How to cope with the rising costs of healthcare benefits

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• The health of the workforce is more important than ever because people are working longer and older workers have a greater chance of being affected by a long-term health condition.

• Wellness schemes are a good way of keeping employees healthy and can help to reduce the number of claims made to private medical insurance (PMI) schemes.

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• The cost of PMI is rising because of medical inflation.

Case study: Prevention pays off for Legal and General

Legal and General reduced its sickness absence levels by 15%, saving almost £70,000, after piloting a preventative
health programme for six months. Between November 2010 and April 2011, the insurer’s sickness absence rates were 15% lower across a pilot group of 1,000 staff, compared with the same period in 2009/10, and 13% lower than in 2008/09.

Working with Serco Occupational Health, GetFit Wellness and charity Stand To Reason, the firm launched a workplace wellbeing programme to the pilot group, which returned £2.47 in cost savings for every £1 spent on it.

Employees were asked to take part in an online confidential questionnaire relating to lifestyle, health risks, medical history and work. Participants were then sent a summary of their health, flagged as green, amber or red. Staff could set health targets or goals, depending on their results.

Legal and General gave managers training to support staff with low levels of emotional wellbeing, such as stress or depression. An early intervention programme, called Beating the Blues, enabled staff with mild or moderate depression to refer themselves for online cognitive behavioural therapy (CBT).

Nicky Richards, HR consultant at Legal and General, says: “I concluded there were some hotspots in the company. In some areas, there were above-average levels of psychological absence. Also, we had no proactive wellbeing intervention.”

Case study: Towry takes PMI out of flex

In April, financial services firm Towry removed private medical insurance (PMI) and travel insurance from its flexible benefits scheme after rising premiums, which were paid for by staff using their flex allowance, made it no longer viable. Richard Higginson, head of reward at Towry, says the benefit, which was taken up by 100 of the firm’s 800 staff, was chosen mostly by those who had a high risk of illness, which increased the number of claims.

“Our premiums were huge when we only had 100 people with a poor claims history,” he says. “We got to the point in April where had we renewed the policy under the flexible benefits plan, it would have been cheaper to phone the same insurance company and buy a retail product.”

Towry plans to reintroduce PMI as a core benefit for all staff in 2013.

Employees will be given the option to add a partner or family members to the plan through the flexible benefits scheme. Although it will cost the firm more year-on-year to provide the benefits, the premiums per head will be lower. Because of the increase in numbers, the risk will be spread more evenly.

Towry hopes this move will mean that the premiums will be £500 a head or less, compared with £1,000 a head if it had renewed its previous policy.


Spiralling costs have caused many employers to reassess how they offer healthcare benefits, says Nicola Sullivan

Healthcare benefits are the next biggest cost burden after pensions, and many employers are starting to realise that fact. It is being suggested that healthcare benefits will follow a similar path to pensions, as the risks associated with offering them shifts from the state to the employer, to the employee.

James Kenrick, practice leader of healthcare at Aon Hewitt, says that in the 1980s it became clear that the state pension would not be enough for employees to retire on. That realisation was followed by growth in the number of final salary schemes, and contracting out of the state earnings-related pension scheme (Serps). Increased life expectancy has now made final salary schemes unsustainable for most employers to offer and many have replaced these with a defined contribution plan where the risk sits with the employee.

Kenrick draws comparisons with healthcare. Waiting lists for non-urgent surgery on the NHS began to emerge in the 1970s and 1980s, prompting growth in private healthcare, which was supported by employers that started offering private medical insurance (PMI) to staff.

“Organisations started giving PMI as a benefit so that when people had a long wait for a hip replacement, they could get treatment quickly, which benefited them and the business,” he says.

But just like final salary pensions, PMI in its current form is no longer affordable for many employers. Medical inflation, driven up by the development of new drugs and procedures, is raising insurance premiums.

Kenrick says the premiums for corporate schemes, even those with good claims ratings, could double in six or seven years purely because of medical inflation. “We have seen a single corporate rate go from £90 to over £500 a year,” he says.

Renewing policy terms

Large insurers will often factor in an extra 10% in costs for medical inflation when renewing policy terms for a large corporate, says Kenrick. Yet, at a time when employers are looking to reduce the cost of healthcare benefits, the health of the workforce has, arguably, never been more important. The government’s welfare reforms mean
more people with long-term health problems are being integrated back into the workplace. Increased life expectancy, the removal of the default retirement age and the government’s plan to raise the state pension age means people will be working for much longer.

The report Healthy work challenges and opportunities to 2030, published in 2009 and compiled by The Work Foundation in conjunction with Bupa, Rand Europe and the Oxford Health Alliance, forecasts that, by 2030, up to 21 million workers will have at least one long-term health condition that affects their ability to work.

Stephen Bevan, director of The Work Foundation’s Workforce Effectiveness Centre, says that although people are living for longer large numbers are suffering from health problems. This means the health of the working population is in decline.

“ There are more and more people who are perhaps over 40 or 50 developing long-term conditions and they are still of working age. And what we mean by working age is moving from 60 or 65 up to 67. We should expect a high proportion of our workforce to have time off because of long-term conditions.”

The challenge for employers is to reduce the cost of PMI in ways that do not devalue it as a benefit. This is especially true if organisations have already introduced an excess, which stipulates an amount the employee has to pay before the insurance kicks in.

One option is to restrict the number of hospitals offered under an employer’s policy. Mike Blake, compliance director at PMI Health Group, says: “Quite a lot of central London hospitals are expensive in treatment and bed-rate costs. If an employer removes these hospitals [from its policy] and gets people to go elsewhere, it reduces its claimscost and its premiums.”

