Covering your health

Private medical insurance (PMI) covers policyholders against the cost of medical treatment outside the NHS. It gives them the option of avoiding the delays in receiving treatment commonly experienced within the NHS and the ability to choose where, when and by whom they will be treated.

As the frontiers of medicine have expanded over the years, with new treatments, diagnostic techniques and therapies becoming available, the state-funded National Health Service established in 1948 has struggled to deliver on its promise of universally available free medical treatment.

As a result, an ever-increasing number of people have opted for private treatment. Somewhere between 20 and 25% of these pay for treatment as and when required, but the vast majority rely on some form of PMI.

The basic purpose of PMI is to indemnify policyholders against the costs of treating unforeseen disease, illness or injury (often defined as acute conditions).

Unsurprisingly therefore, cover generally excludes expenses incurred in connection with long-term (chronic) illnesses such as asthma, diabetes or multiple sclerosis.

The market has historically been dominated by medical provident associations, many of which were set up in the 1920s and 1930s to administer a fund on behalf of subscribers.

A number of these associations subsequently came together to form current market leader Bupa. But in recent years insurance companies such as Norwich Union and AXA (through subsidiary PPP Healthcare) have played an increasingly significant role in the market - insuring around eight million people today.

There are essentially three main types of policy available: premier, standard and budget.

Premier plans have the fewest limitations, covering the vast majority of treatments and imposing few exclusions or restrictions.

Standard policies cost less but often limit the amount that can be claimed in any one year, include cash limits for specific items, or restrict the choice of hospitals that can be used.

Budget policies cost the least but generally feature much broader exclusions, for example any treatment available within six weeks from the NHS.

Some budget policies only cover treatment in private beds within NHS hospitals. Another more affordable option is major medical expense cover, which pays out a tax-free sum if the policyholder needs to undergo certain specified surgery.

Hospital cash plans are a complimentary form of cover, rather than a substitute for PMI, providing tax-free cash sums for each day of treatment as an in-patient or day-patient in either an NHS or private hospital.

Other cash benefits are often included, such as costs of dental treatment, physiotherapy, chiropody and so on. The cash payments are typically fairly small and are designed to cover the incidental costs of being in hospital.

PMI cover can be arranged in the form of individual, group or company-paid schemes. The former protects one individual (and possibly other family members), with premiums paid in advance on an annual, quarterly or monthly basis.

Group schemes are either affinity or so-called employee-paid (or assisted) schemes, where employees share the cost of cover with their employers, and typically feature lower premiums and sometimes simplified underwriting.

Varies widely
With company-paid schemes, employers can usually secure significant discounts (up to 25% or even more). Underwriters normally require full medical histories for all applicants within schemes of up to 100 people. For larger groups insurers may apply a premium based on the group's previous claims experience and not require individual medical histories.

The cover provided varies widely from policy to policy but the costs typically covered include: in-patient or day-patient hospital charges (usually the main cost area, including accommodation and nursing, operating theatre charges, surgical dressings, X-rays, drugs), in-patient specialists' fees (surgeons, anaesthetists etc), out-patient charges (consultations with specialists where no stay in hospital is required), home nursing charges (where recommended by a consultant physician) and cash benefit (sometimes payable up to a fixed amount where the patient receives free NHS treatment).

Policyholders are generally refunded the cost of treatment within the terms of their policy, provided they use a bed in a hospital appropriate to the scale of their cover.

Treatment costs can vary considerably from hospital to hospital and different levels of cover are available to reflect this. Insurers tend to divide hospitals into three or four bands and charge a premium to reflect the policyholder's selection (London contains a high concentration of higher band hospitals).

PMI insurance is not designed to replace all the services offered by the NHS. Accident and emergency services, for example, are beyond the scope of what most private hospitals offer.

Conditions from which the policyholder is already suffering (pre-existing conditions) are normally excluded from cover.

Some policies will, however, meet costs associated with existing or foreseeable conditions by prior agreement or on a moratorium basis - indicating that any condition or illness occurring within the five years prior to inception will be excluded until a specified period thereafter - typically two years - has elapsed.

Other common exclusions include: normal pregnancy and maternity, routine dental treatment and sight testing, cosmetic surgery, long-term illness (though initial and acute phases may sometimes be covered), AIDS-related illness, treatments other than those recommended by a GP, long-term care, palliative treatment (for example the relief of suffering rather than treatment designed to cure), abortion, vasectomy, cosmetic surgery, self-inflicted injury, treatment for drug or alcohol abuse, psychiatric treatment, sex change procedures and hormone replacement therapy.

Cover for complimentary medicine treatments such as acupuncture is provided in some plans, but not others.

Many PMI policies now include policy excesses and/or co-insurance requirements (where the policyholder must pay a proportion of the costs).

The main considerations with PMI from an underwriting point of view are the individual applicant's age (the normal age range is 18 to 70), the level and scope of cover sought (see hospital bands above), the type of plan (premier, standard, budget etc), and the applicant's medical history.

Previously those with adverse medical histories would find certain benefits reduced or excluded from cover, but more recently insurers have moved toward simply excluding all pre-existing conditions where these re-occur within two years of inception.

The key considerations from a claims perspective are to verify that the patient and treatment are covered under the terms of the policy, that the premium paid covers the date of treatment, and that the hospital (or scale of hospital or bed) is covered.

Standing agreements
Many insurers insist on pre-authorisation, whereby the policyholder is obliged to check with the insurer in advance of any treatment to allow claims handlers to verify that the treatment is necessary and relevant and that any fees are likely to be reasonable.

Hospitals normally submit bills directly to the insurer. Most insurers have standing agreements with them covering daily fees for hospitalisation and general care and charges for various procedures and treatments.

This approach benefits both parties - insurers can predict and manage costs of meeting claims, while hospitals know they can generate sufficient revenue to cover the costs of providing treatment. Following approved treatment, the insurer will remit funds to the hospital and inform the patient in writing. IT

' Peter Farmer is a director of Searchlight Solutions. This feature is based on materials available on Searchlight's Tick e-learning system

Test yourself on PMI
Q1. Approximately what percentage of private hospital users fund treatment directly without recourse to PMI?

Q2. When pre-existing conditions are excluded for a period of time after the policy starts, what is this called?

Q3. Underwriters will normally request sight of individual medical histories for groups of under what size?

Q4. Name three types of treatment commonly excluded from PMI policies.

Q5. Over what upper age limit is it not normally possible to take out PMI?

Answers
A1. 20 to 25%. A2. Moratorium basis. A3. 100 people. A4. Any three from: normal pregnancy and maternity, routine dental treatment and sight testing, cosmetic surgery, long-term illness, AIDS-related illness, treatments other than those recommended by a GP, long-term care, palliative treatment, abortion, vasectomy, self-inflicted injury, treatment for drug or alcohol abuse, psychiatric treatment, sex change procedures and HRT. A5. 70.