Focus on facts
What is a healthcare trust?
Healthcare trusts are a method of providing self-funded medical cover to employees. An employer will typically appoint a third-party administrator to manage a trust. The claims fund is based on the estimated value of an employer’s claims over a year, and will pay out only for claims received.
What are the origins or healthcare trusts?
They date back to the early 1980s, and were created 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?
For more information, visit the healthcare and wellbeing channel on the Employee Benefits’ website.
Nuts and bolts
What are the costs involved?
It can cost between £8,000 and £10,000 to set up a healthcare trust. Legal costs could range from £10,000 to £100,000. The administration and claims fund will bring further costs. Many providers recognise that running a healthcare trust is a cheaper alternative when offset against insurance premium tax, which is incurred by private medical insurance schemes.
What are the legal implications?
An in-house or external legal team must be appointed to create a trust deed that meets legal requirements. The employer must ensure that the trust does not run out of funds.
What are the tax issues?
Because healthcare trusts are not classed as insurance, they do not attract insurance premium tax. There is no P11D liability on the benefit received by employees, but there is a liability for employers, which is similar to insurance.
What is the annual spend on healthcare trusts?
No figures are available for the exact amount spent on healthcare trusts, but figures from Laing and Buisson show that at the end of 2010, the claims paid through the self-insured healthcare market were £427 million. Last year, there were 724,000 policies covered by self-insured schemes.
Which healthcare trust providers have the biggest market share?
According to Laing and Buisson, the largest self-insured providers are Axa PPP, Bupa and Simplyhealth.
Which trust providers increased their share most in the past year?
There are no figures available, but providers include Axa PPP, Aviva, Bupa, Cigna Healthcare Benefits, Healix, Medical Care Direct, Simplyhealth and WPA Protocol. There was some consolidation in the market when Simplyhealth acquired Remedi and Medisure in 2006 and 2007, respectively.
The rising insurance premium tax rate has made healthcare trusts a more attractive option for employers, but there are other costs to consider when setting one up, says Tynan Barton
Healthcare trusts have been around since the early 1980s, and offer an alternative way of providing healthcare cover to private medical insurance (PMI).
Traditionally used by organisations with large workforces, healthcare trusts enable employers to offer medical insurance on a different cost structure with an element of flexibility around cover. Howard Hughes, head of employer marketing at Simplyhealth, says: “It would come at a cost, but a trust could cover chronic conditions that are typically excluded from a PMI scheme, or employers could go the other way and make it a very focused plan.”
Richard Saunders, sales director at Healix, says the bespoke aspect of trusts is part of their attraction. “It’s self-insured, so employers can decide to add more cover, change excess, add chronic conditions, or add dental insurance or health assessments,” he says. “They can tailor it how they want it.”
Healthcare trusts are often considered a cheaper alternative to PMI because they do not incur insurance premium tax (IPT) and enable employers to self-fund their healthcare arrangements, which will not be taxed as a benefit in kind. Saunders adds: “There still is a P11D liability which is very similar to normal insurance.”
Since healthcare trusts have been in operation, there has been a gradual clarification of the different approaches to running a scheme. Steve Clements, partner at Mercer Health and Benefits, says that to begin with, it was not clear whether or not some features of a trust could be classed as insurance and therefore be subject to benefit-in-kind tax. This was particularly true if employees made contributions into trusts, perhaps for themselves or for dependants. “It wasn’t clear whether that was deemed to be effectively a form of insurance where the employee was seeking to buy some indemnity in return for their contribution,” says Clements. “Over the years, we’ve come to have at least a set of guiding rules on how to establish a trust in different scenarios.”
Meeting legal requirements
To meet legal requirements, an employer must appoint a legal team, either in-house or external, to set up a healthcare trust. This includes setting up a trust deed document that will satisfy regulatory bodies. The employer must also create rules to establish how the trust will operate. A board of trustees will oversee this, and will typically include a senior representative from the organisation, staff members, a representative from the insurance or administration firm that will run the trust, and an adviser.
The employer will make regular contributions to the trust, which is then used to pay healthcare claims for staff, and to cover administration costs. Because trusts are not liable for IPT, the main costs are from the outlay for legal services and the scheme administration.
Nick Reynolds, head of PMI at Aviva Health UK, says: “Everyone says there are a lot of savings to be made by setting up a healthcare trust, but this isn’t always the case because employers have to set up governance bodies and operate within a legal framework. Trustees have to give a fair amount of time to running the trust, and make sure it is running in accordance with rules. That can outweigh the financial savings.”
To control costs, employers have the option of buying stop-loss insurance either at an aggregate or specific level. Rachel Riley, managing director at WPA Protocol, explains: “If the claims fund is at £1 million and an employer buys aggregate stop-loss insurance at 125%, if the claims spend total reaches £125 million or above, then the insurer takes that liability.
“Specific stop-loss insurance is where any one claim or any one individual claims over £30,000 (or whatever amount an employer wants) and the insurance company picks it up. That is becoming more and more popular.”
Insurance premium tax increase
In his emergency budget in June 2010, chancellor George Osborne announced an increase in IPT from 5% to 6%, from January 2011. Saunders says that in the early 1990s, when IPT was 4%, the fact that trusts were not liable to the tax was not a major factor for employers considering a vehicle for offering healthcare cover. “Now it is a very big thing to consider,” he says. “If an employer is paying £1 million in claims, 6% of that is a big issue, which you wouldn’t have with a trust.”
Many people in the healthcare market thought the IPT rise to 6% would signal a move by many employers into the healthcare trust market. “There are rumours from the coalition government that IPT will rise over coming years,” says Saunders. “This will affect trusts even more because if it goes up to 10%, employers will not want to pay that and will instead move into trusts.”
But there has been little movement in that direction so far, says Reynolds. “We haven’t seen significant escalation. Some employers decide after consultation to go down a trust route, some wind up the trust because they think they can get better full insurance terms. It’s probably neutral at the moment.”
But WPA’s Riley says there has been some growth in healthcare trusts among employers with fewer than 300 staff. “Some providers operate where the trust can be much smaller in membership number. That’s where there has been more interest in the market,” she says. “In the last 12 or 18 months, most employers have had pretty much the same standard insured scheme with little variation, whether it be out-patient limits or excess, or anything like that.”
Riley adds that many employers are looking at much more tiered solutions for healthcare, perhaps using flexible benefits so that staff can pick the benefits relevant to them EB†
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