What is medical inflation and how it affects your health insurance premiums?

The cost-of-living crisis has made us all more aware of the impact inflation has on our finances, but how much do you know about medical inflation? We examine how medical inflation works and how it can affect the cost of private health insurance.

What is medical inflation?

Medical inflation refers to increased costs in healthcare services, which then affect the cost of private treatment and private medical insurance. We’ll get into causes of medical inflation in more detail shortly, but in general, it happens because of new developments in medical treatments, trends, and technologies. These changes typically increase costs because healthcare companies invest in developing new treatments and spend more on offering them to their patients in the long term.

What causes medical inflation?

The causes of medical inflation are complex, but a few common factors have the most significant impact. Here are some of the main factors behind medical inflation:

1. New technology and treatments

Private healthcare providers pride themselves on investing in new treatments, drugs, and technology to improve patient outcomes. Private health services typically offer treatments and new drugs that may not be available via the NHS. This is one of the main benefits of private healthcare, but it also comes with increased costs.

For example, nano knife treatment for prostate cancer can offer an alternative to prostate removal, so it’s much less invasive than traditional treatments, has fewer side effects and has better outcomes. It’s currently only available privately as it involves expensive cutting-edge technologies.

2. Increased demand

The NHS is still most people’s first port of call for medical treatment in the UK. However, the balance is starting to shift, with more people seeking private treatment due to long waiting times for NHS care.

The Private Healthcare Information Network (PHIN) reported a 7% increase in private hospital admissions during the first quarter of 2023 compared to the previous year. While many patients paid out of their own pocket for treatment, the vast majority were funded by health insurance, with insurance-funded claims reaching near-record levels.

These figures reflect a shift in the number of patients paying privately for in-patient treatment and don’t include claims for out-patient treatment such as physiotherapy or counselling. As insurers’ overall health spending increases due to more claims, this also impacts medical inflation.

3. People are living longer

We’re all living longer, which is great news for us as individuals, but it can also increase our risk of ill health. It’s predicted that 34 countries’ populations will be classed as ‘super-aged’ by 2030, meaning at least 20% of each country’s population will be over 65.

The prevalence of health conditions such as hearing loss, cataracts, diabetes, dementia and musculoskeletal issues all increase as we age. Most cancer diagnoses in the UK are in those aged over 50, with a third affecting people over 75.

While many age-related conditions are chronic illnesses not covered by health insurance, an ageing population means more claims and rising medical inflation.

4. Increased lifestyle-related health issues

While we’re living longer, lifestyle-related health issues are also on the rise, many of which are preventable with the proper support.

Here are two lifestyle factors causing health issues that drive increased medical inflation.

Obesity

In 2021/22, 63.8% of adults in England were classed as overweight or obese, increasing from 63.3% the previous year. Figures were highest in adults aged over 45. Obesity often results from a poor diet and sedentary lifestyle, where people don’t get enough physical activity during the day and eat a diet high in sugar and fat and low in fruit and vegetables.

Being overweight can cause or exacerbate chronic illnesses such as high blood pressure, diabetes or asthma, which health insurance doesn’t cover. However, it can also cause rising medical inflation due to increased claims for hip or knee replacements or treatment for mental health issues. Being overweight can create a vicious circle where weight gain results in reduced activity because of joint pain or breathing problems.

Smoking

While the number of smokers in England has fallen in past years, it’s still the leading cause of preventable ill health and early death. Smoking can cause some cancers, heart disease and lung conditions such as asthma and COPD. While many patients with smoking-related health issues must rely on NHS treatment as their illness requires long-term monitoring, most insurers include cancer treatment in their core coverage. Smokers typically pay higher health insurance premiums as they’re more likely to claim. However, this can also impact medical inflation.

How does medical inflation affect health insurance premiums?

Medical inflation increases health insurance premiums because it makes healthcare services more expensive to run. We’ve discussed some of the causes of medical inflation already, but here are two main ways medical inflation directly impacts premiums.

Treatment costs per head have increased

Investing in new treatments and medical treatment technologies is expensive. Still, private healthcare companies prioritise this type of investment to attract new customers and give them the best possible outcome from their treatment.

This usually means that if a new, cutting-edge drug or treatment offers you the best chance of making a full recovery, you can access it via your health insurance. While you can still receive high-quality care with the NHS, newer and more expensive treatments may not be available.

The trade-off is that when your insurers spend more on the latest treatments, they’ll pass it on to their customers via premium increases.

