A recent article by Kevin Gude from law firm Gowling WLG, talking about why employers have chosen to use healthcare trusts raises some interesting points. In his article Kevin, quite rightly questions if employers have put healthcare master trusts in place in order to improve medical benefits to staff, or simply to take advantage of the favourable tax position of these products?
Here at HCB Group, we clearly believe that the advantages of a healthcare trust are in the design of a tailor-made benefit schedule, and choice of claims administrators, who will run the scheme exactly as the employer wants it to be run.
We know that in the main, healthcare benefits are highly valued by employees, and for employers they can help to attract and retain talent, get staff back into the workplace from illness more quickly, and help to maximise employee productivity, especially if linked to an effective employee health management programme, such as the one that we at HCB Group provide.
Healthcare trusts or Private Medical Insurance
Traditionally employer-funded healthcare provision was in the form of medical insurance schemes from medical insurers. The private medical insurance market in the UK is dominated by a small number of large players (e.g. BUPA, AXA PPP, Aviva), and even though we have seen some new entrants in the market (e.g. Vitality) and the re-discovery of cashplans, the market doesn’t look vastly different today than it did 40+ years ago.
Healthcare trusts first appeared in the UK market back in the 1980’s but it wasn’t until the first decade of the 21st century did employers start looking at them with any real interest, and often it wasn’t the benefits value that caused interest it was the fact that they offer a cost-effective alternative to private medical insurance (PMI).
Healthcare trusts, provide an agreed fund into which the employer puts money to cover eligible medical expenses for employees. Setting aside money in this way means it can only be used to purchase health cover that is specified in the trust’s deed document. Once money is paid into the fund, it cannot be paid back to the employer. But if the money in the fund is not spent in the first year, it can roll over into the next calendar year, and so on.
Trusts can be structured in two ways: either as non-discretionary trusts, which are fully funded by the employer, or multi-contribution trusts, which permit voluntary contributions from trust members, for example if employees wish to cover members of their family.
Flexibility and/or cost-effectiveness
For many employers, the key factors where a healthcare trust makes sound business sense is in the trusts’ flexibility and cost-effectiveness. By effectively owning the healthcare benefit, the employer has greater flexibility over how much money is put into the trust, and what treatment it will cover, allowing it to create a bespoke medical insurance package.
For example, the employer can choose to cover chronic health conditions that may be excluded from a PMI scheme and can change the benefits offered more regularly and easily than is possible with PMI. A healthcare trust also gives an employer greater control over funding, so in effect it is self-insuring.
Now to the main point of Kevin’s article, cost-effectiveness. Kevin argues that this other attraction of healthcare trusts, may have been the principle reason for implementing a revised medical scheme, the insurance premium tax (IPT) exemption. However, an upcoming HMRC measure could have an impact on the cost savings of delivering healthcare benefits through a trust.
As the trust serves as an alternative to insurance, and is subject to VAT on administration costs instead, employers do not pay Insurance Premium Tax (IPT) on their contributions.
Following a series of IPT increases, trusts have been able to benefit from a potential cost reduction of 12%, compared with the payment of medical insurance premiums.
It’s a very attractive distinction, but it is one that many trust administrators and advisers have been sensible to play down.
Kevin states, “Employers should not rely on their providers to carry out that review for them but, alongside their advisers if necessary, should consider whether any changes are needed to the arrangement they participate in.
In the short term, the advent of the new tax rules may also disrupt the market for providers of alternatives to insured medical benefits.
Over-reliance on IPT savings could result in some products being notifiable, but for the majority of providers and employers, the new rules should be treated as a welcome opportunity to put to rest any lingering concerns about tax avoidance and focus instead on the wider, longer-term gains of providing benefits via a healthcare master trust.”
HCB Group believes that healthcare trusts should continue to play an important role for employers looking to offer a more flexible healthcare arrangement, particularly if there is a need to provide cover for chronic conditions, or a requirement to have ‘targeted’ benefits. But like any health-related benefit, it should never stand-alone as costs even with a properly managed trust can still creep up and up. A fully co-ordinated and managed employee health care programme is the way to pull together healthcare provision be it insured, or self-insured. HCB Group’s nurse-led employee health management service, utilising early intervention and full case management is the best route to have a fully functioning, cost-effective, transparent and flexible health management policy for any size of employer.