Do you need to catch the health insurance bug?

As the political parties bicker over the NHS's future, James Daley looks at how to cover your future needs

Last week, Tony Blair horrified the left of his party by talking about plans to extend the Government's use of the private healthcare sector, promising to plough billions of pounds into giving patients the "choice" to use either public or private hospitals free of charge.

This week, the Conservatives followed up by arguing that Labour's ideas did not go far enough. The Liberal Democrats believe the plans are pushing in the wrong direction altogether.

If Blair's controversial new proposals make it through Parliament, they will work something like this: by 2008, every patient will be given a choice of five local hospitals when they are in need of treatment - one of which will be private. Hence, for those who believe they will be better served by their local private hospital than by the NHS, the Government says it will pick up the tab.

At first glance, this appears too good to be true. If every patient is genuinely offered the option of going private - for free - every time they have a medical problem, there would be no more need for private medical insurance (PMI).

In practice, however, few - aside from the Government - see such a strategy working. The British Medical Association (BMA), the medical profession's trade body, believes that, while choice for patients is good, the side effects of the Government's strategy could be disastrous.

Given that NHS hospitals receive funding based on the number of people they treat, the BMA is concerned that the drift of patients to the private sector will steal a large amount of the revenue that state-owned hospitals rely on.

Others believe the inflow of patients into private hospitals will inevitably create a two-tier private sector. Philip Blackburn, an economist for Laing & Buisson, healthcare sector analysts, says: "What will probably happen is that some of the private hospitals will start separating NHS work from true private work. And are conditions and standards for the NHS patients going to be comparable with the private sector as it is now? Probably not."

Whether such reforms prove to be the much-needed cure for the NHS remains to be seen. In the meantime, the demand for private medical insurance does not appear in doubt.

Although perceptions of the NHS have improved in the past year, there are still concerns over sanitation and the spread of MRSA in state-run hospitals, as well as worries about the quality and speed of many NHS services. And, while most acknowledge that the Government has helped to reduce waiting-lists, the journey from GP's surgery to specialist is often still far too long. Many wait several months before they even receive a proper diagnosis.

As a result of these and other concerns, the number of individuals buying PMI policies increased for the first time in almost a decade last year, with almost 4.2 million people willing to pay up to protect themselves from the NHS.

Nye Jones, head of intermediary services at Axa PPP Healthcare, says the longer-term decline in PMI sales was a result of the rise in cost. With medical inflation averaging almost 6 per cent a year for a decade, the cost of the average PMI policy has almost doubled since 1994.

However, a concerted effort by the industry in recent years to make health insurance more affordable has helped to kick-start a resurgence in the product's popularity.

The flip side of such reform is that the typical PMI policy today is very different to those sold 10 years ago. Although you can now buy private health cover for a few pounds a month, it usually has large excesses or major exemptions.

If you agree to forfeit your right to claim for cancer-related illnesses, for example, you may be able to reduce premiums by hundreds of pounds a year. However, critics of these policies say that accepting such exemptions is akin to playing Russian roulette.

In their defence, Jones says: "It's about people keeping their eyes wide open. There's always a trade-off between affordability and benefit with your cover, but as long as we're being honest and open about that, our customers are happy.

"In some situations, people are happy with the cancer care they can get from their local NHS, for example. But when it comes to heart problems or joint replacements, these are about activity and are the kind of things they would want treated quickly."

Julian Stainton, the chief executive of WPA, a Somerset-based health insurer, says cheaper premiums have led many more young people to buy policies. "What's happened, in our experience, is that we're seeing an upsurge in the number of younger people - I mean people in their thirties, not 18-year-olds - buying policies for the first time," he says. "This seems to be growing faster than the number of older people giving up on policies.

"Often, it's relatively healthy people taking out relatively inexpensive policies to fix their position for the future."

If you are interested in taking out health insurance, there are three main types of plan you should consider - comprehensive, co-payment, and cash plans. A fourth option is to not bother with insurance, and to pay directly for private health services when you need them.

COMPREHENSIVE

As the name suggests, comprehensive medical insurance is designed to pay out for any medical need at any time. But advances in medical technology have sent the price soaring, and today this tends to be a product only for the super-rich.

As a result of the fewer people who have comprehensive cover, and the fact that many of those who do tend to be prone to making regular claims, premiums continue to soar.

Last year, however, Prudential launched an innovative new product which reduces premiums for those who make regular visits to the gym, and are proactive about maintaining a healthy lifestyle.

Shaun Mattison, the chief executive of PruHealth, believes that his product is set to reverse the ailing fortunes of the comprehensive market. "Although the market has been responding to price increases with the launch of budget products, we don't believe that's what the consumer wants - it's just what they can afford," he says. "So we're more focused on trying to provide comprehensive policies at a reasonable price."

For those who find the likes of PruHealth too costly (the average annual premium for a 40-year-old man is about £1,000), the other way to reduce the cost of comprehensive policies is by agreeing to large excesses of £500, £1,000 or even £2,000. Alternatively, some providers will reduce premiums if you agree to exempt certain common conditions from your cover.

Another option for keeping premiums down is to opt for policies, such as those provided by Axa PPP, which only pay out if you have not received adequate care on the NHS within six weeks of making a request. This is more of a direct insurance against the failure of the state-run system.

Like all PMI, comprehensive policies will not tend to cover you for any conditions which you were aware of before you took out the policy (known as pre-existing conditions).

CO-PAYMENT

The next best thing to comprehensive policies are co-payment, or shared responsibility. The idea behind these policies is that the customer pays a certain percentage of any claim. With WPA's flexible health plan, for example, you agree to pay 25 per cent of any claim, up to a pre-agreed limit.

Once again, premiums can be reduced by agreeing to exempting claims for outpatient treatment or therapies such as physiotherapy or acupuncture.

CASH PLANS

These tend to provide the cheapest form of cover - but also tend to be the least comprehensive. Typically, they work by paying out a lump sum, up to a certain limit, for hospital visits, dentist or optician appointments or physiotherapy sessions - and can cost as little as £100 a year.

Unlike regular PMI policies, cash plans will not, for example, pay up for your hip replacement operation in a private hospital. However, they will pay you a cash sum for every night you spend in hospital - whether it is private or NHS. Bupa's cash plan, for example, has three levels of cover, costing between £2.25 and £5.60 a week. It pays between £15 and £45 for each night spent in hospital, as well as 100 per cent of all optician and dentist's bills up to a pre-specified limit, and 50 per cent of many other out-patient treatments.

SELF-PAY

Heart surgery or a knee replacement operation could set you back a five-figure sum, so if you're planning to pay for your private healthcare directly, it's worth putting some money away each month into a savings plan.

There are also a number of services, such as GoPrivate, run by the Exeter Friendly Society, which will find the cheapest price for your operation or treatment, in your area. GoPrivate charges about £35 a year, and also includes a free telephone-advice line.

'I wanted to ensure that I'd be treated as quickly as possible'

Alyson Andrews - a sales administrator from Port, just outside Glasgow - took out her first private medical insurance policy last month, with HSA.

At 24, she's one of few young adults to buy PMI cover in Britain, but after a traumatic experience as a youngster, she decided that she didn't want to have to rely on the NHS.

"I had to wait for about 10 months for an operation on my sinuses when I was 15," she says. "I couldn't breathe through my nose at the time, and I had no sense of smell. Ten months is a long time for anyone, but as a 15-year-old, it seemed a lifetime."

After shopping around on the internet, Alyson opted for HSA's fully comprehensive personal medical plan, which costs £33 a month. She also pays for a cash plan to cover more basic medical needs.

"After having been on such a long waiting list, I just wanted to ensure that in the future I would be seen as quickly as possible, and would get the best care possible."