Insurers adjust premiums to reflect your claims history

As mentioned, more people are using medical insurance to fund their treatment and avoid time on an NHS waiting list. More claims mean health insurers pay more each year. Insurers calculate premiums based on the risk someone will claim. They’ll do this individually, meaning your premium increases if you claim on your policy and could reduce if you don’t. However, the overall level of claims can also affect premiums.

If medical insurance is a backup that customers only use for treatment they can’t get from the NHS, total payouts will be relatively low. However, if more people regularly claim for treatment via their health insurance, this can affect insurers’ risk assessments and cause premiums to rise.

Is medical inflation linked to economic inflation?

Strictly speaking, medical inflation isn’t linked to general inflation, although inflationary pressures can affect medical care prices. The Consumer Price Index measures how much we pay for everyday goods and services, including medical care costs and reports on how much those costs have changed.

While inflation affects the amount healthcare services pay in wages, rents, and utility bills, medical inflation is a separate calculation based on medical care costs. It’s typically different from the general rate of inflation.

How can you reduce the impact of medical inflation on your premiums?

You can’t control medical inflation, but you can take steps to reduce its impact on your premium. Getting advice from a regulated broker helps you choose the right policy for your circumstances and get the best possible coverage for your budget.

Here are a few things to consider if you want to reduce your premium and how medical inflation affects the price you pay.

Stay healthy

Looking after your health reduces the risk of becoming ill and needing to use your insurance for treatment. Insurers provide various resources to help you improve your health, including online resources and information on common health issues and ways to live a healthier lifestyle. You can also access discounted gym memberships, fitness trackers, and discounts on other support services. The NHS also provides tools and services to help you stay healthy; this article explains how your lifestyle affects your health and the help available.

When you invest in health insurance but don’t claim, your premium is less likely to rise and may even drop. Medical inflation will still affect prices, but you can minimise its impact on your premium.

Use preventative health services

Medical insurance typically includes various health assessments and tools to help you stay healthy. Some insurers even reward customers who achieve their healthy living goals with reduced premiums, perks, and discounts on various products and services. For example, Vitality’s rewards program offers discounts on hotel stays and spa days.

Participating in health assessments helps you identify areas of concern and take preventative measures before they cause ill health. A recent survey of health insurers asked them to identify how customers and healthcare services increased medical inflation. Unnecessary treatment or over-prescribing was the number one issue. However, poor lifestyle choices and underuse of preventive health services came in second and third, respectively. By looking after yourself, you can reduce your premium and help combat medical inflation.

Review your coverage

Reviewing your coverage periodically is a good idea, especially if your circumstances have changed. Insurers sometimes alter their coverage, for example, by packaging services differently or removing or adding discounts. An independent broker will carry out a whole of market review to ensure your policy still meets your needs. If your circumstances have changed, for example, if you’ve changed jobs or become a parent, your policy may need to change to reflect this.

Reviewing your coverage means you’ll only spend money on things you’ll likely use. You can do this yourself, but getting professional advice reduces the risk of removing something essential.

Increase your policy excess

Your policy excess is the amount you pay towards your treatment before insurance covers the rest. Increasing your excess can reduce your premium by cutting the amount your insurers must spend if you claim.

One note of caution: consider how much you can afford to pay out of pocket if you need treatment. Some providers offer an annual excess, so you’ll only pay once, while others charge an excess per treatment. Setting your excess too high might put you off using your insurance, so you don’t get the benefits you’ve paid for.

Consider guided consultant choice

Guided consultant choice cuts the cost of your health coverage because it reduces the amount your insurers pay for your treatment. While it won’t prevent rising costs due to medical inflation, it minimises the impact. Guided consultant choice works by limiting the amount of choice you have over who treats you. Instead of offering unlimited choice, your insurers will send you a list of 3-5 consultants when you claim. These consultants are still qualified but charge lower rates based on their treatment costs or experience level. Some highly experienced doctors also agree to treat a fixed number of patients at a reduced rate.

Taking this approach reduces your premium as it helps lower your insurer’s overall costs.

MyTribe guides aim to help you learn more about private healthcare and health insurance and the factors that can affect the cost of your premiums. We hope this guide has helped you understand how medical inflation impacts healthcare costs.

The best way to find the right health insurance coverage for your needs and budget is to speak to a broker. Contact us for a comparison quote, and we’ll connect you with a high-quality, regulated broker for tailored advice, whether you’re buying health insurance for the first time or want to review your current policy.

Disclaimer: This information is general and what is best for you will depend on your personal circumstances. Please speak with a financial adviser or do your own research before making a decision.