A cost-effective alternative to private medical insurance (PMI) is for an employer to provide medical cover for staff through a healthcare trust. This can be particularly beneficial for organisations with more than 500 employees and a medical benefit spend exceeding £250,000 a year.
Healthcare trusts, which first appeared in the 1980s, provide an agreed fund into which the employer puts money to cover eligible medical expenses for employees. Setting aside money in this way means it can only be used to purchase health cover that is specified in the trust’s deed document.
Once money is paid into the fund, it cannot be paid back to the employer. But if the money in the fund is not spent in the first year, it can roll over into the next calendar year, and so on.
Trusts can be structured in two ways: either as non-discretionary trusts, which are fully funded by the employer, or multi-contribution trusts, which permit voluntary contributions from trust members, for example if employees wish to cover members of their family.
Flexibility and cost-effectiveness
Trusts’ flexibility and cost-effectiveness are key factors for employers. By effectively owning the healthcare benefit, the employer has greater flexibility over how much money is put into the trust, and what treatment it will cover, allowing it to create a bespoke medical insurance package.
For example, the employer can choose to cover chronic health conditions that may be excluded from a PMI scheme and can change the benefits offered more regularly and easily than is possible with PMI. A healthcare trust also gives an employer greater control over funding, so in effect it is self-insuring.
Cost-effectiveness is another attraction of healthcare trusts. For example, they are exempt from the 6% insurance premium tax (IPT).
Employers can increase the level of cover, adjust the excess paid on claims, and control costs by buying stop-loss insurance. This allows them to limit claims coverage to a specific amount without affecting the funds held in the trust.
An employer can buy insurance at an aggregate level, protecting itself against higher-than-expected claims above the capped fund, which would be liable for IPT. For example, if the claims fund is capped at £500,000 and a claim exceeds that limit, the stop-loss insurer will cover the excess.
However, some organisations are still put off by healthcare trusts because they do not want the burden of being the trustee and taking responsibility for overseeing the banking, administration and claims process. These considerations must be taken into account by all parties when considering setting up a healthcare trust.
Employers are required to appoint a legal team, either in-house or externally, to set up a healthcare trust. This team will then be tasked with creating a trust deed document, while the employer draws up rules on how the trust will operate.
This process is overseen by a board of trustees, which typically includes a senior representative of the employer, staff members, a representative of the insurance or administrative organisation that will run the trust, and an adviser.
Contributions paid into the trust are used to settle employees’ healthcare claims, as well as to cover administration costs. While the general consensus is that there are many savings to be made by setting up a healthcare trust, the cost of establishing governance bodies and operating within a legal framework means this may not be the case for all employers.
Trustees have to devote a fair amount of time to running the trust and to ensuring it is run compliantly, which can, in some cases, outweigh any potential savings identified at the trust’s launch.
The tax structure of healthcare trusts can also be quite complex, depending on how they are operated. When trusts were launched in the 1980s, it was unclear whether some of their features could be classified as insurance and therefore subject to benefit-in-kind tax. This was particularly true if employees made contributions into a trust, for themselves or for dependants.
Master trusts, run by providers such as Axa PPP Healthcare, help to ease this burden. Axa’s master trust, launched in May this year, allows employers to delegate the running of the trust to the provider. It is designed for employers with a minimum medical benefit spend of around £200,000 a year.
Providers can help manage a trust on the employer’s behalf, sending the employer regular management information and giving employees access to their medical expertise.
Demand for PMI is growing again after a steady fall in 2009. Laing and Buisson’s Health cover UK market report, released in July 2013, found that PMI membership increased by 1.1%, or 43,000 subscribers, to reach 4.03 million at the end of 2012. Membership of self-insured schemes, which include healthcare trusts, increased by 5.2%.
A notable trend seen by healthcare trust providers is that self-insured arrangements and trusts are more popular with employers that have between 300 and 400 staff.
The market is having to respond to the fact that employers continue to seek more tiered solutions for healthcare cover, perhaps providing it via flexible benefit schemes, so employees can select the medical benefits most relevant to them.
What are healthcare trusts?
A healthcare trust is a method of providing self-funded medical cover to staff. Premiums, which can be funded by employers and employees, are paid into the trust and based on the estimated value of an employer’s annual claims. Trusts are run independently and are managed by a third-party administrator, often appointed by the employer, rather than a health insurer.
What are trusts’ origins?
They were created in the early 1980s to give large employers greater flexibility and control over the cost and structure of their healthcare benefits.
Where can employers get more information and advice?
Visit the healthcare and wellbeing channel
What are the costs involved?
The cost of setting up a healthcare trust is entirely legal fees. An in-house legal team can reduce the costs greatly but they range from £8,000 to £10,000.
What are the legal implications?
An in-house or external legal team must be appointed to create a trust deed, and employers must ensure the trust does not run out of funds.
What are the tax issues?
Healthcare trusts are not classified as insurance schemes, so are not subject to the 6% insurance premium tax (IPT). If the trust is set up correctly, there should be no P11D liability for employers, but there is a liability for staff, which is based on income tax level and is therefore variable.
What is the annual spend on healthcare trusts?
Laing and Buisson’s Health Cover UK Market Report, published in July, estimates that in 2012, £606 million was spent on self-insured schemes, which include healthcare trusts. The average price paid by organisations for private medical cover was estimated at £897 per employee. The average pot is capped at £500,000.
Which providers have the biggest market share?
There are no exact figures, but providers include Axa PPP Healthcare, Aviva, Bupa, Cigna Healthcare Benefits, Healix, Medical Care Direct, Simplyhealth and WPA Protocol.
Which providers have increased their market share?
Laing and Buisson reports that the market continued to be dominated by Bupa and Axa PPP Healthcare.
4.03 million was the number of insured and self-insured private medical insurance (PMI) policies in operation in the UK at the end of last year.
5.2% was the rise in the number of policies covered by self-insured schemes in 2012.
12,000 health cover policies are covered by self-insured arrangements that were fully paid for by UK small and medium-sized enterprises (SMEs) at the end of 2012.
758,000 employees were covered by self-insured policies provided by large corporates in 2012.
Source: Laing and Buisson’s 2013 Health Cover UK Market Report