With the cost of private medical insurance on the rise, employers who wish to fund medical treatment for their staff are exploring healthcare trusts, writes Sonia Rach
Staff healthcare propositions can tick a range of boxes: from getting employees back to work quickly and reducing absenteeism to increasing productivity and boosting motivation. With wellbeing the buzzword of 2016, employers have been going into 2017 with a view to increasing their cost-effective healthcare strategies.
Healthcare trusts and private medical insurance (PMI) are two ways in which employers can offer health benefits. Traditional PMI offers just that – private medical insurance for employees. A healthcare trust, however, could be regarded as a cost-saving alternative.
By offering a way of funding medical treatment for employees and dependents, healthcare trusts allow employers to self-fund their corporate healthcare provision. It works by employers putting funds into a trust that is managed by trustees, with the claims themselves managed by a company that specialises in healthcare benefit administration.
Paul Dunsford, a health benefits expert at consultancy PES, explains: “A trust is a pot of money that’s set aside by an employer to cover staff’s private health costs. “The trustees will set the parameters for the fund and these are likely to be similar to a PMI policy. Trustees can be external to the company, or they may be directors.”
What to consider
Healthcare trusts used to be regarded as a vehicle for organisations with 500 employees or more. However, with what many consider prohibitive increases to the insurance premium tax (IPT), smaller companies are considering them as an alternative to more expensive health insurance.
The chief consideration when setting up a healthcare trust is, however, still the size of the organisation. Dunsford says: “Organisations with fewer than 150 staff may find it’s not viable, because without a significant prior claim history, it’ll be too difficult to predict the size of fund required.
“So smaller businesses, like individual policy holders, may have to swallow group policy IPT increases whole – unless they choose another option.”
There are also some financial costs linked with setting up a healthcare trust. Health trusts are distinct legal entities with regulatory requirements that have to be met when setting up and administering a scheme. These costs are something that businesses will need to take into account. Even so, they can still be significantly less than opting for a PMI policy.
Benefits to the employer
There are a number of advantages to an employer for opting for a healthcare trust. Mike Blake, director, PMI Health Group, part of Willis Towers Watson, says: “Healthcare trusts can offer a high degree of flexibility, enabling employers to better define the health benefits covered. For example, treatment for chronic conditions, which can have a significant impact on levels of sickness absence, may be covered. Such conditions would not ordinarily be insured by a conventional PMI policy.”
Janice Buffett, group marketing director at Healix, agrees. With healthcare trusts, employers are given a considerable degree of control in selecting the levels of benefits and services compared with a traditional PMI contract, which usually closely prescribes what can be offered.
She says: “They allow greater flexibility in scheme design, with the benefits tailored to suit the employer’s requirements and different levels of cover possible for different groups of employees.”
She continues: “Another big advantage is that the employer retains funds when claims are lower than anticipated, rather than an insurer taking extra profit. The employer can elect to be protected from claims exceeding their budget through the use of ‘stop loss insurance’.”
Another bonus for organisations switching from an insured arrangement to a trust is that the claims history will be known, making it less of a leap in the dark.
With trusts, the employee can receive more overall. Unlike PMI, the trusts allow for other health-related benefits such as cash plans and dental plans to be incorporated – allowing a more effective use of a healthcare budget.
For the employer, the flexibility and bespoke nature of a trust also allows for better long-term planning and future-proofing of healthcare spend.
The impact of IPT
The IPT has doubled from 6% to 12% in two years. With this sharp rise, it is likely that many employers will start to seek alternative healthcare propositions.
Buffett explains: “There are tax advantages with a healthcare trust as it doesn’t attract IPT in the same way.”
Healthcare trusts so have other notable tax advantages. The employer automatically saves 10% (12% from June 2017) as they are not required to pay IPT on the non-insured element of the trust, unlike with PMI.
There is another favourable factor to take into account. Blake explains: “The other tax advantage is to the trust beneficiaries, who only pay tax on their notional premium – the proportion of the trust cost attributable to them – rather than on the benefit that’s paid out. They consequently benefit from the same tax advantage afforded to PMI scheme members.”
PES’s Dunsford says: “If a company pays £200,000 for a group PMI policy, that’s an eye-watering £20,000 on top. Small wonder then that many businesses are looking for more cost-effective ways of keeping their staff healthy.
“A healthcare trust doesn’t attract IPT because it’s not an insurance policy. There are other costs involved in the set-up – legal fees, for example – but that’s still a good trade-off for IPT.”
With the rate of IPT doubling, the latest increase is expected to lead to both companies and individuals reducing cover or cancelling health insurance policies altogether, putting further burden on an already-stretched NHS.
The rise is expected to have a detrimental impact on the individual PMI market – combined with medical inflation, it could lead to PMI becoming increasingly unaffordable for consumers.