The well-off are deserting medical insurance companies in the face of soaring premiums and opting to pay for operations directly, according to a report out this week.

The number of people with medical insurance fell by 200,000 last year to 6.6m, according to healthcare specialists Laing & Buisson. But "self-pay" patients in private hospitals are rising rapidly.

As recently as five years ago just 50,000 people in Britain paid for operations directly. But last year that jumped to 250,000 and is expected to continue climbing.

"It shows that people are voting with their feet. Many don't see themselves as having any other option, squashed between high insurance premiums on one side, and long NHS waiting lists on the other," says Roger Thomas of insurers HealthNow. Bupa says self-pay is one of its fastest growing business areas, while Nuffield Hospitals revenue jumped 17.5% last year.

It's not difficult to see why. The average private medical insurance (PMI) premium continues to rise at around three to five times the general rate of inflation. In 1985 the average premium was £224 but since then has more than tripled to £719 last year.

As our table below shows, even a healthy 40-year-old male with no dependants will be charged £500-£750 a year for PMI with restrictions around the amount of out-patient care offered.

A luxury plan with no restrictions, such as Axa PPP's "Premier" will cost a 40-year-old in London more than £1,500 a year.

But even these figures disguise the huge premiums now being demanded of the elderly, who can find that even basic private medical insurance can cost £2,000-£3,000 a year.

Private medical insurance can also only cover people for a limited range of treatments. Almost every PMI policy excludes accident and emergency, pregnancy, HIV/AIDS, long-term chronic illnesses and treatment for alcohol and drug abuse. Most also exclude psychiatric care and "pre-existing conditions". In all these medical situations the NHS is, in reality, the only source of treatment.

So what are the pros and cons of buying private medical treatment direct, rather than taking out insurance?

The vast majority of claims made on medical insurance policies are for less than £5,000. This sounds like a large amount of money, but is only two years premiums or less for people over 65 years old.

If, say, the 65-year-old diverts his or her £2,500 a year into a high-interest cash ISA earning 4% a year, after five years the account will be worth £14,082. Assuming the person has remained healthy, they will have accumulated a sum that will be more than sufficient to pay for most treatments. The table below shows the cost of many typical treatments.

But anybody considering self-pay over insurance is, of course, taking a gamble. If the person above experienced regular bouts of illness requiring extensive treatment, they would be thousands of pounds out of pocket.

However, anecdotal evidence suggests that patients who buy direct are often charged less than the sums billed to insurance companies for the same treatment. What's more, one of the main benefits to self-pay charges is that they are not usually affected by age.

Private hospital groups are encouraging the growth of self-pay business with fixed-price packages that take away the worry of unexpected costs.

For example, a medical bill could spiral to enormous levels if complications arise after the patient has entered hospital. For this reason, most private hospitals now agree charges in advance, even if unexpected complications arise.

Nuffield Hospitals offer a fixed price on nearly all their treatments, although it says some conditions are not suitable for a fixed price offer.

If you stay in longer than expected there are no extra charges and it even has a low-interest loan deal with Barclays Bank.

Obtaining a quote for self-pay treatment is, however, a daunting prospect for most people unaccustomed to the private hospital system.

First you have to visit your local GP or specialist. Once they have decided on the treatment you need, you can ask for the "OPCS" code which are standard descriptions to identify all medical procedures. This allows you to approach a hospital for a quote without getting involved in medical jargon.

But there are other, simpler routes to self-pay. Axa PPP, the second biggest health insurer, offers 'Pay as you go Healthcare', a free service on 0845-600-1696 which helps you choose appropriate hospitals and specialists, as well as giving information on local NHS waiting list times.

There is no charge for the service, as Axa PPP earns an introductory fee from each hospital. If you take the treatment offered, you will pay the hospital direct.

An alternative is to seek treatment abroad. For example, the Hospital Costa Adeje in Tenerife advertises hip replacements at an all-inclusive package price of €10,400 (£6,800) covering all medical and accommodation costs for the patient and one accompanying person.

That compares favourably with the £7,200-£10,000 price quoted by Bupa for the same treatment in one of its UK hospitals.

Insurers, aware that they may be losing customers to the self-pay route, are also coming up with imaginative alternatives that mix self-pay with an element of insurance.

WPA's Self Pay Protect plan (01823-625150) pays up to 75% of hospital and out-patient costs, costing £155 a year for a 40-year-old.

HealthNow (0800-328-4448) offers a scheme which gives you access only to treatments where there is an NHS waiting list, at a cost of £225.60 annually for a 40-year-old male.

The cost of cover

Quotes based on annual cost of cover for 40 year old male with no dependants, no pre-existing conditions and no hospitalisation in the past five years.

Insurer
Plan name - Annual cost - Exclusions

Axa PPP
Classic £998.76 - £1,000 out-patients limit.
Ideal £847.44 - Psychiatric care. £1,000 out-patients limit.
KeyPlan £536.88 - £300 out-patients limit.

Bupa
Heartbeat £609.12 - Some out-patient restrictions.
Heartbeat £468.96 - Same as above plus £250 excess.

Norwich Union
Fair & Square £612 - £160 max each consultant visit. Max 10 out-patient sessions.
Fair & Square £300 - No out-patient cover.

Standard Life
Primecare £740.76 - Price falls by 10% for £100 excess, 25% for £250 excess.
Primecare Saver £604.08 - No psychiatric or home nursing cover. Same excesses can be chosen.

WPA
Flexible Health £338.16 - Limited out-patient cover, £100 max for consultant visit.
Flexible Health £785.88 - Full out-patient cover.
Shared Responsibility £550.58 - Insured pays 25% of bills but with maximum annual cost of £250.

What you pay

Cataract removal £1,800 - £3,000

Coronary angioplasty £5,500 - £7,200

Coronary artery bypass graft £13,500 - £17,500

Cruciate ligament repair £3,750 - £4,800

Epidural injection £650 - £1,000

Grommets insertion £1,100 - £1,400

Haemorrhoids removal £2,000 - £2,350

Hernia treatment £1,400 - £1,900

Hip replacement £7,200 - £10,000

Hysterectomy (vaginal) £4,100 - £4,700

Knee replacement £8,500 - £10,000

Varicose vein treatment £1,350 - £2,000

Vasectomy £300 - £900

Vasectomy reversal £1,000 - £2,200

Wisdom teeth extraction £1,100 - £1,400

Breast enlargement £2,300 - £6,300

Breast reduction £3,000 - £6,000

Ear pinning (pinnaplasty) £1,000 - £2,800

Facelift £3,500 - £7,200

Tummy tuck (abdominoplasty) £3,400 - £5,700

Source: Bupa. Price includes accommodation, nursing care, in-patient drugs and dressings, X-rays, physiotherapy and pathology. Price varies, depending on the type of operation and anticipated length of your treatment. You will usually pay the hospital direct, although some consultants prefer to collect their fees separately.