Akin to self-insurance, organisations are getting wise to healthcare trusts, says Sally Hamilton
No wonder that many large employers, and increasingly medium-sized firms, turn to self-insurance instead where they can keep a closer eye on their medical costs.
Since the 1980s, there has been a steady increase in the number of employers taking the DIY approach, with many saving significant amounts along the way, not least in recent years from avoiding the 5% insurance premium tax (IPT) charged on medical policies.
To go it alone is straightforward if employers follow some key steps, starting by setting up a healthcare trust that is recognised by the HM Revenue & Customs. There are legal costs, which can run into thousands of pounds but these can be shrunk dramatically by using standard documents offered by specialist healthcare providers or administrators, which are sometimes offered free of charge.
Steve Clements, principal at benefits consultancy firm Mercer, says: “If you engage your own legal advice then there will be higher costs. But most companies seem to choose the standard documents with some amendments.” Even if employers fork out for legal advice the costs should be offset by the savings on insurance premium tax (IPT) in the first year.
Should employers opt for a template design, they should still have their own legal eagles cast their eyes over the detail, which should include exactly who and what the scheme covers.
Lawyers might also need to alter the wording of employees’ contracts if they previously included explicit terms relating to medical insurance as a perk. Clements, says: “This might simply mean rewording it to say they are covered by the medical benefits plan.”
FDs might baulk at the thought of the extra time and responsibility involved in running a trust. But most providers say it takes just a few weeks to get one off the ground, mainly because most use one of the large insurers or a smaller healthcare claims specialist to administer it. Once a trust is up and running it should consume no more company time than a well run health insurance scheme.
Financially the savings are mainly from removing the taxes and expenses related to insurance, which mount up over the long-term.
In return you need to accept the volatility in claims. The idea of accepting volatility can be minimised by buying specialist ‘stop loss’ insurance.
Clements adds: “This can be applied in two ways: either you cap the aggregate spend, which means if your usual claims come to £1 million each year, then you might say you’d accept 25% more risk and pay a premium to cover any excess over £1.25 million. Alternatively, you apply caps on specific claims, such as £50,000 per individual, and then pay for insurance to cover claims above that amount.” Most employers choose a stop loss of 120%-125%, although 100% is available.
Why have a trust at all? Could employers not simply pay claims from their own reserves as they arise? “That way employees would have to pay tax on any amount paid out for their treatment as a benefit-in-kind. Imagine how employees would feel if they had a treatment that cost £100,000 and were then presented with a tax bill for £40,000. Through a trust, they are taxed on the amount that goes in per head, just as with an insurance premium,” Clements explains.
Employers are encouraged to brand their healthcare trust. Insurer WPA, a healthcare trust provider through its Protocol subsidiary, says this can control costs dramatically. Spokesman Charlie MacEwan, says: “This creates an X-factor that can cut costs by 20% or more. It’s psychology. An employee might not care about claiming from a big fat insurer, but [may feel different] claiming directly from their employer.”
Employers who choose insurance are attracted by its simplicity, after all once the premium is paid they don’t need to worry if claims exceed the total bill. Richard Saunders, business development manager at healthcare consultant Healix, says: “The flipside is that if an employer’s claims’ experience is less than the premium, they don’t enjoy the benefit. With a trust you do.”
Employers need to be organised about how much is paid into the trust because once it is there, it cannot be taken away. Saunders says: “You can pay by dripping the money in monthly. If you have enough there by month 10, you don’t need to top it up further.”
An excess can also be diverted to other benefits (before it reaches the trust), such as the company pension scheme. Healix helped travel assistance group Mondial achieve this.
If the trust ends up in surplus, employers can simply adjust the following year’s payments. The money is usually kept in an interest-free account to avoid income tax complications.
The design of a scheme can also help control costs. Saunders says: “If you choose a private insurer you have to fall in with their benefits scheme. With a trust you have stability and more control over the spend.”
Employers can also control claims by linking the scheme to other benefits, such as an employee assistance programme (EAP). Saunders says: “If an employee comes forward with a stress claim, we can navigate them to the EAP, if appropriate.”
It is also easier for employers with healthcare trusts to spot and act on problem areas. Saunders says: “We can offer feedback from claims which can help the employer diagnose problem areas in the organisation and do something about it.”.
Source: WPA Protocol, May 2008