IF7
IF7
1. UK healthcare insurance market
Before the NHS
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The rich funded their own healthcare while the poor relied on charity or self-help.
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Schemes were set up under which working men were encouraged to put aside a small amount each week to fund future healthcare.
The NHS: from 1948 to today
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Founded by the National Health Service Act 1946, and started in 1948.
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The original concept of healthcare that was free at the point of use has been modified by the introduction of payment for spectacles, dental work and prescriptions.
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GPs are organised locally into clinical commissioning groups, along with other health professionals. A number of NHS trusts provide ambulance, acute, mental health, and health and care trusts.
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Greater use is being made of the private sector than previously.
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New NHS reforms came into effect from April 2013 and are set out in the Health and Social Care Act 2012.
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The change of UK Government in July 2024 could see further changes and reforms affect the NHS.
Healthcare insurance market
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The private healthcare sector provides surgery and medical treatment for those who are willing to pay either directly themselves, or indirectly through insurance.
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The perceived advantages over the NHS include less waiting time, choice of hospital, consultant and timing, and cleaner, more private facilities.
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Provident associations are non-profit, mutual organisations for the provision of health insurance whose operating surpluses are counted as part of their reserves.
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Commercial insurers are profit-making organisations which need to pay dividends to shareholders out of their taxed profit.
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Reinsurers provide capital and cover for larger risks which would otherwise impact on the solvency of the insurance company.
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Health cash plans meet claims for optical and dental treatment and provide other benefits, often paying a small cash amount for each night spent in hospital.
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A growing proportion of private medical schemes are run on behalf of employers for their employees by TPAs.
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Specialist healthcare consultancies advise corporate clients on selecting healthcare solutions for their employees.
Health trusts and self-funded schemes
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The employer pays money into the health trust, which is administrated by trustees.
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Benefits to employees are not guaranteed to avoid the trust being regarded as insurance and so subject to IPT.
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Some employers simply decide to pay for their employee’s healthcare needs as and when they arise, rather than having insurance, but this may have tax implications.
Taxation
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Benefits paid under a medical insurance policy or from a health trust are not usually subject to tax for the person who receives the benefit.
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Medical insurance policies are subject to IPT. Long-term insurance policies such as individual group income protection and critical illness insurance are not.
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Where the employer pays the employees’ premiums, employees are liable to income tax on those premiums as a benefit in kind (P11D benefit).
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Companies can offset the cost of providing medical insurance to their employees as an expense against corporation tax.
2. Healthcare outside the UK
Global healthcare trends
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Health spending is rising due to an ageing population, a rise in chronic conditions, new treatments and increasing pharmaceutical costs.
How much do countries spend on health?
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How much a country spends on healthcare is a key indicator of how they consider the health of their citizens.
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Two measures to use are spend on healthcare as a percentage of GDP and per head of population.
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In most countries, the State pays for, or towards, some healthcare costs.
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Every country has its own healthcare system and the detail can be complex and subject to politically driven change.
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In Ireland, there is no universal entitlement to public healthcare, although all residents are entitled to receive care in public hospitals either free or at a reduced cost. Those on low incomes or with certain conditions can access primary care and some other services for free, but 58% of people have to cover the cost of accessing a GP themselves.
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In the USA the State pays for half of all healthcare, with the private insurance market financing little more than a third.
How the UK compares internationally
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Many people believe that the NHS is the best healthcare system in the world.
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In some areas, however, the UK's healthcare system ranks poorly compared to some other countries.
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Independent academic research compares different systems. Their conclusions depend on what factors are looked at and what weighting is applied to each factor.
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Generally, the UK ranks roughly in the middle on international comparisons, although on some measures it is placed near the top.
International healthcare insurance for UK expatriates
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Healthcare insurance for UK expatriates often offers additional benefits compared to the standard UK health insurance policy.
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Such policies have different pricing structures depending on the countries covered.
Travel insurance and international medical expenses
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A key element of a travel insurance policy is cover for health treatment abroad.
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It is rated on the basis of age, countries visited and duration, among other things.
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Some UK national medical insurance schemes also cover treatment abroad in certain circumstances, while others specifically exclude it.
3. Core healthcare insurance products
Private medical insurance
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The purpose of medical insurance is to pay the costs of secondary, acute care received outside the NHS; it is not designed to provide medical treatment in life-threatening emergencies or for the relief of chronic conditions.
