Midweek Money: Perils of your private medical cover

Imagine having to spend a few days in hospital for a non-essential operation to remedy a minor medical problem. How nice it would be to select an operation date, the hospital, and even the surgeon of your choice.

The ability to do this is in sharp contrast to the often lengthy wait when receiving the same treatment through the NHS. For up to 6 million people, this is an option available to them thanks to the private medical insurance (PMI) they are covered under.

PMI is not cheap, however, and this is, perhaps, why the vast majority of those with cover have it courtesy of their employers, who usually operate group-wide schemes. Which is fine, as long as you are working for a firm that is prepared to pay the premiums. But what happens if you join a firm where cover is not one of the perks on offer, or if you have just retired?

"It can be quite a blow to find out how much PMI cover really costs," says Steve Walker, proprietor of Medical Insurance Services, a firm specialising in this field. "Many people may have seen it as a pounds 300-a-year employer's perk, and assume that is all it will cost them. They then discover that to maintain the same level of cover for themselves and their wives could cost them up to pounds 1,000 a year each."

Peter Bye, a partner at the Private Health Partnership, another specialist adviser, adds: "It used to be the case that many firms would offer continuing cover to people who had retired. But a few years ago, most companies decided they simply couldn't afford it.

"It's one thing to offer PMI to employees in a firm where the average age is 32 and group premiums reflect that fact, quite another to pay for someone who is at an age where they are likely to be making the most claims. Most companies would now say that their responsibility ends when that person leaves their employment."

The problem of finding affordable but comprehensive cover is compounded by a combination of factors. One of them is inflation in the cost of medical equipment and treatment: on average, premiums have risen by 10 to 15 per cent a year, some 6 to 12 per cent a year above the retail price index. The industry is in a costs and claims spiral, partly because, as in the NHS, medical costs have risen with the advent of new techniques.

But the main factor appears to be an increase in claims, with insurers facing what some describe as "health investors" who are determined to recoup rather more than their cover has cost them, with this in turn leading to a process of "selective" self-insurance.

The other main factor is age-related: as people get older, they are more likely to need medical care. Therefore their premiums are likely to rise. Eventually, premiums become unaffordable for many. Peter Bye adds: "One of the reasons for this seepage of people away from PMI recently has been because of the Government's decision to scrap tax relief on premiums in the Budget last year."

So what happens if somebody wants to retain cover after leaving their last employer? Steve Walker says that, for the majority of people, the main option is that of retaining cover with their existing insurer: "The standard practice is for `continuing terms' to be offered to a former employee, whether they have retired or have joined another firm. This is usually done as soon as the person leaves that employment. Of course, that's when people discover just how much it will cost them each month to obtain the same level of cover."

It can make sense - despite the higher premiums and the sense of being held hostage by your existing provider - to go for that option, if only because looking for another insurer can leave a person who has made use of PMI in the past without cover for "pre-existing" conditions. Often, the premiums are cheaper, too.

A danger of shopping around for a cheaper insurer, one that sometimes applies to the former, employer-provided one, is that prospective policy- holders may be required to undergo new underwriting tests if they wish to pay for cover themselves. This could mean either that premiums rise to reflect factors such as age, or that insurers are unwilling to offer cover for pre-existing conditions.

In any event, exclusions are standard among insurers, the main ones being treatment for chronic conditions such as asthma and diabetes, dental treatment, cover for normal pregnancy, and any treatment for alcohol or other drug dependency.

The alternative is to opt for "moratorium cover", where a person will not receive payment for treatment for a set period of time, usually between two and five years after taking out the insurance policy. The advantage of this is that you will not be forced into a time-consuming and potentially even more problematical medical examination, with all the accompanying risks of discovering a previously-unknown medical condition.

It is important to note, however, that in a recent report the Office of Fair Trading (OFT) attacked "moratorium cover" for potentially putting people off seeing their doctors about their medical problems for fear of losing their cover.

In addition, the OFT said, even if policy-holders held off having treatment for two years, the wording on some policies was so confusing that they were being refused payment for private medical treatment without its being made clear in the policy's small print that this might happen.