Author: Mintel Group Ltd.
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Private Healthcare - UK - June 2016
Executive Summary
 
“The UK healthcare landscape is changing, with both corporate and individual customers more engaged than ever in their own healthcare, fitness and wellness programmes. This has opened up opportunities for the market if providers and insurers can help design healthcare models that have availability, convenience and ‘value for money’ at the centre of their plans.”
-Lewis Cone, B2B Analyst

Market size
UK expenditure on private acute healthcare is believed to have increased year-on-year in the last five years, with the market expanding by a cumulative 22% between 2011 and 2015 to an estimated £7.8 billion. Currently, there are approximately 1.61 million admissions to private hospitals for surgical procedures each year, with a quarter now funded by the NHS.

FIGURE 1: UK Expenditure on Private Acute Healthcare, 2011-15
 
(£ Million)
 
Source: MBD and trade estimates

Total growth in corporate and personal premiums has been relatively even since 2005, with personal PMI premiums rising by 36% and corporate premiums increasing by 39% to 2015. However, since 2011, growth in personal premiums (11%) has outpaced corporate premiums (9%).

Gross PMI premiums earned increased by an estimated 4.2% over the review period, from £3.5 billion in 2011 to just under £3.7 billion in 2015. The number of PMI policyholders is estimated to have fallen by 3.8% between 2011 and 2015 to 2.95 million people. The number of people covered is estimated to have declined by 3.3% over the same period, from 5.29 million to 5.11 million.

FIGURE 2: The UK PMI Market, 2010-2014, by Number of Policyholders and People Covered
 
(000)
 
Source: MBD analysis of ABI data and MBD estimates (*)

PMI penetration is strongest in affluent areas so more of the population in the south of the UK are covered. The south east and London have the highest rates of PMI penetration, at an estimated 12.2% and 10.7% respectively. The north east, Wales, and Scotland, have the lowest rates of 1.5%, 2.5% and 3.4%. Between 2010 and 2014, Wales recorded the highest increase in weekly spend on medical insurance premiums of 57% from 70p to £1.10, with London recording the largest regional increase over the same period of 21% from £2.90 to £3.50. The East Midlands recorded the largest fall in spending, at 18% from £1.70 to £1.40; followed by Northern Ireland, at 17% from £1.20 to £1.

FIGURE 3: Estimated Weekly Spend on PMI Premiums, by Region, 2012-14
 
(Average Weekly Spend in £)
 
Source: MBD analysis of ONS data and Trade estimates

Market trends
Rising demand for health cash plans denting PMI growth...
There has been a visible trend towards self-insurance among larger companies in recent years, with employers setting up healthcare trust funds to pay medical costs. According to LaingBuisson, the number of employer-paid health cash plan contributors increased by 12% in 2014 to reach a high of 833,000 at the start of 2015, following similarly impressive growth a year earlier. The number of company-paid cash plan contributors (policies) more than doubled between 2010 and 2014 - driven by an average price that did not increase over the period, and underpinned by a sales drive from intermediaries keen to grow a progressive market. Meanwhile, individual demand for cash plans continued to edge down in 2014, falling by 2.4% to 1.81 million individual paid contributors at the start of 2015. However, this was the smallest annual fall in seven years and implies fairly stable demand from individuals.

... as self-pay healthcare sector growth also potentially dampens PMI development prospects
Double-digit growth in the self-pay healthcare sector has occurred at the expense of PMI. The London self-pay market alone is estimated to be growing at 20% annually, largely driven by inbound international business. However, the ad-hoc nature of most consumers’ health needs mean that self-pay options are likely to be the first considered, especially if remedies put in place by the CMA make this more affordable. On the other hand, the type of health care required may be more intensive as the UK population ages, which could lead to more customers becoming interested in the fuller coverage provided by PMI policies. Providers may wish to consider options that act as a ‘halfway house’. For example, a very basic and affordable policy that only includes an annual health check, but also offers a discount on self-pay treatments. This stepping-stone option makes the jump between self-pay cover and full policy coverage smaller, while its lower cost will make private medical insurance seem more accessible.

Private provider income set to be faced with additional cost pressures
The NHS foundation trusts regulator Monitor and NHS England use the national tariff to set national prices and establish rules that commissioners and healthcare providers must use to agree locally determined prices. Given that current established prices are based on data from 2010/11 or 2011/12, the latest payment system started to use data from 2013/14. Monitor’s impact assessment for 2016/17 proposed that the NHS price changes would cut the nationally priced income of private providers by 7% - making them among the hardest hit by tariff changes. The revenue reduction is largely caused by cuts in orthopaedics prices, which have mostly fallen by more than 10%. Orthopaedic services are responsible for a significant amount of independent sector revenue within state service, accounting for around 40% of total private profit from NHS patients.