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It will usually pay for acute flare-ups of chronic conditions and for their initial diagnosis.
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It pays for treatment as an in-patient, day patient or as an out-patient.
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It is usually annually renewable and the insurer may change premiums, benefits and benefit limits.
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Insurers band hospitals according to geographical location and facilities offered, and the band covered is specified in the policy.
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Most PMI policies are supported by a table of benefits which details the type of medical services covered and the total benefits that may be claimed daily, weekly, annually or per procedure.
Personal PMI products
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Personal PMI products can be comprehensive, standard, budget and international, and it must be made clear to the purchaser exactly what is covered by their policy.
Group PMI
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Group PMI products are purchased by employers for the benefit of their employees.
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Alternative forms of group private medical cover include health trusts and cost plus schemes. These are forms of self-insurance that may be used by larger employers but which often have a stop loss insurance element to protect the employer against large losses.
Health cash plans
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Although, following the creation of the NHS, such schemes paid a small cash sum for each night spent in hospital, in recent times additional benefits have regularly been offered, the most popular of which are dental and optical costs.
Dental insurance and capitation plans
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Dental insurance is usually written on an annually renewable basis and pays a cash benefit up to the cost of the treatment.
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Capitation plans are not insurance but a form of budgeting.
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The customer pays a fixed amount to the provider each month, and in return, the dentist carries out treatment without payment.
4. Other healthcare insurance products and healthcare services
Hospital treatment insurance
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This typically pays a given amount for specified, mainly surgical treatments only. Although additional services and/or cover may be offered by some providers.
Cancer only cover
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Pay a fixed cash lump sum on diagnosis of a specified cancer rather than on the cost of treatment.
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They provide most of the cover of CI policies but are much cheaper and simpler to set up and understand. however, the cover is very limited.
Travel insurance
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Covers the cost of emergency (i.e. not planned) medical treatment abroad.
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Covers the cost of return to the UK or evacuation to another country.
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Does not usually cover going abroad for the purpose of having treatment.
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May provide additional benefits (such as loss of baggage or personal effects).
Personal accident insurance, accident, sickness and unemployment (ASU) insurance, including PPI
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PA insurance pays out a fixed sum if the insured has an accident, with the amount varying with the severity of the accident.
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Sickness insurance may also be available offering a weekly or monthly benefit if the insured is unable to work because of illness.
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ASU insurance includes personal accident (A), sickness (S) and unemployment (U) covers in one policy.
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PPI and MPPI is essentially sickness, accident and unemployment insurance designed to protect loan payments.
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Unemployment insurance was withdrawn by most insurers in 2020, but is now more widely available again.
Long-term care insurance
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LTC insurance provides a pre-selected monthly income to meet the cost of home care or nursing home fees for those too old and disabled to look after themselves.
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Benefit usually commences when the member is no longer able to perform a set number of ADLs.
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Under an immediate needs LTC policy, the customer pays a capital sum to the provider who then invests it to provide income to pay for care as long as the insured lives. This is usually done through the purchase of an annuity.
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Some insurers now pay out a cash lump sum on a whole life policy where the customer needs permanent long-term care.
Income protection insurance
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Provides customers with a replacement monthly income if they are unable to work because of sickness or accident.
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State welfare benefits are changing – one change is Universal Credit which is replacing several State benefits.
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There is usually a deferred period during which no benefit is paid and this is usually set according to how long the employer pays sick pay or whether the insured is self-employed.
Critical illness insurance
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Pays out a predetermined lump sum on either the diagnosis of one of a specified range of illnesses or on undergoing one of a specified range of operations.
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Most insurers pay a benefit when the member is assessed as having TPD, which prevents them from engaging in either their own or any occupation.
Wellbeing services
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Insurers increasingly provide more than just cash or pay for treatment when an insured event occurs as a way of differentiating themselves from their competitors in the service they offer their customers.
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Some providers of group schemes offer additional benefits to employees such as an employee assistance programme or occupational health audits.
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Treatment advice services can either be passive, i.e. simply providing pre-recorded information on specific conditions, or active, i.e. providing access to a person who can give information, help or advice.
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PMI does not generally cover the cost of preventative medicine or health check-ups, though some policies may offer a discount on health screening carried out by the insurer's recommended expert.
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Private GP services are offered by a growing number of insurers, usually with a pre-booked online consultation.