Kenrick says it might make economic sense for policies to stop covering common treatments that take place in an out-patient or day-case setting, but still cover treatment that requires in-patient care. “Typically, inpatient stays are for higher-cost procedures and longer stays: the cancers, the hip replacements and the cardiac cases,” he says.†

Some employers may also find they have to change the way their policy covers serious illnesses such as cancer, which can result in claims as high as £500,000. Caps can be placed on how much an individual can claim for cancer, or policies can be structured so they cover tests as part of the diagnosis of the disease but do not pay for treatment. Cancer treatment on the NHS is often fast and the patient sees the same consultant they would have if they had gone privately, says Kenrick.

Giving access to drugs

However, an insurance policy could give patients access to drugs they would not be able to get on the NHS. Kenrick explains: “If the person’s condition gets to a point where it moves to acute or palliative care, in other words when the treatment is not about curing the condition but about life extension, within the NHS the drugs used will be those approved by the National Institute for Health and Clinical Excellence, whereas some insurers will pay for drugs that are not approved, providing they are on the consultant’s prescription.”

If employers are tempted to cut costs by protecting benefits for existing employees but not offering them to new joiners, they could inadvertently increase their premiums. Marcia Reid, managing director of Finchers Consulting, says: “The danger with that is the risk pool will get more expensive because of the ageing workforce and[employers may] want the younger members in the scheme because they reduce the risk.”

Another way of offsetting the costs of PMI is to use it in conjunction with a health cash plan that could be used for minor procedures and treatment after surgery. Russ Piper, chief executive of Sovereign Health Care, says: “The health cash plan does not cover as many chronic conditions. If an employee needs cartilage surgery on their knee, the cash plan is not going to cover that, but PMI would. For post-operative care such as physiotherapy, the cash plan will cover some of the costs.”

Cash plans, which typically offer cash back on dental treatments, alternative therapies and health screening, could also play a role in keeping staff healthy. Preventing employees getting ill in the first place not only reduces the number of PMI claims, but also cuts the cost of sickness absence and increases productivity. Peter Choueiri, chief
operating officer at Healthways, says: “Employers have been trying to manage the medical cost explosion by reducing the supply, but they cannot reduce it further.

“Employers need to make sure people do not use the services as much as they have been. The best way to do that is to ensure they remain healthy.”

Wellness strategies are underpinned by thorough research into employees’ wellbeing. These surveys give employers an understanding of employees’ social, emotional and physical wellbeing and assess the quality of the work environment, including its stress triggers, culture, leadership, wellness and prevention programmes, and recruitment and retention efforts.

Benchmarking an organisation

The findings can also be used to benchmark an organisation against other employers. Interventions, based on the
survey’s findings, can then be used to improve wellbeing. These can include providing healthier choices in canteens, encouraging staff to get fit by taking part in walking challenges, and offering subsidised gym membership as a benefit.

Employers can also tackle mental resilience by increasing communication between managers and employees,providing cognitive behavioural therapy (CBT) or publicising an employee assistance programme (EAP). Health screening also often appears in wellness programmes.

Finchers’ Reid says: “Wellness schemes take a much more holistic view of the workforce. There are two elements: one is keeping the workforce healthy to keep them at work, and the other is the benevolent aspect, an employer’s duty of care for its staff.” Wellness is becoming an issue of national importance. Employers are being asked to†make pledges to improve staff wellbeing under the government’s Public Health Responsibility Deal, which was launched in March 2011 as part of efforts to tackle problems such as obesity and alcoholism.

Organisations are pledging to: ensure staff with chronic conditions are managed in the best way possible; include a section on staff health and wellbeing in their annual report and/or website; and introduce measures to encourage healthy eating and exercise. The Work Foundation’s Bevan says: “Rather than regulating, the government is encouraging employers to sign a pledge saying ‘we will encourage employees to do more exercise’.”

David Cameron’s planned ‘happiness’ survey will measure people’s psychological and environmental wellbeing, and similar projects are being looked at in other countries, such as France and Canada.

Healthways’ Choueiri says: “In the past, governments used gross domestic product (GDP) as a measure of economic strength. More governments now realise this is not good enough because it is relatively static and does not take into consideration the real performance-related issues of a wellbeing component.

More governments are looking at the question: what is another indicator we can put next to the GDP to get a composmentis picture of the strength of a nation?”

So employers that concentrate on wellbeing, may improve productivity, cut absence and PMI costs, boosting their bottom line.

How much chronic conditions cost the UK economy

The Gallup-Healthways wellbeing index, which surveyed 8,866 UK workers between January and August this year, concluded that full-time employees who are overweight or obese and have other chronic health conditions, in total, miss an estimated 103 million additional days of work each year compared with healthy workers, resulting in an estimated cost of more than £21 billion a year in lost productivity.

• The index showed that full-time workers who are of normal weight and do not suffer from chronic health conditions make up 20.2% of the UK workforce and average 0.34 unhealthy days a month, or about four days a year.

• The average number of unhealthy days a month doubles to 0.69 among those who are overweight or obese but do not have additional chronic health conditions. These employees make up 20.6% of the UK workforce.

• The number of unhealthy days rises to 1.41 a month for the 17.5% of staff who are of normal weight and have one to two chronic conditions.

• Workers who are overweight or obese and have three or more chronic conditions make up 10.8% of the workforce and report a significantly higher average of 5.04 unhealthy days a month.

Reducing the cost of private medical insurance

• Employers could limit the number of hospitals covered by the insurance policy.

• They could restrict policies to covering treatment for conditions that require in-patient care.

• Employers may want to change the way their policy covers serious illnesses such as cancer, which can result in claims as high as £500,000.

• A health cash plan could be used in conjunction with private medical insurance to offer treatments that might be required after surgery, such as physiotherapy.

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