Government action has sent mixed signals to the PMI market
Government action has had a mixed impact on the group, or corporate, PMI market over the last year. The launch of the Fit for Work service was seen as a positive move for the market as it promoted the role of healthcare within the workplace, though increases in Insurance Premium Tax (IPT) have had a negative impact.

The IPT was set at a flat rate of 2.5% when it was first introduced. It was increased to 4% in 1997 and 5% in 1999. The IPT was then held at 6% from January 2011 until November 2015, when it was increased to 9.5%. In the March 2016 budget, the chancellor increased the IPT by an additional 0.5% to 10% - putting it in line with the rates of many other EU nations. However, many of these countries make an exception for healthcare insurance policies, treating it differently to regular insurance and lessening the burden for those who wish to go private. Anecdotal evidence suggests that private medical premiums could rise by between 7.5% and 15.5% annually due to the increase in IPT.

Market factors
NHS budgetary issues affecting industry performance...
Private healthcare providers are worried about the escalating black hole in NHS finances as it will likely reduce their full-year earnings. In August 2015, Spire Healthcare said the flow of cases from the NHS to the private sector had started to fall, with management expecting revenues and earnings to grow by between 4% and 6% - down from earlier estimates of “mid-to-high single digit” growth. In the last quarterly monitoring report from The King’s Fund, published in February 2016, NHS trusts forecast an endofyear net deficit of around £2.3 billion. More than half of trust finance directors (53%) said quality of care in their local area had worsened in the past year. Nearly as many (48%) clinical commissioning group finance leaders agreed.

...but outsourcing to private sector remains strong
The NHS now contracts out the provision of health services to the private sector at a value of more than £20 billion a year - equivalent to a fifth of the total healthcare budget. Although a significant proportion is made up of contracts with dentists, pharmacies, opticians and general practitioners, the newest and biggest area of outsourcing is for services that the NHS, until very recently, used to provide directly: community health services and secondary care.

Between 2009 and 2014, there was a 50% increase in spending in the private sector on these services by local commissioning bodies and NHS trusts - from £6.6 billion in 2009 to £10 billion in 2014. This has been aided by the introduction of the Health and Social Care Act 2012, which places a requirement on CCGs to put services out to competitive tender.

623 NHS contracts were put before the market in the first three quarters of the 2015/16 financial year, which is on target to at least match the last financial year’s total of 692. 172 clinical contract awards had been advertised up to the third quarter of the 2015/16 financial year - passing the previous financial year total of 162 and far exceeding the 75 advertised in 2013/14.

Doubts still surround level of competition in the market
In April 2012, the Competition Commission, a predecessor body of the Competition and Markets Authority (CMA), started an investigation into private healthcare, which reported in April 2014 immediately after the establishment of the CMA. The report concluded that certain features of the markets for privatelyfunded healthcare services were leading to an adverse effect on competition. 

The CMA’s provisional findings report, published in November 2015, found that HCA’s large market share, combined with high barriers to entry and expansion in central London, result in HCA facing weak competitive constraints. This allows the company to charge higher prices to private medical insurers than would be expected in a wellfunctioning market. However, in March 2016, the CMA reached a provisional conclusion that none of the considered remedies, including the divestment of hospitals by HCA, would be effective or proportionate. The CMA’s provisional decision was put out for consultation until 13th April and final decisions are expected to be made later this year.

Rise in insurance premium tax could dampen PMI market growth
In the July 2015 budget, the chancellor announced that the insurance premium tax would rise from 6% to 9.5% from November 2015. This represented the first significant rise in the tax’s standard rate since 1996. The IPT will impact all insurance customers, with the BIBA labelling it as a ‘stealth tax’ on insurance policies that will affect millions - despite the chancellor suggesting that it would only affect a fifth of all premiums. Furthermore, in the March 2016 budget, the chancellor announced that the standard rate of IPT would be increased by an additional 0.5% to 10% to primarily help support flood defences.

The additional IPT rise has been met with concern in the PMI industry as it will increase costs for employers offering PMI to their employees, and could affect the rate of innovation in the market. More employers might also consider self-funding medical insurance, such as via a trust, to reduce tax liability. Despite PMI being subject to the IPT, life assurance, critical illness and group income protection are exempt.

WPA has advised businesses to start investigating how they might keep healthcare insurance costs under control despite the IPT rise by exploring options such as corporate healthcare trusts and corporate deductible plans.

Industry structure
Private Acute Medical Care
The private acute medical care industry has gone through a continued period of consolidation, with some smaller hospital operators struggling to secure the best rates from private medical insurers. The financial crisis slowed the rate of acquisition, but the market has remained highly consolidated, with the seven largest providers accounting for almost 75% of the market for privately-funded acute healthcare.

