What is self-insurance in respect to health insurance?

How does self-insurance work?

When you take out a health insurance policy with an insurance company, you pay your insurance premiums, and the insurer agrees to cover your treatment up to a specified number of sessions or certain financial limits. Your insurance company also accepts the risk that your claim may cost more than predicted, resulting in reduced profits or a loss. They'll also place exclusions on your policy to offset the risks.

With self-insurance, you act as the insurer and set aside funds to pay for private medical care out of your own pocket. When you self-insure, you take the risk that the money you've set aside won't be enough for the treatment you need. You'll need to carry out your risk assessments. For example, you might have a family history of arthritis, which has led to previous generations needing hip replacements. You can look at the price of a private operation, specialist consultations and physiotherapy and set appropriate funds aside so the money's there when you need it.

When can self-insurance be a good idea?

Self-insurance has advantages, just as with taking out health coverage from an insurance company. If you're considering whether to self-insure, here are some benefits of using the self-insure method.

1. You can sometimes pay less

You'll only have private medical coverage for as long as you keep paying the premiums. For some people, this could mean years of paying premiums for a service you never need to use. The average health insurance premium cost for a 40-year-old in the UK is £57.67. That could quickly turn into thousands of pounds spent on coverage that you haven't used, particularly as premiums increase as you age.

The average cost of a hip replacement operation in the UK is currently £13,405 in 2023. If your premium is £60 per month, but you only need one operation in 25 years, that equates to £18,000 in insurance premiums. When you self-insure, your premiums won't go up because you got older or made a claim, although the cost of treatment will still rise.

2. You can decide where to spend your money

The cost of living crisis has increased our awareness of spending our money wisely. When you self-insure, you set aside sufficient funds to pay for your treatment. However, you're not tied in. You can create a self-insurance fund using a standard savings account that lets you withdraw money immediately. If you faced another emergency that your insurance didn't cover, you could choose to spend the money on that instead.

By contrast, when you pay for medical insurance, the premiums can only pay for one thing. The only way to save money is by cancelling your insurance policy. It'll likely cost more if you want to take out a new policy later.

3. Flexibility to choose the right provider

Medical insurance policies provide a hospital list which includes all the treatment centres covered by your policy. You may have a free choice about the consultant you see or a guided consultants option where your insurance company offers you a shortlist of approved specialists. These measures allow insurance companies to manage the cost of claims, and some help you save money on your premium.

However, if you want to see a leading expert in their field or someone recommended to you, it may not be possible if your insurance company doesn't cover them. In that case, self-insurance lets you choose the right person for you, regardless of insurance coverage. All you need to ensure is that your self-insurance fund has enough money to cover your treatment.

4. You don't have to wait for treatment

Self-insurance lets you choose the best provider for your needs. You'll need to research private hospitals and consultants in your area and contact them for a quote. However, you won't have to wait for an insurance company to decide your claim. Most insurers aim to make a quick decision when processing claims, but the waiting time depends on the complexity of your claim and the type of underwriting you have. There's also a risk that your insurer will reject your claim. With self-insurance, you decide where to spend your money.

When you choose self-insurance, you only have to wait for quotes, and then you can select your preferred provider and start treatment immediately.

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5. Access private care for pre-existing conditions

If you have a chronic condition such as diabetes or angina, you'll need long-term monitoring and care throughout your life, meaning you're better off with the NHS. Private medical insurance in the UK also doesn't cover chronic illnesses.

Your health insurer will also exclude any pre-existing conditions from coverage to reduce the claim risk. If you've had treatment for a condition within the five years before taking out the policy, it'll be excluded for the first two years. If you saw your GP or an NHS consultant about a health issue and decided to take out medical insurance, your policy wouldn't cover any treatment for that issue.

However, this isn't the case with self-insurance. Your GP or an NHS consultant can treat you until you need surgery. When you self-insure, you can go to your self-insurance fund and have your operation privately.

6. You can spread the cost if you need to

Paying annual or monthly insurance premiums lets you spread the cost of your coverage. You might think that when you opt to self-insure, you'll need to hand over the total cost of your treatment upfront. However, most private providers offer finance options if you don't have the financial resources to cover a lump sum payment.

When you contact a private hospital for a treatment quote, they'll give you a fixed price and explain what it includes so you know what to expect. If necessary, you can choose a repayment plan. Most private providers have a finance partner offering loans subject to the usual credit checks. Ideally, your self-insurance pot will have enough funds to allow you to pay upfront.

What are the disadvantages of self-insurance?

Before you choose to self-insure, it's vital you're aware of the potential pitfalls. Here are some of the main disadvantages of choosing self-insurance.

