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Risk Solutions—Global
Mike TylerHead of Lockton Employee Benefits
Risk Solutions+44 2079332773
[email protected]
L O C K T O N C O M P A N I E S
Market Update December 2012
TAKING THE FIGHT TO PRIVATE
MEDICAL INSURANCE INFLATION
IN THE U.K.It is encouraging that the pace of price rises in the
U.K. slowed in September 2012, pushing the inflation rate down to
its lowest level for nearly three years. The Consumer Price Index
(CPI) measure of inflation stood at 2.2 percent, down from 2.5
percent in August.
The CPI level in September is usually used to work out the rise
in a range of benefits from Jobseeker’s Allowance to income support
in April next year. The Office for National Statistics (ONS) said
that the Retail Price Index (RPI) measure of inflation, which
includes mortgage payments, stood at 2.6 percent in September, down
from 2.9 percent the month before.
The CPI level was much lower than the rate seen in September
2011, when it stood at 5.2 percent.
So far, so good for U.K. Plc despite some concerns that the U.K.
population is apparently in a muddle over the difference between
the two measures. This was no doubt exacerbated by an announcement
a few months ago by the ONS, which intends to change the
methodology by which the RPI is calculated.
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Market Update, Risk Solutions—Global Lockton
© 2012 Lockton, Inc. All rights reserved.Images © 2012
Thinkstock. All rights reserved.
The latest fall in both the inflation measures comes at an
interesting time in the inflationary cycle when set against the May
Bank of England Survey showing that the public expected inflation
to rise to 3.7 percent over the ensuing 12-month period.
Expectations of inflation in the Private Medical Insurance (PMI)
business are, if anything, significantly higher. In fact, the
expectation that the rate of medical inflation can be relied upon
to increase as PMI subscription rates rise has become something of
a doctrine in our business. The term “medical inflation” has gained
popular currency. But, as with all currencies that inflate without
adequate controls, there must be a worry its meaning will become
debased.
It seems we must all go along with the idea that medical
inflation must always hover some way above general price inflation.
Clearly, this must have consequences. In the Q&A that follows,
we outline these consequences, what they mean for PMI products in
the U.K., and how they can be ameliorated.
Can we quantify the levels of medical inflation in the U.K.?
In its annual review, Laing & Buisson offers a helpful
reference point showing that it is possible to calculate the
average rate of increase of subscription costs per subscriber,
which it does by taking aggregated historical data from the U.K.
PMI market. The data reveals that from 2000 to 2010 the compound
average increase was 5 percent per year, outstripping price
inflation by more than 3 percent. This may be a slightly crude
method of calculation but it is accurate nevertheless.
What are the drivers of medical inflation?
Well let’s take the U.S. as an example. The evidence here seems
to demonstrate that medical inflation has not so much hovered over
the CPI but surged over the measure by as much as 4 percent.
How has this occurred?
It is a complex area with a number of drivers, but it really
boils down to an uplift in the way benefits are used combined with
higher average claim costs.
People with PMI cover increasingly have higher expectations for
healthcare provision. In addition, frustration is rising with the
National Health Service (NHS) for three reasons:
Salary costs for the specialist medical staff
The costs of the new technologies
R&D for new drug therapies
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Market Update, Risk Solutions—Global Lockton
This is despite the trend for shorter hospital stays and the
development of less-invasive surgical techniques as medical
procedures grow more sophisticated.
How are clients being affected then?
There are misperceptions about the drivers of medical inflation
that are probably down to poor communication. For clients it can be
an article of faith that the industry and insurers in particular
are blasé about price rises.
I have seen insurers quote renewal terms incorporating
double-digit future inflation rates and clients unsurprisingly
recoiling from this and reminding them that salary rates and input
costs for their raw materials are not being allowed to increase in
this way. What particularly irks clients is the implicit link of
the insurers’ administration margins to these high inflation
rates.
So how are employers responding?
By calculating the administration margins as a percentage of the
overall cost, it means these also increase at the same high
rate—much higher than you expect if these were calculated
separately. A further consequence of these increases is that
employers are looking more closely at the plan design to consider
how to mitigate the increases. In addition, they are looking at the
value added by the insurers in terms of negotiating prices with
providers, ensuring quality service is delivered at appropriate
costs and helping claimants make informed decisions on their
care.
There is a grim acceptance that medical inflation will always be
much higher than general price inflation. This has a number of
consequences for PMI products in the U.K.
What kinds of solutions are out there?
Simple short-term solutions include:
Introducing or increasing a claim excess.
Reducing the scope of benefits covered.
Or, reducing the contribution base, for example by only covering
the employees’ costs and not the family’s.
These points typically produce one-off reductions in cost and
are not long-term solutions.
The so-called DC style of medical benefits is now being
considered in the U.S. by some companies. By adopting this
approach, the company does not commit to picking up all costs for
the medical scheme. Instead, it establishes a base level of
contribution, increasing this contribution in line with an index of
salaries or prices.
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Market Update, Risk Solutions—Global Lockton
What are the merits or pitfalls of this approach?
The balance of costs will fall on the employee. This approach
has the merit of clarity but is likely to lead to selective
withdrawal of better risks from group schemes over time. The result
is that costs per subscriber increase even faster than they would
have done had the scheme remained unchanged.
We are unlikely to see these challenges disappear any time soon.
It is incumbent on us all in this business to deliver client
advocacy and better solutions than those that are currently being
offered or face the real prospect of customers withdrawing their
support in a declining PMI market.
About the author:
Mike Tyler heads Lockton’s Employee Benefits Practise in the
U.K., which specializes in the design, implementation,
communication, and year-round service of PMI and other
employer-sponsored benefit programs. In addition to working with
their dedicated service team, clients will have direct access to
Lockton in-house subject-matter experts including actuaries,
medical directors, compliance attorneys, health risk solutions
directors, and M&A due diligence specialists.
