important. There are still around 250,000 individuals a year doing self-pay by going directly to the hospitals but we add value by comparing all hospitals, including those outside the major groups. We still see a huge opportunity in individual self-pay because, although an improving NHS is undoubtedly a factor, there are still some long delays. We’ve picked up people who have been waiting 11 months for a hysterectomy and for between six and eight weeks for an MRI scan.”

The Interior of HCA International’s Lister Hospital in London. Cleanlines in one of the pirvate sector’s major selling points

For a company working in a supposedly lacklustre area, things couldn’t actually be going much better for Medical Care Direct. Having been acquired by PHP in April 2008, it has relocated to Farnham in Surrey and launched a new product, Inclusive Healthcare, in November 2008. This aims to help cut private medical bills and provide logistical advisory and care support by combining treatment sourcing with a 24/7 GP helpline and access to the RED ARC care advisory service.

When the boom times eventually return for the self-pay market it will certainly be interesting to see whether insurers once again try and muscle in on the act by starting up their own self-pay intermediaries. It is questionable how comfortably those offered by Exeter Friendly Society and AXA PPP healthcare ever sat alongside insurance operations and, having heard Bupa’s concerns about conflicts of interests in other areas, it seems that we can safely rule out at least one major insurer from joining in.