1. You have to decide how much money to set aside

Insurance companies have teams of expert risk analysts who work out each customer's risk profile and evaluate the statistics on paying claims. Each insurance company aims to profit over and above their claims payments. They crunch the numbers to predict the likelihood of you claiming and how much your premium should be.

When you choose self-insurance, you need to be your own analyst. Unless you're an insurance professional or actuary, you likely won't have access to the same skills and experience as an insurance company.

You can keep your calculations simple by focusing on the treatment you will most likely need based on your medical and family history. Then, you can track the average surgery cost over time and ensure your self-insurance pot has enough funds to cover it.

However, this risks you having insufficient funds to pay for other, more unexpected, treatment needs. For example, if you take regular skiing trips or participate in extreme sports, your risk of injury is likely higher. Still, the precise nature of that injury can be harder to predict.

2. Some treatment costs can be much higher

Self-insurance is ideal for treatment with a fixed, predictable price, such as an operation. If you need a course of physiotherapy and your therapist recommends a couple of extra sessions, it's unlikely to break the bank.

However, the picture can be very different if you're facing a cancer diagnosis. Self-insurance may cover your surgery or your initial course of radiotherapy or chemotherapy, but your treatment may need to continue over an extended period. The bills can quickly mount, potentially reaching hundreds of thousands of pounds. Many insurers offer unlimited, guaranteed cancer care, but self-insurance doesn't provide the same guarantee. You may run out of money and need to spend time on an NHS waiting list.

It's also worth remembering that some treatments will manage, rather than cure, your cancer to maintain your quality of life long-term. These treatments can carry on for many years, which means the total cost can be significant.

3. Check for aftercare

When you get a quote for private surgery as a self-insured person, your quote will include any required tests, pre-operative preparation and aftercare in addition to the costs of your surgery and hospital accommodation. The follow-up care will likely be for a specified number of sessions or a limited period after your surgery.

Some providers also confirm that they will carry out additional treatment at no extra charge if you experience post-operative complications within a set period following your operation. However, this is only the case for some providers, so it's essential to check. Otherwise, the NHS may have to pick up the pieces.

4. You won't get any additional benefits

You can use self-insurance to fund most types of treatment, from private GP appointments and physiotherapy to surgery. However, health insurers typically offer additional services and incentives to their customers that aren't generally available elsewhere.

Additional services typically include access to member-only information and resources, training sessions and helplines providing access to specialist nurses or mental health support.

Most insurers also offer member discounts and incentives such as free coffee or discounted gym memberships and fitness tracking technology. These help you to save money on things you'd normally buy, occasional treats or support you in improving your health and well-being.

Can I combine a health insurance policy with self-insurance?

Happily, you can get the best of both worlds. Every health insurer offers a treatment-only plan that covers the basics, including cancer care, as standard. These plans' premiums are much less than more comprehensive policies but provide coverage for conditions such as cancer that carry much higher treatment prices.

Then, you can create a separate self-insurance fund for treatment that isn't covered by your insurance. For example, most basic policies don't include outpatient treatment, meaning they won't cover diagnostic tests, scans, or physiotherapy unless needed after surgery. You can use self-insurance for these and any treatment excluded from your policy, for example, because of a pre-existing condition.

Of course, you can also choose to have NHS treatment.

How can I prepare for self-insurance?

It's a good idea to create a self-insurance account that you top up regularly. Alternatively, you could rely on savings you already have. Choosing an account with a good interest rate means you'll get extra money over time.

High-interest accounts offer good returns, but some lock your money in, potentially for a few years. These accounts typically charge a penalty if you want to withdraw money early. This may not work for you if you need to access funds quickly when you need treatment.

Depending on how much money you save, you may also face an additional tax bill, so it's wise to get financial advice before starting your self-insurance account.

How much will I pay if I self-insure?

Your treatment costs will vary depending on the type of treatment you need, where you are in the country and which provider you choose. Rents, utilities, staff wages and whether the hospital is non-profit or pays dividends to shareholders can all influence the price before you look at individual treatments.

You can expect to pay between £2,000 and £3,500 for straightforward procedures such as a carpal tunnel release, cataract surgery or hernia repair. More complex operations such as hip, knee or shoulder replacements will set you back between £13,000 and £14,500.

Contact us for professional advice

At myTribe, we conduct regular research to help you keep track of the likely costs of your private medical treatment. We also create guides to help you understand your options and make an informed choice.

If you'd like to learn more about medical insurance, contact us for a comparison quote. We'll put you in touch with a regulated broker for specialist, tailored advice.