Medical expenses trusts can be a cost effective way for medium to large companies to make the most of their investment in employee healthcare. Dudley Lusted explains
Finding ways for your corporate clients to extract the best value from their employee benefits spend is an important part of an intermediary's service. Cutting benefits altogether is rarely a viable option and even reducing them can be counter-productive, sending out negative signals to employees that can demotivate and, in some cases, spur them to leave.
Potential saving
An effective way to reduce expenditure on healthcare benefits without necessarily compromising on cover is by self-insuring and using a trust to provide healthcare benefits.
To the uninitiated, trusts may appear to be complicated and fraught with legal pitfalls, but implementing one is a lot easier than you - or your clients - may think. They were first used for healthcare benefits in the 1990s, when they were trailblazed by a number of the large blue chip companies and their legal advisers. Subsequently, the trust documentation that is used today complies with Inland Revenue requirements as well as being easy to use.
Perhaps because of this, the self-insured medical expenses market is growing fast and now represents 15% of the company-paid private healthcare market. According to 2003 figures from Laing & Buisson, 456,000 people were covered by trust arrangements at the end of 2002, an increase of 13.6% on the previous year.
The potential saving is another reason for this growth. Trust arrangements are not insurance, therefore they are not subject to insurance premium tax (IPT). This currently stands at 5% but could easily be increased if the Treasury decided to use it to generate additional revenue.
Instead the cost of providing the administration for the trust attracts VAT at 17.5%. Although this is a higher figure, because the fee paid for the administration service is usually much lower than the cost of insurance, the resulting tax bill is lower. Indeed, over time an organisation using a trust to self-insure is likely to spend the same amount on their healthcare benefits as if they had taken out an insurance scheme, minus the cost of IPT.
Comparing these costs will determine whether an organisation would benefit from using a trust arrangement instead of medical insurance. As a rule of thumb, we suggest that employers taking out cover for groups of at least 200 people could be better off self-insuring.
Although legal entities, trusts allow flexibility over the granting of healthcare benefits. Employers can provide the cover they want, perhaps replicating the benefits available on an existing insurance policy. Similarly, providing an appropriate trust is in place, benefits can be extended to include dependants on a voluntary basis.
Flexibility
As far as employee perception of their benefits package goes, they are unlikely to notice the difference between being a member of an insured scheme and being covered by a self-insured healthcare trust. The formal documentation will indicate that they are covered by a trust but that aside, most providers offer exactly the same range of additional benefits to their trust customers as they do to their insurance customers.
Some employers are concerned that, by self-insuring, they run the risk of incurring expensive claims that exceed their allocated healthcare budget. However, by using stop loss insurance to cap their liability they can ensure that claims costs don't exceed their budget.
Intermediaries do not lose out by recommending trusts either. For example, at AXA for every trust arrangement placed, a fee is paid equivalent to the commission that they would have earned on a comparable medical insurance scheme.
Setting up a trust arrangement can also be straightforward. There are usually no charges for setting up a scheme, and specialist trust account managers can give support throughout the implementation process and beyond.
Dudley Lusted, director of corporate healthcare development at AXA PPP healthcare.
COVER notes
• Trusts are easy to use and comply with the Inland Revenue's requirements.
• Suited to medium to large companies, healthcare trusts can have a lower tax bill than private medical insurance.
• Stop loss insurance can cap employers' liability so that staff medical claims do not exceed their budget.
