Flexibility and cost-effectiveness are key aspects of healthcare trusts as an alternative to PMI.
Healthcare trusts offer an alternative to private medical insurance (PMI) for providing healthcare cover to staff and their families. Trusts, which first appeared in the 1980s, enable employers to create a bespoke medical insurance benefits package based on the needs of their employees.
For example, a degree of flexibility around cover means employers can choose to cover chronichealth conditions that may be excluded from a PMI scheme. Employers can increase their level of cover, adjust the excess paid on claims, and control costs by buying stop-loss insurance.
This insurance can be brought at an aggregate level, so a policy is triggered when staff claims exceed the fund total. For example, if the claims fund is £1 million and the claims spend exceeds £1.25 million, the stop-loss insurer will cover the excess.
A stop-loss policy can also be brought at a specific level, which means that the insurer will cover any excess relating to an individual employee’s claim, for example if an employee submits a claim for £50,000, but their annual limit is £30,000.
Flexibility and cost-effectiveness
Flexibility is one of the key features that attracts employers to healthcare trusts, but cost effectiveness is probably their most appealing aspect, particularly the fact that they do not incur insurance premium tax (IPT). But the tax structure of trusts can be 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, perhaps for themselves or for dependants.
Within a traditional insurance contract, P11D rates are based on the premium being paid into the scheme. But tax on contributions does not automatically apply to healthcare trusts, so employers have to ensure their arrangement is correctly set up to ensure P11D is not levied on the funds paid out, which could range from £100 for a consultation to £50,000 for a cancer claim. When a trust is set up correctly, P11D (paid by the employer) is calculated on the contributions paid into the trust, rather than money paid out.
Employers are required to appoint a legal team, either in-house or externally, to set up a healthcare trust. The team will then be tasked to create 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 from the employer, staff members, a representative of the insurance or administrative firm that will run the trust, and an adviser.
Contributions paid into the trust are used to pay employees’ healthcare claims, as well as to cover administration costs. The general consensus is that there are many savings to be made by setting up a healthcare trust, but the cost of establishing governance bodies and operating within a legal framework means this is not the case for all employers. For example, 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, outweighs any potential savings identified at the trust’s launch.
The popularity of healthcare trusts was generally expected to rise following Chancellor George Osborne’s changes to IPT in his emergency budget in June 2010.
The chancellor announced an increase in IPT from 5% to 6%, from January 2011.
In the early 1990s, when IPT stood at 4%, the fact that trusts were not subject to the tax was not a major factor for employers that were considering a vehicle for offering healthcare cover. Now, however, it is a considerable factor in the equation.
Figures from Laing and Buisson’s Health cover UK market report, released in August, show that in 2010, membership of traditional PMI schemes was down 5.7% and the number of policies covered by the self-insured market was up 6.6%. However, in 2011, PMI scheme membership rose by 0.1% while self-insured scheme membership fell by 1.5%.
A factor contributing to the decline in healthcare trust take-up is growing interest in corporate deductible arrangements, offered by providers such Aviva and WPA.
A corporate deductible arrangement is based on an insurer’s pricing policy, which is based on an employer’s claims history, with a group excess paid by the employer.
By treating the risk as an excess, the insured element of the policy is minimised, reducing IPT and national insurance (NI) costs. Corporate deductible arrangements are easier to launch, but the initial set-up cost is likely to be higher than for a traditional healthcare trust. They are also popular with smaller employers that are looking for a fl exible alternative to a standard insured scheme.
Another trend noted by trust providers is that self-insured arrangements are more popular with employers that have between 300 and 400 staff. Laing and Buisson’s Health cover UK market report shows that, by the end of 2011, 8,000 health cover policies in the UK were covered by self-insured arrangements offered by smaller employers.
As well as meeting the needs of smaller organisations, the self-insured market is also having to respond to the fact that employers continue to seek more tiered solutions for healthcare, perhaps using fl exible benefits plans so that staff can select the benefi ts relevant to them.
What is a healthcare trust?
A healthcare trust is a method of providing self-funded medical cover to staff. Premiums, which can be funded by employers and/ or employees, are paid into the trust and based on the estimated value of an employer’s annual claims. Trusts are independently run and are managed by a third-party administrator, often appointed by the employer, rather than a health insurer.
What are trusts’ origins?
Trusts 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 on Employee Benefits’ website: bit.ly/T8cjDa.
What are the costs involved?
It can cost between £8,000 and £10,000 to set up a healthcare trust. Administration and premiums will incur further costs.
What are the legal implications?
An in-house or external legal team must be appointed to create a trust deed, and employers must ensure their trust does not run out of funds.
What are the tax issues?
Healthcare trusts are not classifi ed as insurance schemes, so are not subject to 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 August, estimates that in 2011, £520 million was spent on self-insured schemes, which include healthcare trusts.
Which providers have the biggest market share?
There are no exact figures, but providers include Axa PPP Healthcare, Aviva, Bupa, Cigna Healthcare Benefi ts, Healix, Medical Care Direct, Simplyhealth and WPA Protocol.
3, 971,000 million is the number of PMI policies in operation in the UK (insured and self-insured) at the end of last year.
1.5% is the fall in the number of policies covered by self-insured schemes in 2011 after rising 6.6% in 2010
8,000 health cover policies were covered by self-insured arrangements offered by UK SMEs by the end of 2011.
511,000 employees were covered by policies provided by large corporates in 2011.