Choosing the right policy
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It is important that customers choose the right policy or policies to meet their needs.
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Their choice will depend on their priorities, the greatest risk to their livelihood, their health and affordability.
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Their choice of provider will depend on what benefits are important to them, cost and ultimately, what is available.
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They should periodically review their policy to ensure that it remains suitable.
5. Marketing and the roles of intermediaries and insurers
Distribution
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Many insurers use a mix of distribution channels to market their products.
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The main distribution channels are direct sales forces and independent intermediaries.
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Other distribution channels include advertising, telesales, the internet and worksite marketing.
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Independent intermediaries include brokers, IFAs, employee benefits consultants, and general and specialist intermediaries.
The fact-find
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This has three purposes, to:
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gather information;
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determine the customer’s demands and needs; and
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help determine the best underwriting method.
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Individual customers
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The adviser needs to collect details of the customer’s:
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personal details;
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existing insurance (if any);
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personal healthcare requirements; and
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existing medical conditions (if any).
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SME and corporate customers
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The adviser needs to collect details of the business’s:
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company profile;
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current scheme profile (if any);
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claims profile (if there is an existing scheme);
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benefits requirements; and
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proposed membership.
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Provider roles and responsibilities
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Providers have a responsibility to:
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assess risk;
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provide appropriate quotations;
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accept risks;
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administer cover on an ongoing basis; and
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handle renewals, loyalty mechanisms and transfers.
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Roles and responsibilities vary depending on the type of customer – individual, SME or corporate.
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The IDD came into force on 22 February 2016 and EU Member States (which then included the UK) were required to transpose it into their national legislation.
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The IDD introduced pre-contract commission disclosure and the requirement to provide an Insurance Product Information Document (IPID) to customers in the consumer and SME markets.
6. Assessing the risk
Basic principles of medical insurance
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The basic principle is that many customers will pay premiums for the benefit of those customers who will actually need private medical treatment.
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As people with poor health are more likely to need attention than those in good health, and some conditions are likely to recur, insurers commonly exclude pre-existing conditions, and associated conditions, from cover.
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Medical insurance has to cover the morbidity risk that the insured will need medical treatment involving unspecified costs. Morbidity relates to the probability that certain medical conditions will occur and their frequency throughout the member’s life.
Medical underwriting principles
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In order to keep premiums at an affordable and sustainable level while maintaining cost-effectiveness, applications must be assessed to determine the potential risk, and to check that the terms, conditions, benefits and price are appropriate to attract new business.
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Underwriting ensures that the terms and conditions accurately reflect the degree of risk posed and remain cost-effective for the insurer.
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Healthcare insurance products often incorporate exclusions that apply to all customers of that product.
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Underwriting can take the form of excluding all pre-existing conditions, full medical history underwriting, moratorium underwriting or medical history disregarded, among others.
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New developments in medical techniques, drugs and customer expectations all impact on underwriting strategy.
Rating factors relating to medical insurance
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Rating factors include age, marital status, smoker or non-smoker, hospital banding and previous claims experience.
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Excesses are usually defined in monetary terms and can be automatic (imposed) or voluntary.
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Some insurers encourage customers to remain with them by offering loyalty schemes.
Underwriting other types of health insurance
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Although the principles of underwriting apply to all kinds of healthcare insurance, different product types apply to different styles of underwriting.
7. Paying Claims
Claims assessment
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Insurers become involved in determining the need for treatment.
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They do this through pre-authorising treatment; by both insisting that they are consulted prior to treatment, and through medically qualified staff managing claims.
Direct settlement
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Major PMI insurers settle bills from hospitals and specialists direct on a consolidated monthly basis, rather than indemnifying their insurers, who would then settle with the hospital or specialist.
Electronic billing
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Electronic billing uses specialist software into which hospitals and specialists record details of a claim, along with their costs or fee. This is then forwarded to the insurer’s claims system directly to be processed.
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The benefits are faster processing, fewer mistakes and no paperwork.
Claim forms
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Claim forms are not always required but will typically be used for contentious claims, with dental and health cash plans and for long-term protection policies.
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The form provides the insurer with relevant information regarding the claim in order to help determine the claimant's eligibility to receive benefits.
Payment determination
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After the validity of the claim is established, the amount to be paid and to whom it should be paid is determined.
Notification to the customer
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After a claim is settled with a provider, a note is sent to the customer to advise them that payment has been made.
