Affordability is arguably the biggest factor when an employer decides to offer – or keep – private medical insurance. Nick Martinuale has been doing some sums
The increase in insurance premium tax (IPT) from 6% to 9.5%, announced in the July Budget, took the industry by surprise. The move will have a huge impact on a number of different areas, including employers taking out private medical insurance.
Providers were understandably disappointed. “It forms a relatively small component of the overall cost of a healthcare scheme for an employer, so it isn’t hugely worrying in itself,” says Dr Doug Wright, medical director at Aviva UK Health.
“The bit that makes us worry is that affordability is at the forefront of all our employer-funded schemes, and anything that lifts it into that slightly more expensive territory will have an impact on the market.”
Matthew Judge, technical director at Jelf Employee Benefits, says: “Clients who have their business through an intermediary will probably expect them to negotiate away the effect of the extra 3.5% in the first year.”
Insurers themselves, though, are unlikely to absorb any of the costs as the margins they operate on are already tight, says Chris Bailey, a partner at Mercer. “Essentially you’ve got a consolidated market, with insurers struggling to make a margin on large volumes of business,” he says.
The immediate issue for many employers has been uncertainty around the administration and accounting of policies rather than the cost itself, says James Love, senior health consultant at Buck Consultants, a Xerox Company. “Some say any change in membership after 1 November will attract the higher IPT on current P11D-able rates,” he says. “Others have said it’s the renewal after 1 November that’ll have an impact. It’s confusing for intermediaries and clients, but that’s short term, because once you get through the renewals it won’t be an issue.”
Rachel Western, principal at Aon Employee Benefits, says this has been a particular issue when PMI is offered under a flexible benefits arrangement. “Many corporates are considering whether the increases are applied to individual premium (P11D) costs or absorbed at a corporate level,” she says.
Doing things differently
In the longer term, however, the rise in IPT could be the catalyst for employers to look at ways of structuring their arrangements so they do not attract the tax at all, such as moving towards a self-funded scheme managed through a trust.
The concept of self-insurance is already well established in the sector, although it does add both financial and regulatory obligations to the employer. These can, however, be mitigated by an external provider taking on such responsibilities under a mastertrust arrangement.
“A ‘turnkey’ approach is available where employers engage an administrative services provider to act as trustee and undertake these tasks on behalf of the sponsoring employer,” says Nick Jeal, head of corporate marketing for AXA PPP Healthcare.
Such an arrangement could provide savings of 3% a year compared with a standard PMI contract, he adds, rising to 5% for organisations that can recover VAT on the charges incurred.
Love says that many of these arrangements were originally designed a number of years ago in anticipation of further rises when IPT rose from 5% to 6%, only to be quietly abandoned when nothing happened.
But such trusts are not solely the domain of larger employers. Some providers such as Healix now offer access to such arrangements for organisations with as few as 100 employees.
In any case, IPT alone is not a good enough reason to migrate, believes Bailey: “Employers should do it because they genuinely want to take ownership of their plan and actively want to take it in-house as a trust rather than as an insurance contract.”
That said, Sarah Tanswell, workplace health consultant at Barnett Waddingham, also points to other benefits of trust-based schemes, including the ability to provide a surplus in years where premiums are greater than claims, and greater control over how members use such plans.
“Many companies leave it to the employee to find their own treatment path, which can lead to high claims and therefore premiums,” she says. “On trust-based schemes, third party administrators can again be brought in to ensure the PMI scheme is the correct benefit for the member to seek treatment through, or whether they’re better using their cash plan, employee assistance programme or group income protection scheme.”
For those wary of trusts, another option could be the use of corporate deductible or excess products, which effectively ringfence the majority – typically 75-80% – of a claims fund and treat it as an excess, meaning IPT is only payable on the remaining amount.
“We’ve seen a lot of clients who haven’t been 100% comfortable going to full self-insurance now saying they’re of the size where these hybrid middle-ground vehicles become very attractive,” says Nick Clayton, a healthcare consultant at Towers Watson.
How employers react, though, will also be influenced by what Clayton describes as “the elephant in the room”: wider inflation in premiums, which is currently around 6%.
“Our view is that mitigating IPT can be achieved, but the issue of all issues is the inflation in costs,” he says. “We’re certainly seeing a lot of interest from clients looking to tailor policies, either by saying this level of workers don’t need this level of cover, or this generation aren’t interested in medical insurance and it’s not what they need.”
Another option is to increase excesses or to restrict benefit limits around certain provisions, such as outpatient, cancer cover and psychiatric help.
But Tanswell warns: “Simply cutting limits may undermine the object of the exercise, which is to get a member back to work as soon as possible.
“For example, the average cost of a consultation is £250. If an outpatient benefit was to be reduced to £1,000 per annum, a member could only have four consultations.”
Excesses are also dangerous ground, she adds – set them too low and it will have little impact on members’ behaviour but too high and it could deter members from claiming when they do have serious conditions.
Providers are also responding to the need to mitigate rising costs. Aviva, for instance, has developed its Essentials range, which enables organisations to target particular segments of the population with specific healthcare needs to bolster any other existing provisions, such as cash plans.
“It’s about providing something that comes in at a significantly different cost point, which allows people to think differently,” says Wright. This could enable companies to restrict PMI to a smaller group of employees, he says, and offer lower-cost propositions to the rest of the workforce.
AXA, meanwhile, has launched its AccessHEALTH product, covering conditions that have the biggest impact on employee productivity and absence. “The focus is on prevention and early intervention in respect of key risks, including mental health issues, musculoskeletal conditions and poor lifestyle,” says Chris Horlick, distribution director at AXA PPP healthcare.
Health screening services may also come more into the picture, potentially working in conjunction with health insurance for any treatment that may be needed.
“This is far more tax efficient than PMI, as it’s not a P11D benefit in kind for employees,” says Peter Blencowe, managing director of Bluecrest Wellness. “It may be an allowable expense against corporation tax and, if used as salary sacrifice, the staff member pays for it before tax.”
For now, however, the increase in IPT is unlikely to lead to a mass exodus from traditional PMI products, although many have expressed concern that future rises – perhaps to the level of VAT – could have a much bigger impact.
So Love believes most employers will just accept the premium, particularly if they have been budgeting for higher premiums anyway. He says: “I suspect it will only be seen as a one-year hit. I don’t think people will pull out of the market.”