Author: Mintel Group Ltd.
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Private Healthcare - UK - July 2015
Executive Summary
 
“As income levels start to rise in the UK, more people have money available to spend on healthcare services to improve their standard of living. The private healthcare industry is well positioned to take up extra demand if services become strained with the current difficulties in the NHS, despite the country’s strong affection with it. Over the past few years, private healthcare operators have integrated with the public sector’s provision of health services, making any necessary crossovers a smoother process. With leading PMI insurers, such as Bupa, stating their intention to charge fairer premiums, costs are also less likely to intimidate customers from purchasing in the future.” 
-Lewis Cone, B2B Analyst

Market size
UK expenditure on private acute healthcare is believed to have increased year-on-year throughout the last five years, with the market expanding by a cumulative 19% between 2010 and 2014 to an estimated £7.2 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, 2010-14, (£ Million)
  
Source: MBD and trade estimates

Growth in corporate and personal premiums has been relatively even since 2004, with personal PMI premiums rising by 31% between 2005 and 2014, and corporate premiums increasing by 31% over the same period. However, since 2010, growth in personal premiums (10%) has outpaced corporate premiums (7%).

Gross PMI premiums earned increased by an estimated 3% over the review period, from £3.5 billion in 2010 to just more than £3.6 billion in 2014. However, the number of PMI policyholders is estimated to have fallen by just under 3% to 3.03 million from 2010 to 2014. The number of people covered is also estimated to have declined by 6% from 5.5 million to 5.1 million over the same period.

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

Market trends
Growth in the private healthcare sector has largely been driven by increased demand from the NHS in recent years. NHS spending on private sector care has risen significantly over the past decade, aided by a shift in government policy that has enabled NHS PCTs, and now CCGs, to rely more heavily on the private sector to provide NHS care. The proportion of the private acute hospital care sector funded by the NHS has increased from 9% in 2003 to almost 28% in 2014, representing a substantial shift in how independent hospital care is paid for. However, independent hospital operators also rely on NHS hospitals to treat many of their patients who develop complications, with an estimated 6,000 patients a year admitted to the NHS from private hospitals.

Both the private healthcare and private medical insurance markets exhibit regional fragmentation, with higher numbers of private hospital beds and significantly higher penetration of private medical insurance in the south east, London and East Anglia. An estimated 12.4% of households in the south east and 10.3% in London contribute towards private medical insurance, compared with 1.5% in the north east.

The increased use of open referral schemes, where a GP’s diagnosis is used by insurers to find the most suitable consultant and facility for the policyholder‘s clinical needs, has added to the pressure on some unaffiliated and smaller hospitals, which are often unable to negotiate suitable fees with insurers.

A large majority of work carried out in private acute hospitals is surgical. The surgeons and anaesthetists who carry out surgeries are typically not employed by hospitals, but instead use agreed ‘practising privileges’ and are self-employed. Almost all are consultants at nearby local NHS hospitals, working privately during their non-NHS hours.

PMI providers have also increasingly developed products to target age groups where uptake is not particularly high, particularly the over-64s and younger adults, who may no longer be part of a joint-policy with their parents and who do not have the greatest knowledge of the market.

The recent gains in company-paid PMI have been driven by the increased popularity of self-insured schemes with employers as insured volumes have declined. The rise in insurance premium tax from 5% to 6% in January 2011 influenced demand, increasing savings offered by ‘tax-exempt’ self-insured schemes.

Market factors
Open referrals have improved customer choice and changed cost structures 
The increased use of open referral schemes, where a GPs diagnosis is used by insurers to find the most suitable consultant and facility for policyholders’ clinical needs, has led to unit costs savings of an estimated 5% to 10%. Bupa reported that half of its corporate clients have experienced a reduction in claims costs, while its patient pathways have quickened. However, this has also reduced the competitiveness of smaller and unaffiliated hospitals, which had lower fee-bargaining power beforehand and now find it even harder to negotiate the fees required to efficiently operate hospitals.

The Health and Social Care act has led to favourable conditions for private healthcare
The Health and Social Care Act 2012 led to a wholesale reform of the NHS - abolishing Primary Care Trusts in favour of new doctor-led Clinical Commissioning Groups (CCGs). These commission care based on outcomes and put the vast majority of NHS services out to tender, with NHS providers given no preference over private sector providers when bidding for contracts. More than 70% of tenders are believed to have been won by private sector companies since the act came into force. The act also abolished the cap on income that can be derived from private charges by NHS foundation trusts.

The launch of Fit for Work could increase medical insurance within the workplace
The national roll-out of the government-led Fit for Work service from May 2015 has also improved the environment for insurers to pitch the sale of PMI to organisations. The FfW service aims to provide an occupational health assessment and health and work advice line to employees, employers and GPs to help people return to or remain in work after an illness. The government also offers a tax exemption of up to £500 a year for each employee on medical treatments recommended by the service or an employer-arranged occupational health service as a further incentive. There have been calls from industry leaders to extend this tax exemption to corporate group PMI. Research by Punter Southall Health & Protection Consulting found that the tax rate to provide PMI for an employee in the 45% tax bracket with family cover could be as high as 64% for employers.