Use of procedure codes
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To assist in the rapid assessment of claims and to help insurers plot the frequency and incidence of disease, the industry uses codes to identify medical conditions, their treatment and surgical procedures.
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For impairments, since 1 January 2022 the industry mainly uses the WHO’s ICD-11.
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For surgical and medical procedures, the industry uses the schedule developed by the CCSD.
Controlling claims costs
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Insurers control costs through pricing agreements with hospitals, the imposition of clinical guidelines and hospital and consultant networks.
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Case management or managed care are generic terms used to describe early intervention in the decisions surrounding medical care in order to ensure that the procedures undertaken are necessary.
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Open referral is where the patient’s GP does not specify a named specialist but instead a specialist is chosen by the insurer.
Health cash plan claims
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Claims can be either small value/high frequency treatment carried out by a known provider, higher value claims or third-party claims.
Dental claims
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Claim procedure will depend on the types of scheme – for dental insurance a receipt from the dentist is required, for capitation plans no claim is required, unless for an insured event, such as an accident.
Countering fraud and overcharging
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Fraud can be the result of actions by both healthcare providers and customers, attempting to charge for procedures that never happened, were not medically necessary or claiming for the same treatment from different insurers.
8. Law and regulation
UK regulatory framework
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In April 2013, the FSA’s responsibility for statutory regulation was split between the FPC, the PRA and the FCA.
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The PRA is responsible for micro-prudential regulation of systemically important firms.
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The FCA is responsible for the conduct of business regulation across the financial services industry.
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The FCA has a single strategic objective – to protect and enhance confidence in the UK financial system.
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The FCA has twelve principles for businesses, which firms must conform to if they are to be regarded as ‘fit and proper’.
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ICOBS sets out the FCA’s detailed rules governing firms and individuals advising on general insurance products.
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The FCA requires all firms to consider and manage conduct risk and embed it into the firm's culture.
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The FCA requires firms to regularly review the competence of their employees.
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The CII Code of Ethics is a set of ethical principles concerned with attitude and behaviour. Although not part of the regulatory regime, abiding by it will help those in the market meet the standard of ethical conduct expected by the FCA.
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The IDD requires brokers and employees of insurance companies that sell insurance to do at least 15 hours of training and CPD each year.
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The Consumer Duty moves away from the former rules based regulation to one based on good customer outcomes.
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The ABI produces a Statement of Best Practice for the Sale of Individual and Group Private Medical Insurance to which members of the ABI must comply.
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Firms must have a written complaints procedure and customers can appeal to the FOS if they are not satisfied.
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The FSCS compensates certain customers for financial loss suffered because their insurer has gone out of business.
Access to Medical Reports Act 1988
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Gave individuals a right of access to reports provided by medical practitioners for employment or insurance purposes, that relate to themselves.
Access to Health Records Act 1990
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Established the right of individuals to access health records relating to themselves and others.
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Its main provisions now fall within the Data Protection Act 2018 (DPA 2018) and it now only applies to the records of deceased persons.
Equality Act 2010
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Prohibits discrimination against anyone with a disability and covers many aspects of life, including transport, employment, education and leisure.
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Insurers can treat the disabled less favourably as long as they can justify it on the basis of actuarial or statistical information.
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On individual policies from 21 December 2012, insurers can no longer discriminate on grounds of gender, even where there is strong actuarial evidence of a greater or less risk due to gender.
Data protection legislation
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The UK's data protection legislation places legal obligations on ‘controllers’ and ‘processors’ of personal data. Its definition of personal data reflects changes in technology and in the way in which information is collected.
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The ABI’s Code of Practice includes confidentiality guidelines.
Mental Capacity Act 2005
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Provides a statutory framework to empower and protect people who may lack the capacity to make some decisions for themselves. The test of incapacity is decision- and time-specific.
Law relating to customer disclosure and the remedies for misrepresentation
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The Consumer Insurance (Disclosure and Representations) Act 2012 requires consumers to take reasonable care when answering the insurer's questions.
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If a consumer makes a misrepresentation that was deliberate or reckless the insurer can regard the policy as void and keep all premiums. If it was simply careless, the insurer has a proportionate response. If it was honest, the insurer must accept the claim.
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Under the Insurance Act 2015 businesses must make a fair presentation of the risk.
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The insurers can only reject a claim for misrepresentation if the misrepresentation was deliberate or reckless.