How the boom in private medical insurance is exposing its own flaws

Private medical insurance is booming: unprecedented waiting lists for treatment in the UK’s strained NHS and a crisis in primary care have driven demand to its highest in years. But the surge in demand is storing up problems for health insurers — and the customers relying on them.

Patients going private encounter insurers with stretched customer service and in fierce competition for doctors, some of whom are pushing back against what they say are years of near-stagnant fees for operations.

A lack of cover for chronic conditions and frequent changes to policy terms make private health insurance ill-suited to pick up the slack from the NHS, according to specialists.

“There’s the general public and government perception that [private medical insurance] helps out the NHS,” said one doctor, who spoke on condition of anonymity. But health insurance “doesn’t do what the NHS does . . . It’s a very restrictive model.”

Consumer advocates, meanwhile, worry about the industry’s ability to cope with the hundreds of thousands of new customers, and the drawbacks of policies with a multitude of restrictions and exclusions.

“It’s a big opportunity for the sector, but also a dangerous time,” said James Daley, managing director at advocacy group Fairer Finance.

The private medical insurance sector took shape in the 1940s as an adjunct to the newly created NHS. Customers, or their employers, pay a premium to cover new acute medical conditions — with the promise of faster, more convenient treatment. More difficult cases are also referred or transferred to the NHS.

The work is done by NHS consultants in their spare time at private hospitals such as Spire or Circle Health/BMI Healthcare. The biggest insurers, including Bupa and Axa, use their buying power to secure a good price for their customers from doctors and private hospitals. Their insurance policies also include prevention and early detection services, aiming to reduce claims.

Some 5.8mn people in the UK are covered by this insurance — the highest number since 2008 — according to data from the Association of British Insurers. A record 4.4mn are covered through their employer, rather than an individual policy.

For the biggest providers, there is an acceptance that prices will have to increase, both as a result of rising medical bills and doctor rates, but also spending to enhance customer infrastructure. 

“[There is] no doubt that prices will increase, because we have to maintain our margins,” said Frédéric de Courtois, deputy chief executive at France’s Axa.

Price rises may pose a longer-term challenge to the sector. In a July note, analysts at Jefferies noted that private medical insurance is already expensive at about £1,500 per year per person, and prices typically rise 15 to 20 per cent a year.

The more immediate worry for insurers, however, is on costs. Doctors have long chafed at insurers’ ability to dictate rates. A 2014 report by the competition regulator acknowledged the biggest insurers had “significant buyer power”, but said it had not found “sufficient evidence that it was currently being exercised in such a way as to harm competition by suppressing fees to uneconomic levels”.

Tensions broke into the open last month, as scores of anaesthetists gave notice on contracts with Bupa, the biggest insurer in the UK private health market.

Doctors who spoke to the Financial Times said Bupa’s fees had not improved meaningfully since the 1990s and lagged well behind inflation. One cited a fee Bupa would pay for an anaesthetist working on a joint replacement surgery in 1994, at £320. At the start of this year, the same operation paid just £5 more, the doctor said.  

Bupa declined to comment. A person familiar with its position said it was incorrect to say it had not increased fees since the 1990s, and that this example was misleading in isolation. Some fees had fallen over the years as procedures became easier or faster, while other fees had risen, the person said. It bumped up fees for anaesthetists by 15 per cent at the beginning of the month after pressure from doctors. 

It is not clear whether nudging rates higher will be enough. One consultant told the FT that he would no longer work for Bupa and would instead bill the patient directly, leaving the insurer to pay the proportion it deemed fit and the customer to make up the shortfall.

He also questioned whether it made sense for the same fee to be payable for a hernia operation regardless of whether the patient was a fit 21-year-old man with no medical problems, or a 90-year-old chain smoker who has had two previous heart attacks. “This is of course blatantly ridiculous,” the consultant said. “I would rather not take on the second patient as the risks and the stress are not worth the fees.”

Experts describe a power shift in the sector, as private hospitals have sourced a rising proportion of revenues from the NHS and patients who pay for themselves over the past two decades. That makes doctors less reliant on insurers — and more willing to walk away if they feel rates are not high enough.

“Private medical insurance has been slowly declining as a percentage of independent hospital income for years . . . and so has lost some of its bargaining power over doctors,” said Tim Read, a researcher at consultancy LaingBuisson.

Despite the expense, demand for private health insurance is expected to continue to grow, making the need to retain doctors and invest in services even more pressing for insurers.

In a recent poll, one in five business leaders said they were considering adding private medical insurance in the next year. The boss of one UK business with more than 15,000 employees told the FT his company had given its entire staff private medical cover, in response to the pressures on state healthcare.

But, according to Fairer Finance’s Daley, with both private and public sectors relying on the same pool of medical staff: “Either [private medical insurance] will take people away from the NHS and make matters worse there, or insurers will struggle to maintain the levels of service that people expect from a private policy.”