Demand continues to grow for health insurance as employees look to their organisations to help them access healthcare post-pandemic. But, with the breadth and cost of treatment increasing, and benefits budgets under significant pressure, employers are looking for cost-effective ways to keep their workforces healthy and engaged.
To meet this demand, healthcare trusts, which can offer tax savings alongside greater flexibility and control, are seeing plenty of interest. “The healthcare trust market continues to expand,” says John Dean, consulting development director at Healix. “We estimate that most companies spending in excess of £1m on healthcare benefits will now be using a trust. After moving to a trust model, very few, if any, return to insurance, which contributes to the market’s continued growth.”
Financial benefits
For these larger organisations, using a trust to provide healthcare offers plenty of benefits. As the fund is not subject to insurance premium tax (IPT), with employers paying VAT on the fee they pay for administration instead, this can represent a significant saving. “An organisation can save 12 per cent on IPT by switching to a trust,” says Ed Watling, employee benefits consultant (healthcare) at Mattioli Woods. “This was a major incentive in the past when IPT was rising but, now it’s stable, it’s less of a draw. It might return if medical insurance premiums start increasing and employers can save 12 per cent of a larger number.”
Alongside the IPT savings, there are other potential financial benefits. Any unspent claims fund rolls forward, rather than into an insurer’s pocket. “We estimate that the true cost savings of a healthcare trust are around 18 per cent of the premium,” adds Dean.
Flexible appeal
But, while the savings are compelling, the major driving force behind the popularity of trusts is the ability to tailor benefits. Although they can be set up to mimic a medical insurance scheme, employers can adjust the benefit levels and add areas of healthcare that are not readily available on medical insurance schemes. “
We’re seeing a lot of new benefits in the trust market, especially in areas such as fertility, menopause and neurodiversity,” says Rachel Western, principal at Aon. “Trusts are always the first, with many benefits trickling down into medical insurance over time.”
Being able to include these cutting-edge benefits is particularly important in the current employment market. Dr Luke James, workforce health leader, Europe at Mercer Marsh Benefits, explains: “People are looking for richer benefits and especially ones that support diversity, equity and inclusion. Offering these can make a real difference in the war for talent.”
Smaller attraction
While a full healthcare trust is great for a large company with a stable claims fund, innovation among the trust providers means that even smaller organisations can enjoy their benefits. Master trusts can work well for companies with claims funds of as little as £250,000.
Subsequently, Dean has seen a huge increase in medium to large companies using master trust solutions run by the likes of Healix, Aviva, Bupa and Axa. “ These simple solutions allow mid-sized companies to access the benefits of a healthcare trust, without having the administrative burden or responsibility of setting the trust up themselves and appointing trustees.”
The benefits are more diluted at the smaller end of the scale. Dr James says that smaller arrangements won’t necessarily get the cost savings or the level of flexibility seen on full trusts but the master trust structure does mean they can outsource the governance and administration.
Under scrutiny
Whether a full or master trust, governance is a key theme in the market. HMRC required all trusts to be registered last year, putting the way they’re run under the microscope. “There’s a real focus on governance,” says Dr James. “Employers want to ensure they’re abiding by the rules and they’re not creating undue exposure to risk.”
With HMRC holding details of every trust, there’s a further risk too. Western says that with the government keen to balance its books, it may look at the way trusts are taxed. “There is a risk that the government might look at trusts from an IPT perspective,” she says. “Full trusts offer benefits aside from IPT mitigation but there’s less ownership and flexibility on a master trust so they could be targeted.”
Anything is possible as the government seeks to shore up the nation’s finances but the state of the NHS means the government should be encouraging more employers to provide healthcare to help ease the pressure. Watling isn’t convinced that master trusts will be targeted. “It’s possible but it’s not a major hole in the government’s tax take,” he adds.
Claims pressure
While the importance of providing employee healthcare may make changes to taxation less likely, the very same pressures in the NHS could prove tricky for trusts. “We’re going to see a big jump in claims in the next 12 months,” explains Western. “Employees who might have been happy to use the NHS in the past are likely to turn to the medical scheme to avoid the waiting lists.”
On top of increased demand, healthcare costs are rising. Alongside a shortage of healthcare staff, which will push up costs, Dr James says that some of the more expensive treatments are becoming more commonplace. “CAR-T cell therapy, at a cost of £500,000 to £750,000 per person, is becoming more widely used to treat cancer. A couple of additional claims could be a major risk to a trust,” he explains.
Against this backdrop, keeping tabs on claims patterns and the cost of treatments is essential in the trust market.
CAPTIVE AUDIENCE
Organisations seeking greater control over their insurance spend may want to explore a captive. These enable the organisation to reinsure its liabilities, with any underwriting profits remaining in the captive. In addition, as a captive can be set up anywhere in the world, including tax havens such as Bermuda and the Cayman Islands, it’s possible to secure significant tax savings.
The prospect of taking on the insurance role can be attractive but they are really only suitable for larger organisations. Rachel Western, principal at Aon, explains: “A captive can work well for a multinational, enabling them to put all their insurances and global benefits through it. As well as the financial benefits, this can also make it easier to harmonise global benefits.”
The nature of healthcare benefits also makes them less suitable for inclusion in a captive. Ed Watling, employee benefits consultant (healthcare) at Mattioli Woods, says: “Employee benefits don’t always fit well. Captives are better for liability or catastrophic but infrequent losses, for instance insurance for oil rigs, where there is an underwriting profit.”
In contrast, premiums on health insurances tend to be almost in line with the claims costs. And, with claims costs and frequencies increasing, the possibility of an underwriting profit becomes even more unlikely.
But, while there’s not a huge appetite to use a captive for the health insurance, there is potentially more room to use them for the stop loss insurance on a healthcare trust. John Dean, consulting development director at Healix, explains: “I’m surprised that very few companies use captives to place their stop loss insurance. It could be that healthcare benefits are managed by HR and reward teams whereas captives are typically linked to insurance departments. Using a captive enables an organisation to maintain and hold the risk in-house. This could lead to substantial cost savings but, this could also be a disadvantage, if there was a big claim against the fund, the organisation would be responsible for paying it.”
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