Soaring medical inflation to push demand for DC healthcare

Medical inflation has hit 10 per cent a year as claims increase and costs rise, according to figures from Mercer.

The firm says that the rate of inflation is so severe that company medical plans may have to undergo similar changes experienced by company pension schemes.

Data analysed by the company shows that medical inflation of 10 per cent a year will push the cost of a medical plan costing an employer £1 million in 2008 up by around 60 percent in 5 years.

In 2007, the company carried out a survey of historical claims of over 250 companies, with a combined annual claims spend of £142m.

According to the data generated by the survey, the claim cost per life – the cost of providing medical cover for a group of employees and their dependants – has risen by 67 percent since 1999. This is an average compound medical inflation rate of just over 6 per cent annually. In comparison, the UK’s Retail Price Index has risen an average of 2.75 percent a year over the same period while the National Average Earnings have risen by just under 4 per cent annually.

Steve Clements, principal in Mercer’s health & benefits business says: “The current rate of inflation isn’t sustainable. In spite of increased NHS funding over the last few years, medical inflation in the private sector has not been quelled. Companies still face massive inflation demands in this sector compared to other business costs. It’s proving an increasing challenge for companies to maintain current levels of cover irrespective of how much their employees value it.”

“If the current rate of inflation continues, we may see medical plans undergoing the same process experienced by pension schemes in the move from defined benefit to defined contribution arrangements. Employers will move to cap liabilities. We have already seen larger medical plans unbundling different elements of cost and services. Now we are beginning to see increasing interest in the UK and the US over the viability of personal account-based medical plans.”

According to the report, until January 2003, medical inflation was mainly driven by an increase in the incidence of claims as employees looked to company plans to avoid NHS waiting lists. Since then a key driver has been the introduction of new treatments and drugs, in particular relating to complex medical treatments.

In 1997, fewer than 6 per cent of all claims were registered as ‘high claims’ with an average cost of over £10,000. These remained fairly constant until 2003, when they rose to 8 percent. In 2005 and 2008, the proportion of high claims rose even further to 9.5 percent and 11 percent, respectively.

Clements says: “We’ve seen a notable rise in the number of large claims over £10,000. The rise is due to an increase in provider costs and improvements in medical technology including a new generation of drugs and new treatment methods.

Mercer says some companies are responding to change by linking access to treatment with NHS waiting times and so reducing workplace absence by accelerating access to care. Others are increasing employee and dependant contribution levels either through premium sharing or at the point of claim, or both. Some are introducing medical underwriting to exclude pre-existing conditions from cover or introducing annual maxima for all treatment or for specific high cost conditions.

“We are also seeing companies offer greater financial incentives for using the NHS, while other organisations restrict cover by excluding psychiatric conditions and reducing out-patient cover levels. Some companies are even changing the eligibility criteria for plan membership,” commented Clements. “Moreover, there is increasing focus on health risk management including wellness programmes to improve employees’ overall health and motivate them to live in a healthier manner.”