Offering private medical insurance through a healthcare trust

Switching private medical insurance cover to a healthcare trust can save money for large organisations, says Debbie Lovewell

If you read nothing else, read this…

  • Healthcare trusts are most suited to larger organisations that provide private medical insurance to a number of employees.
  • Trusts are typically set up as a subsidiary of an organisation and are managed by a third-party administrator.
  • The claims fund is based on an employers’ estimated value of claims over a year. If they do not pay out this amount, trusts can prove more cost-efficient than a fully-insured PMI scheme.
  • Healthcare trusts do not attract insurance premium tax.

With many employers firmly focused on where they can make cost savings, private medical insurance (PMI) schemes have inevitably come under scrutiny. Healthcare trusts are an alternative method of providing the benefit that may lower the cost for some organisations. Punch Taverns, for example, has saved £170,000 since switching PMI cover for its 1,000 managers from a fully-insured scheme to a healthcare trust last year.

Healthcare trusts are best suited to larger employers that are more comfortable with self-financing their medical benefits and taking on the associated risks. Elliott Hurst, senior consultant in Watson Wyatt’s healthcare and risk consulting team, says: “Rather than having an insured contract and paying a premium to an insurer, including an element of risk premium, employers can say ‘we can pretty accurately forecast what our medical claims will be over the next 12 months, so we are going to self-finance it’. They then gain ownership of the programme.”

A trust is typically set up as a subsidiary to an organisation, through which all money relating to its PMI scheme is channelled. There are a number of law firms that can manage the entire project, creating the necessary trust deeds, looking at contracts of employment and obtaining approval from HM Revenue and Customs.

Good cultural fit

The employer must appoint an administrator to run the trust, either a traditional insurer or a specialist third party. Rachel Riley, managing director of WPA Protocol, says: “It is about finding a provider that is a good cultural fit with the employer, with the flexibility to get under the organisation’s skin.”

The trust administrator is responsible for an organisation’s claims fund, the value of which is based on estimated claims during the following year. Because the trust will only pay out for claims received, if the total value of these is less than the employer’s estimates, it can prove more cost-effective than providing PMI through a fully-insured scheme. The administration fee is paid as a percentage of the overall claims fund.

Employers can also guard against claims volatility by taking out stop-loss insurance, which enables them to set a maximum level to which they will pay out. If they exceed this, it will be covered by the policy.

Further savings can be made by the mitigation of insurance premium tax (IPT) on the claims fund and administration of a trust.

Cost-effective

In some cases, the tax break on IPT may help employers decide whether their scheme is big enough to run cost-effectively through a trust. “There is no hard and fast figure above or below which a trust might or might not be more attractive,” says Hurst. “But one of the main motivating factors is the mitigation of the IPT levy, so it is more attractive to those with a higher IPT levy on their insurance contract. Ultimately, the greater the amount of the claims fund and the greater the number of lives in the contract, the more predictable the risk should, in theory, be.”

But employers should bear in mind other tax liabilities. Richard Saunders, business development director at Healix, says: “There is no P11D liability on the benefit received, but it is still one that has a notional premium. If employers have company healthcare in a trust, they still have P11D liability, but they do not have it on the benefit received.”

Healthcare trusts offer employers greater flexibility. For example, they can take out cover for certain conditions or restrict some benefits to gain greater cost control.

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But in the current climate, employers must consider whether a healthcare trust is the most cost-effective way of providing PMI for their staff. Hurst says: “The marketplace right now would appear, in some instances, to dictate that a fully-insured option might offer greater cost certainty and maximum financial liability to the employer than a trust. We are seeing evidence that a number of employers are moving away from trust funding for a time because the financial benefits of a soft full insurance market are proving more attractive than self-finance.”

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