The NHS funding crisis and its potential restructuring will indirectly affect the industry
With NHS under increasingly intense budgetary pressure, NHS hospitals may look to increase private patient capacity over the coming years to balance the books, unless necessary government funding is provided. This transition to further privatisation may attract public backlash and tough decisions will have to be made on whether to allow it to continue to reduce the financial burden on public finances. Whatever the outcome, the private provision of public healthcare will remain under intense scrutiny and regulation as the public demands services of satisfactory quality ahead of the deemed profit motives of private companies.

Industry structure
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 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 a business, typically with 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.

Some hospital trusts within the 147 foundation trusts sourced a significantly higher proportion of income from private patients in 2013/14. At least four trusts received roughly 10% or more of their total income in this way: The Royal Marsden NHS Foundation Trust (20.1% of total income); Moorfields Eye Hospital NHS Foundation Trust (12.3%); Great Ormond Street Hospital for Children NHS Foundation Trust (10.1%); and Royal Brompton and Harefield NHS Foundation Trust (9.9%).

The four largest private medical insurers - Bupa, AXA PPP, Aviva and VitalityHealth - accounted for an estimated 89% of the total value of the PMI market in 2014. Aviva and AXA have the greatest immediate growth potential after Aviva’s merger with Friends Life in April 2015 and AXA’s purchase of Simplyhealth’s PMI business in May 2015.

The market has historically been difficult for new entrants, with several companies returning high losses and subsequently withdrawing. This reflects the difficulties companies with no claims record face in a market where product selection involves a high level of trust.

The two largest providers of PMI have effectively created scale economies from cost containment, notably through the development of network schemes of private healthcare providers. Bupa and AXA PPP Healthcare have exerted significant purchasing power over healthcare providers to negotiate deep discounts on services. This has increased barriers to market entry and limited the development of competitors’ market share. However, the two companies have largely been unable to negotiate sufficient discounts to offset the increase in fees charged by hospital operators.

Consumer
68% of consumers have never used a private healthcare service, while 11% last used a service five or more years ago. Consumers aged between 35 and 54 years old used private healthcare services the least, with only 26% of males and 27% of females in this age group having ever recorded using such services.

A quarter of respondents listed avoiding long waiting lists as the main reason for using private healthcare. Growing concern over waiting times in the public health service, especially with the recent news that a significant number of NHS hospitals have not met the 18-week waiting list target by the end of 2014, clearly led demand for private healthcare.

The two most common reasons why consumers have not used a private healthcare service are initial treatment costs (40% of respondents) and satisfaction with current NHS care (25%).

Gaining access to another supply of health services (25% of respondents), wanting cover for other family members or a partner (23%) and gaining access to specialist treatment not available on the NHS (22%) are the most common reasons for purchasing health insurance.

Forecast
The value of the private acute healthcare market is forecast to increase by 12%, but will experience weaker growth beyond 2017

UK expenditure on private acute healthcare is estimated to increase by 3.7% in 2015 and 4.2% in 2016, before growth slows over the next three years due to an anticipated recovery in NHS operations. This will see less people willing to pay “double” for healthcare services. The market is forecast to increase in value by 12% from just over £7.5 billion in 2015 to around £8.4 billion in 2019.

FIGURE 3: Forecast UK Expenditure on Private Acute Healthcare, 2015-2019, (£ Million at 2014 prices)
  
Source: MBD forecasts

The PMI market is expected to develop at a constant rate over the next five years
The outlook for PMI is forecast to improve due to the continued stable economic growth expected over the next five years. Real incomes are expected to rise and more companies will offer employee wellbeing programmes as part of the government’s drive to improve occupational health. These trends should increase both the number of people and businesses considering and purchasing PMI. The market for private medical insurance is forecast to increase by just over 2% in real terms between 2015 and 2019 - from £3.6 billion to £3.7 billion.

FIGURE 4: UK Market Forecast for Private Medical Insurance Subscription Income, 2015-2019, (£ Million at 2014 prices)
  
Source: Mintel/MBD forecasts

What we think
The lead-up to and immediate aftermath of the general election pushed the current condition of the UK’s healthcare system into the public domain. With the NHS facing its most difficult challenge since its inception, due to a gap in both funding and healthcare professionals, the government and healthcare providers must work in tandem to ensure that the public service can adapt and restructure to return to its previous outcome level. It is important for private operators that the NHS recovers as the private healthcare industry has become more integrated with public healthcare in recent years. This trend is set to continue given the implications of the Health and Social Care Act. Public concern over the traditional profit motives of private companies providing NHS services can only be reduced with full transparency over costs and patient outcomes. An efficient, competitive and complementary private healthcare service will benefit the entire healthcare system as supply pressures from the growing and ageing population stretch resources and facilities to their limit.

M B D | © MBD Limited.