Analysis: Cash plans and PMI excesses

As cash plan providers continue to develop solutions to help employers and employees cover PMI excesses, Sam Barrett looks at some of the implications

As cash plan providers continue to develop solutions to help employers and employees cover PMI excesses, Sam Barrett looks at some of the implications

Using a cash plan to mop up a medical insurance excess is a common sales strategy in the corporate arena. But, while it has been operated on an unofficial basis for the last few years, it has now been formalised with the launch of medical insurance excess cover by Simplyhealth and Medicash.

The two providers have taken slightly different approaches to offering the cover. On Simplyhealth’s corporate cash plan it is available as an optional module. Three levels are available, starting at 25p per employee per week, which gives £100 of excess cover, and rising to 75p per employee per week for £300 of excess cover. Conversely, Medicash includes it automatically on its Proactive corporate plan, wrapping it up with its specialist consultation and diagnostic tests benefit. It has four benefit levels, starting at £1 a week for £200 of cover a year and rising to £5 a week for £400 of cover.

For Howard Hughes, head of employer marketing at Simplyhealth, formalising excess cover was a logical step.

"It makes sense," he says. "Advisers are shrewd and are selling cash plans to fit alongside medical insurance and soak up the excess. If it’s going to be sold this way, we have to make sure it works properly."

Making sure it works properly is welcomed. Without a separate excess benefit, an employee would have to pay the excess and then send the excess statement letter they receive from the insurer on to the cash plan provider, claiming for it under the specialist consultation benefit.

Paul Gambon, head of sales at Medicash, says this was not always the smoothest of procedures.

"Having excess cover benefit does make it easier," he explains. "Not all medical insurance claims start with a specialist consultation and you could also run into problems where treatment ran across two policy years and two excess periods."

Additionally, given the complexity of the process, it required thorough communications to ensure that employees understood how to claim their excess payment so they did not feel out of pocket if an excess was introduced to cut costs.

Excess distress

But not everyone is happy to see cover for excesses being given such a prominent spot.

"They’ve taken a good idea and ruined it by making it too easy to claim on both products," says Mike Izzard, managing director of Premier Choice Group. "We’ve been recommending cash plans alongside medical insurance excesses for the last five years and it worked. This is a salesman’s dream but there could be serious repercussions."

Recommending these excess plans is certainly something of a no-brainer for any healthcare adviser. By adding an excess to a medical insurance policy, they can generate sufficient discount to pay for a cash plan that, in addition to all the traditional benefits, also covers the excess that was introduced to pay for it. This could drive huge growth for the cash plan market.

But, for Nick Lipczynski, director of IHC, the specialist healthcare consultancy, the benefits simply do not stack up. He is concerned that the cash plan providers are offering so much more for, in some cases, no additional charge.

"Cash plan providers have offered their cash plans at between 75p and £1 a week, telling us how much they pay out but now we find that, for the same price, they are able to introduce, offer and encourage the use of an additional benefit, medical insurance excess cover," he explains.

The maths is certainly concerning. On average, one in five people claim on their medical insurance every year. On a level one premium with Medicash at £1 a week, the total annual premium for five people would be £260. Statistically, one person would claim a year, taking £100 of excess cover out of the premium pot. On top of this, administration costs of around £50 would need to be deducted, leaving a pot of £110 to cover all the other benefits the five people could claim.

"Either the cash plan providers have been misleading us or they are aggressively promoting unsustainable plans. This is not ethical or professional," Lipczynski adds.

Behavioural disorders

Other cash plan providers are also concerned about this latest stage in product development. Brian Hall, sales and marketing director at BHSF, believes this is a result of increased competition in the market.

"There’s a scramble for new business with cash plans getting commoditised into oblivion," he says. "The ones offering excess cover haven’t thought through the consequences of what they’re doing."

Stuart Scullion, managing director of the Private Health Partnership, is also worried about the sustainability of offering this additional benefit, especially at no extra cost.

"The smaller cash plan providers need distribution and niche benefits can help them achieve this," Scullion says. "It can backfire if everyone follows them or, worse, if it becomes unaffordable and they have to increase the cost or withdraw it."

There are also concerns about how excess cover will affect medical insurance. Steve Sharrock, head of intermediary sales at Westfield Health, believes that, as well as potentially driving up claims on cash plans, it will also change claims behaviour on medical insurance.

"A cash plan isn’t a medical insurance cost control mechanism," he says. "Medical insurers are able to offer discounts on premiums to companies taking out an excess because they act as a claims deterrent. By allowing an employee to claim the excess through the cash plan it will remove this deterrent. Medical insurers will react: if they see an increase in usage, the level of discount will be reduced."

Should this happen, it would push up the overall cost of a company’s healthcare. Often cash plans can be implemented cost-neutrally, with their premium covered by the savings generated by introducing an excess on the medical insurance policy. With a smaller discount, or none at all, employers could find themselves paying a full premium for their medical insurance with an additional premium for the cash plan, effectively cancelling out the excess benefit altogether.  

Making it work

Understandably, the cash plan providers offering excess cover argue that they are managing the risk. Gambon says his firm has been covering excesses informally since 2009 and is happy with the level of risk involved.

"The nature of insurance means that not everyone will claim but we will monitor it to make sure claims patterns don’t change," he adds.   

Hughes is also keen to reassure advisers that it will monitor claims on both its cash plan and its medical insurance.

"We do have a foot in both camps so will be able to see whether any changes in behaviour occur," he says. "It was already being used to cover excesses so we don’t expect to see any significant changes in claims."

Further, while there are potential issues for cash plan providers, even the critics admit there are ways to use excess cover without affecting the sustainability of the product. For example, Scullion says he is comfortable using a cash plan to mop up an excess where only a small proportion of employees have medical insurance.

"We often implement a cash plan in these situations, using the savings to extend the cash plan to the entire workforce," he says. "You need critical mass to make it work."

Hall is also happy to offer excess cover in these situations.

"We do it if we’re asked but you do have to charge for it," he adds. "I’m glad that Simplyhealth are charging for it: they do understand the cost implications."

Another instance where adding excess cover can work is when a policy has a particularly large excess, for instance £750, and the cash plan only looks to cover a small proportion of this, say £150. This model allows the cash plan provider to offer a capped benefit, in keeping with its model for other benefits, while also ensuring the medical insurance excess continues to work as a claims deterrent.  

A more radical way to make excess cover viable in the long-term is to adjust the price of a cash plan. Simplyhealth is charging between 25p and 75p a week for its cover. This means that for every five employees on the £100 excess benefit level, £65 is collected over the course of a year. This would put Simplyhealth only slightly behind if medical insurance claims ran at 20%, which could probably be made up by a reduction in claims for specialist consultation benefit.

But, while Hughes believes this is the right price for the excess cover, he would like to see premiums increase across the market.

"The cash plan market is wedded to the £1 a week entry level product but it’s putting a straitjacket on product development," he says. "You can’t keep adding benefits at no extra cost. Even with a price increase, plans will continue to offer exceptional value for money."

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