Private equity groups own around half of the 200-odd private hospitals in the UK via leveraged buyouts. Private equity makes money by growing the profitability of the business generally over a three to five-year investment cycle. This model of financing has limitations compared to corporate ownership because there are strong disincentives to building new hospitals or renovating old ones - it takes two years to decommission a hospital and build a new one in its place and a further year for revenues to settle down.

The largest market player is General Healthcare Group through its acute medical and surgical division, BMI Healthcare. General Healthcare Group currently operates and owns 60 medical/surgical hospitals with more than 2,700 beds, representing 27% of the UK’s private hospitals and 29% of private hospital beds.

According to an analysis by HSJ, the earnings that 153 individual NHS Foundation trusts gained from private patients rose by 14% over the last two financial years on record - from £346.1 million in 2012/13 to £395.9 million in 2014/15. The largest expansions in private patient income were found in the following trusts: Royal Brompton & Harefield Foundation Trust (a 30.2% rise from £28.8 million to £37.5 million); Royal Marsden (a 28.6% rise from £59.8 million to £76.9 million); and Chelsea & Westminster Hospital Foundation Trust (a 26.6% rise from £10.9 million to £13.8 million).

PMI
The four largest private medical insurers accounted for an estimated 92% of total market value in 2015. Bupa remained the market leader, with an estimated 38% share of private medical insurance sales in 2015 - down from 41.5% in 2010. Major market share movements have tended to follow acquisitions rather than organic growth. Alongside AXA PPP’s growth following its acquisition of SimplyHealth’s PMI business in May 2015, Aviva is likely to provide strong competition going forward after its merger with Friends Life in April 2015.

The market has historically been difficult for new entrants, with several instances of companies returning high losses and subsequently withdrawing, reflecting the difficulties that companies with no claims record have in penetrating a market where product selection involves a high level of trust by the customer.

Anecdotal evidence suggests that more than four million people, equivalent to 80% of private hospital patients, have medical insurance through companies such as AXA, Bupa, VitalityHealth or Aviva, which purchase care from a handful of hospital chains. Some hospital chains have been accused of creating local monopolies across the UK and of forming strong relationships with doctors and insurance companies to help push up prices.

The consumer
64% of consumers have never used a private healthcare service, with 11% last using a service five or more years ago. Those aged between 35 and 54 years old were found to have used private healthcare services the least, with only a third of men and 30% of women in this age group having ever used such services.

More than a third of respondents paid for their last respective private healthcare treatment via their own private payment.

35% of men paid for their last private healthcare service using employer-provided PMI. However, just 23% of women paid using this method for their last visit to a private healthcare service.

By a fairly significant margin, the most commonly used insurance provider by survey respondents was Bupa - responsible for 33% of all private healthcare payments by respondents.

A brand that respondents know and trust was a factor for 34% of insurance purchases.

Forecast
Strong, but stable, growth expected in private acute healthcare to 2020
UK expenditure on private acute healthcare is estimated to increase by 6% in 2016 and enjoy stable 5% growth in the proceeding four years. This reflects that a relatively high number of competitive tenders for NHS contracts are likely to be won by private companies as financial and personnel struggles in the NHS remain high priority issues in the public healthcare sector. The ability of private medical insurers and private hospitals to offer products that address the public’s concerns with NHS treatment is vital if private healthcare is to appeal to a wider audience. Cumulatively, the market is forecast to increase in value by 22% from just less than £8.3 billion in 2016 to £10.1 billion in 2020.

FIGURE 4: Forecast UK Expenditure on Private Acute Healthcare, 2016-2020
 
(£ Million at 2015 prices)
 
Source: MBD forecasts

Slow growth expected in the PMI market
The market for private medical insurance is forecast to increase in real-terms value by a marginal 0.8% between 2016 and 2020 - from £3.73 billion to £3.76 billion. Growth is expected to be fairly stable over the forecast period, excluding the slight 0.1% decline in 2017 as the market adjusts to the higher IPT rate (set at 10%) from October 2016. Despite real income levels improving and more companies offering employee wellbeing programmes as part of a drive to improve occupational health, market value will not be driven by a significant rise in the number of subscriptions, but due to spiralling costs of premiums.

FIGURE 5: UK Market Forecast for Private Medical Insurance Subscription Income, 2016-2020
 
(£ Million at constant prices)
 
Source: Mintel/MBD forecasts

What we think
Although many people still use the NHS as their first destination to receive healthcare services, the organisation’s widespread struggle to reduce waiting times on a restrictive budget, amid a growing and ageing population, offers potentially significant demand for alternative healthcare provision. The ability of private medical insurers and private hospitals to offer products that address the public’s concerns with NHS treatment will be vital if private healthcare is to appeal to a wider audience.

With the UK population becoming more aware of available healthcare options, patients increasingly want to be involved in decisions about their healthcare and the services they are likely to use or not. This is why insurers and hospital providers must offer flexible services that cater for differing individual needs so that patients feel they are receiving value for money.

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