In order to provide some help in assessing the possible consequences of choosing each of the main approaches to paying for private medical treatment, an imaginary example is given below comparing these routes for a man aged 50 today who is in good health. The example makes the assumption that the person needs two periods of private hospital treatment: one at age 55 costing £4000 and one at age 65 costing £8000.
Assume the person chooses a comprehensive health insurance scheme with standard grade private hospital accommodation and an excess of approximately £200, with a premium of £500 in the first year (£41.66 per month). For comparison, the cheapest comprehensive plan in our premium comparator, Norwich Union's Trust Care (District 1) plan with £100 excess would cost £40 per month or £480 per year.
The person’s premium would be subject to two sources of increase over the years, apart from general retail price inflation.
Firstly, health insurance premiums increase with age. To use the example above, a person aged 70 subscribing to the Trust Care plan with a £100 excess would pay a premium of £86 per month or £1032 per year. This represents an annual percentage increase of 3.9% over a 20 year period.
Secondly, private medical insurance has consistently been subject to price inflation above the rate of price inflation. Medical expenses in general increase in price faster than general inflation as technology becomes more complex and new, more expensive drugs are developed etc. The 1998 Office of Fair Trading report quotes evidence from Laing & Buisson suggesting that private medical insurance has experienced increases in premiums of between 3% and 3.5% above retail price inflation. While it cannot be assumed that future premiums will automatically increase in the same way, there is currently no basis for predicting a significant reduction in the rate of medical insurance inflation. Obviously, medical expenses paid for directly through self-payment or any other route will be subject to similar increases above retail price inflation.
For the purposes of this illustration, it will be assumed that the person’s premiums increase by 3% a year due to age-related increases and a further 3% a year due to medical insurance inflation above retail price inflation.
These effects have the consequence that premiums reach £133.33 a month or £1600 a year by age 70, leaving aside retail price inflation. Over the 20 year period, the person will have paid a total of £18,400. All private medical expenses will have been paid for by the insurance apart from any conditions which fall into excluded categories, such as those defined as pre-existing or chronic. In the comparative example, the two hospital stays will have been paid for, apart from a small excess, if applicable.
Looking ahead from age 70 the person faces further significant increases in premiums up to age 75, when increases diminish. The person has no accumulated credit from past contributions. The incidence of illness increases and treatment will be covered subject to exclusions, particularly those relating to "chronic" conditions.
For the purposes of comparison with the comprehensive insurance option above, the assumption will be that the person invests the same amounts each year as they would have paid in premiums. This could be into an ISA or other investment plan.
The financial outcome will depend on two main assumptions: firstly, the return on the investment; and, secondly, the levels of private medical expenditure which the person has to fund from their own resources.
This example takes two possible rates of return: a conservative 5% return and a realistic 7% return assuming an equity based investment and allowing for charges levied by the fund provider. For simplicity, the ISA option is assumed and therefore tax is not paid on gains made from the investment.
The example assumes two instances where the person requires private medical treatment, which they pay for themselves. The first, at age 55, costs £4000 and the second, at age 65, costs £8000. Therefore the example does allow for substantial medical expenditures (and the impact of medical price inflation on the costs of treatment in future years).
Under this example, at age 70 the person has a positive balance in their health fund of approximately £10,500 in the case assuming a 5% return and of approximately £13,000 assuming a 7% return. This is after the fund has paid for the two cases of hospital treatment. They have accumulated a useful reserve as they look ahead to future years.
The actual outcome depends very largely on the levels of medical expenditure occurred. In the positive extreme case where the person had no private medical expenses during the period 50 to 70 and invested in a health fund, it would be showing a final positive balance of £29,000 with a 5% return and £35,000 with a 7% return. If the person experienced regular cases of illness requiring complex treatment, they could be tens of thousands of pounds out of pocket.
To allow a comparison with the comprehensive insurance and self-pay options above, the example below again takes a 50 year old man over 20 years with two cases requiring private medical treatment: one at 55 costing £4000 and one at 65 costing £8000.
The example uses the premium rates and excess amounts quoted by XS health. The company quotes one premium rate for each age. These increase by approximately 3% per year, in line with the assumptions applied above. A medical inflation rate of 3% per year has been added to the premiums. XS health applies an excess of £1500 for people aged up to 59 and £3000 for those aged 60 and above. Therefore, in our example the person will have to pay £1500 from their own resources at age 55 and £3000 at age 65.
The example assumes that the person invests the amount saved by choosing high excess insurance compared to comprehensive insurance each year. Again two rates of return, 5% and 7% are applied. To illustrate the savings, at age 50 the person’s annual subscription for high excess insurance is £276 compared to £500 for comprehensive insurance, giving a saving of £224. At age 70, after allowing for medical inflation as well as the impact of age, the premium for high excess insurance is £835 compared to £1513 for comprehensive insurance, giving a saving of £678.
The outcome at age 70 under these assumptions is that the person choosing high excess insurance has accumulated a fund of approximately £6000 at 5% investment return or £7500 at 7% return.
These amounts are approximately 60% of those accumulated by the person choosing the self-pay route (£10,000 and £13,000 respectively), but the person choosing high excess insurance has two important benefits. Firstly, they have been protected against substantially higher medical expenses if these had occurred. Secondly, they can continue subscribing to the high excess scheme for the rest of their life, extending the protection at a significantly lower rate than comprehensive insurance.
If the person was fortunate enough not to require any private medical treatment during the period 50 to 70, they would accumulate a fund of approximately £13,000 at 5% return and £16,000 at 7% return. These sums are around 45% compared with those in the self-pay route if no treatment is required (£29,000 and £35,000 respectively).
The possible downside of the high excess route would happen if the person required medical treatment frequently and therefore had to pay large numbers of excesses. In any year where medical treatment is required under 60, the total payment is not the two or three hundred pounds of the insurance premium but £1700 plus. At age 60 plus in any year when treatment is required the total payment is almost £4000 plus.
The table below summarises the three routes followed in our imaginary example.
| Summary of outcomes of someone following three private health options | ||||
|---|---|---|---|---|
Outlay |
Position at 70 |
Possible upside |
Possible downside |
|
| Comprehensive insurance | £18400 paid in premiums (possibly plus 2 modest excess payments of £100 each) | The two cases of hospital treatment in the
example have been paid for No personal health fund |
If the person had needed frequent hospital treatment this would have been paid for (subject to exclusions) | None |
| Self-pay | £18393 invested | The two cases of hospital treatment in the
example have been paid for There is a personal health fund of £10000 to £11700 depending on rate of return |
If there had been no requirement for private hospital treatment the health fund would have a value of £27700 to £33100. | If frequent complex hospital treatment had been required, expenses could be tens or even hundreds of thousands of pounds |
| High excess | £10153 paid in premiums – balance of £9135 invested: total £18393 | The two cases of hospital treatment in the
example have been paid for There is a personal health fund of £7360 to £9030 depending in rate of return |
If there had been no requirement for private hospital treatment the health fund would have a value of £14000 to £16800. | If the person had required expensive hospital treatment every year (in addition to the two in the example) they would have been liable to pay an additional £19000 in excesses |
The examples show that none of the three methods can be considered clearly superior to the others. The choice of the most suitable method for a particular individual, family or company depends on many factors, including:
The following broad observations may be worth considering. They do not constitute a recommendation of any particular route to any particular individual, family or company.