Medical inflation - are healthcare costs heading down?

Last month, the market leader in UK medical insurance, BUPA, announced it was decreasing its medical inflation factor from 10.25% to 9.75%.

(See the home page on our website to take part in our very brief survey on the current level of medical inflation on your plan.)

Our research among the other main UK medical insurers indicates that they continue to use factors around the 10% level. The inflation figure is one factor that insurers use when calculating the annual premium increases for their experience-rated group medical insurance business. The factor used by both BUPA and many other insurers has been between 10% and 11% in the past few years. Mellon has consistently argued over the past two years that the compound effect of these rates of increase will make the option for employers to provide medical cover increasingly unsustainable as a benefit.

This medical inflation figure is not a simple calculation of rising healthcare costs. Indeed, the health insurance providers would all assert they have measures such as hospital contracts and managed care teams in place to control the cost of treatment, although we believe the effect of these measures is difficult to quantify. The other major factor in the inflation figure is the increasing number of people making claims. This will be influenced by a whole range of factors, most of which are outside the control of both the medical insurance provider and the employer who sponsors the plan.

So does the decision by BUPA signal the beginning of a downward trend in health insurance costs?

It is possible that the market is beginning to reflect a reduction in the underlying risk costs of healthcare. Improvements in the NHS, particularly in areas of cardiac and cancer treatment, could be beginning to have an effect on the number of people being referred for NHS rather than private treatment. There are also predictions that there will be significant changes to the dynamic of the healthcare provider market, which may apply further downward pressure on costs. The accompanying article in this month's Corporate Health Update looks at the proposed sale by BUPA Hospitals of 10 of its hospitals and the refocusing of the business on more cost-efficient models of delivering care.

In the last few days there has been a period of intense political activity around the healthcare question, and both the Government and Conservative opposition have announced their strategies for the long-term future of the health service. There has also been a lot of coverage in the press on the subject - including a Sunday Times Special Report (John Waples, 20 June 2004) in which we were quoted.

Healthcare policy will be one of the major battleground areas at the next election, but there are several themes common to both parties which, we believe, will continue to speed up the pace of change in the healthcare market. These are: