Private plans are no panacea

Insurance: in the seventh part of our series, we look at the strengths and weaknesses of medical cover

Never mind the health club membership - with many Hospital Trust budgets stretched to breaking point, and more than 1 million people on NHS waiting lists, it might seem a good time to add private medical insurance to your New Year's resolutions. But be careful: most policies are hedged around with exclusions and some are over-priced in terms of what they offer.

The fact that private medical insurance (PMI) exists at all could be seen as either an indictment of the NHS or a testimony to the ability of the private sector to plug the gaps in the welfare state.

Certainly, PMI is not a complete substitute for state-funded treatment. It covers the cost of private treatment for acute (short-term or curable) illnesses, but it doesn't cover chronic conditions such as cancer. And you are likely to be treated on the NHS rather than privately for emergencies.

Nearly 6 million people have PMI, more than half of them through their employer. The main selling point is that it lets you jump the queue for the NHS and have more control over when and where you are treated. Without insurance, few people could afford to take these steps - getting a hip replacement done privately in the UK, for example, could cost between pounds 5,000 and pounds 7,000.

The policies themselves have a reputation for being expensive. Moreover, says Steve Walker of the independent adviser Medical Insurance Services, "the policies that cost the most invariably don't provide the most benefit".

The cover offered by different policies varies widely and the documents are often written in complex and obscure language, hedged around with small print. "It is difficult, if not impossible, for those outside the industry to compare different plans in terms of value for money," said the Office of Fair Trading in a report on health insurance published earlier this year.

For this reason, it is worth getting extra advice. "Over 80 per cent of PMI bought by individuals is purchased direct from the insurer," says George Connelly of the independent adviser Health Care Matters. "People buy by name, not product, and they think they're getting the world. Few, if any, know what cover they really have."

Buying direct is dangerous as PMI is littered with pitfalls. For example, the OFT report was critical of the "moratoria" approach to underwriting policies, which it recommended should be abandoned. Here, while not having to make a medical declaration when you take a policy out, you are not covered for conditions for at least the first two years. The other main points to consider when choosing PMI are:

What level of cover do you want?

The two main types of policy are budget and standard. Budget plans are about a third cheaper because they limit the cover on offer by, for example, excluding outpatient treatment or offering cover only if the NHS waiting list is more than six weeks.

Budget-plan limits can cause problems, particularly in relation to diagnostic tests. "Be careful: some policies will pay for diagnostic tests only if you subsequently need hospital treatment. It's a bit of a Catch 22, since it's only after the test that you know whether or not you need the treatment," says Mr Walker. There is a lot of variation within these broad categories. Some standard policies, for example, cover a wide range of alternative medical treatments, such as acupuncture; others don't.

And watch out for any limits on the amount you can claim. According to Prime Health, these are most likely to affect surgeons' and anaesthetists' fees and outpatient treatment.

With most policies you will also have to choose the band of treatment you want to pay for, typically ranging from A (the costliest) to C (the cheapest). A higher band means you have a wider choice of hospitals. But paying more simply means you get a better room and service, not better medical care. "The band shouldn't affect the treatment, purely the 'hotel' side. Band C is perfectly adequate outside the London postal area - check with the insurer what banding it gives your preferred hospital," says Mr Connelly.

What's the cost?

Premiums vary a lot and it is important to look at them in conjunction with the core benefits offered by the policies. If you're over 60, you get income tax relief on your premiums at the basic rate. If the policy is provided as a "free" perk by your employer, the premiums are classed as taxable.

How will premiums increase?

The rising costs of medical care, combined with more claims, mean that average PMI premiums are moving at very roughly double the rate of inflation.

This general tendency is exacerbated by age-related increases which can make PMI prohibitively expensive, particularly once you've retired. "Premiums can quite easily go up 75 per cent between the ages of 60 and 75," warns Mr Connelly. So it's worth checking whether the policy puts any limit on the increase. The Exeter Friendly Society, for example, has no age-related rises in its policy.

What if things go wrong?

The Insurance Ombudsman scheme offers a free and independent complaints arbitration service. But the two biggest medical insurers, Bupa and PPP, refuse to join the Ombudsman scheme. Instead, they belong to the PIAS - an arbitration service which will only consider a complaint with the insurer's consent.

q Jean Eaglesham works for 'Investors Chronicle'.

Monthly Premiums

Insurer Woman 35 Couple 55 + 2 children

aged 10 and 12

Budget Standard Budget Standard

Bupa pounds 19.46 pounds 41.29 pounds 63.10 pounds 120.92

PPP pounds 17.83 pounds 46.94 pounds 57.50 pounds 149.29

OHRA pounds 16.00 pounds 30.34 pounds 45.90 pounds 81.55

Prime pounds 30.47 pounds 28.35* pounds 85.85 pounds 80.20*

BCWA pounds 20.57 pounds 38.95 pounds 55.77 pounds 105.54

WPA pounds 15.83 pounds 34.78 pounds 48.01 pounds 90.89

NU pounds 18.00 pounds 38.85 pounds 68.90 pounds 127.70

Exeter pounds 25.86 pounds 37.69 pounds 71.86 pounds 98.14

Clinicare pounds 29.46 pounds 38.78 pounds 85.87 pounds 112.73

UAP pounds 24.28* pounds 38.43* pounds 68.63* pounds 97.66*

Guardian pounds 24.13 pounds 32.17 pounds 74.02 pounds 104.06

Cornhil pounds 18.22 pounds 27.58 pounds 59.86 pounds 77.76

* Includes a no-claims discount. Premiums will rise by 20-25% if you claim. Source: Medical Insurance Services.