For a parallel to corporate PMI schemes, look at the NHS, with its struggle against legislation and red tape. But there is a remedy - corporate healthcare trusts, writes Rachel Riley
The NHS faces increasing demands from its users and pressure for greater efficiency, yet it is struggling with burdensome legislation and administration. As a result, more and more money is invested each year with arguably little impact on the system as a whole.
Sound familiar? In many ways the struggling NHS is an analogy, albeit on a much larger scale, for many large corporate private medical insurance (PMI) schemes.
Perks
Employees are demanding more from their companies, requiring benefits which can be valued rather than traditional perks, the finance department is calling for cost savings and efficiency in all aspects of the business while the human resources department is buried under mountains of employment law.
The annual decision on PMI generally results in an increased premium for no change in the benefits to the employer or its employees.
In order to effect a significant and long-lasting change, the NHS must look deeper at the structure of the system and how it is used. Similarly, to avoid simply paying higher and higher premiums year on year companies must re-evaluate what they are providing as a benefit, why they are providing it and how best to achieve this.
For companies providing benefit for more than 400 employees, one solution is a corporate healthcare trust (CHT). Setting up a company-owned, branded CHT enables the ultimate in flexibility to the company and to the intermediary a greater tie-in by providing true added-value advice to their customers.
CHTs are not a new phenomenon, having been around for 15 years and with over a million people in the UK enrolled in them. Indeed, it is generally agreed within the market that CHTs are the obvious choice for any large corporate PMI scheme where the company's claims are unlikely to fluctuate significantly from year to year.
By restructuring the private healthcare scheme in this way the company significantly reduces the insurance charge, although a little may remain by way of a stop loss policy at the top end. Furthermore it is no longer subject to Insurance Premium Tax (IPT), although this in itself should not be the reason to convert to a CHT.
Add to this the effect of branding the scheme and communicating effectively to employees and companies can experience savings of up to 30% by converting to a CHT.
Idiosyncracies
Of course, a contributory factor to these cost savings is that when operating a self-funded scheme, the company itself tends to take more of an interest both at renewal discussions and in the day-to-day management of the scheme.
Converting to a CHT means companies are no longer restricted by the idiosyncrasies of an insurer.
It is sensible to take advice from the administrator, who will have the experience to explain why dangerous sports, for example, are typically excluded from cover under an insured arrangement.
However, ultimately the group has the freedom to offer its own set of benefits to employees. The only word of caution is to ensure that while membership is wholly discretionary, once you are a member, benefits should be non-discretionary.
So if CHTs are the great hope of the large corporate PMI industry, why isn't everyone doing it? CHTs can be perceived as rare and impossibly exotic with a number of myths surrounding their set-up and operation. These include:
• It is an unacceptable level of risk to take on board. While it is true for smaller corporate schemes, generally those operating with membership of 400 and over experience stable claims year on year, in which case firms must ask themselves why they are paying an insurance fee to an insurer for a risk which in reality is minimal.
Self-funding a CHT does not mean firms have to take full exposure. A sensible combination of aggregate and specific stop loss policies for the more risk-averse can alleviate this unnecessary concern.
• Firms need to have a fixed cost for PMI in their budgets. Understandably, there is pressure to allocate a fixed amount to the healthcare budget, but why should this prevent a company from benefiting from a CHT? Using the stop loss policies mentioned above there is a definite maximum liability which will not be exceeded. Using this within a budget will give the necessary security to the finance department but should mean that the healthcare costs come in below budget - a win-win situation.
• The set-up costs do not warrant the change. Setting up a CHT is easy and relatively quick - six weeks should be plenty of time and some administrators will issue an insurance cover-note if time is short to ensure a smooth transition. As for the costs, a good administrator will project manage the change from start to finish, obviating the need for the company or the intermediary to give up precious time to such mundane but vital tasks as database checking. Employing a legal team to undertake a set package of work - creating a trust deed, setting up a corporate trustee, checking employment contracts, liaising with HM Revenue & Customs - is advisable and the work is relatively straightforward involving charges of typically between £6,000 and £12,000.
This one-off cost can generally be met in the first year by the saving in IPT alone. Alternatively, some administrators provide their own blank trust deed free of charge for the groups who have less of a need to bespoke their deed - as long as the company actually owns the trust deed, making the whole thing eminently portable, this is a good solution for the smaller groups.
Be wary of subscribing to a trust deed that is owned and maintained by the administrator as this negates many of the advantages that a trust has over an insurance contract.
• It all sounds too complicated. Trust arrangements are no more or less complicated than a medical insurance scheme - the rules and administration are identical. Indeed, it actually enables the group and their intermediary to focus on what is important - making sure the scheme is fit for the purpose, rather than discussing the finer points of competing insurers' rules.
• Many people have never heard of a CHT. Simply because good news stories are not discussed as much as the horror stories does not mean they do not exist. We estimate that CHTs are operated by over 100 top UK companies currently, with some schemes well over 10 years old. Any administrator would be able to provide reference sites which are able to demonstrate a CHT in practice.
• There is no real reason to change. This is untrue. There is a massive change occurring in the insurance markets affecting supply, while company profits are constraining demand. Insurance companies who have previously relied on their reserves saw their value fall with the stock market and started demanding a higher net underwriting return. All of this inevitably leads to higher premiums.
At the same time, companies are looking closely at their costs. The twin effects of medical inflation and increases in employers' National Insurance contributions continue to place an upward pressure on premium increases at a rate of some three times wage price inflation. At this rate, with no sign of abatement, the costs of running a medical insurance scheme as a percentage of payroll will soon equate to that of a final salary pension scheme.
Companies are looking for change and the intermediaries who can facilitate it. Should we stick to the notion that it is easier simply to do nothing, keep plugging away at the traditional way of doing things and everything will be alright in the end? I think we would all agree that this is not going to work for the NHS, so why should it for large corporate PMI?
For firms deciding to go for CHTs the next step is to choose an administrator.
Aside from the common issues of claims cost management, database management and top quality management reporting, there are a number of steps firms must take before setting up a CHT:
• Obtain professional advice. If correctly arranged with proper professional advice, CHTs are straightforward and simple.
• Appoint an administrator - services range from a basic Third Party Administrator (TPA) to a fully comprehensive service incorporating claims cost containment, database management and detailed management reports. It is vital that the administrator understands the company's requirements and, to that end, a service level agreement should be entered into at the outset.
• Own the trust - ownership enables the company and its intermediary to maximise the advantages CHTs offer: freedom to switch administrators, complete control over benefits and deciding the balance to be struck between cost and compassion.
• Branding - for certain companies, this can be a vital component in cost containment as employees' perceptions tend to change when they realise their company is providing the benefit rather than a faceless insurer. Claims funds generally reduce in a branded CHT.
• Regular reviews and formal renewal procedure - as with any medical scheme it is essential to regularly review the CHT's performance and that of the administrator. In addition to the standard management reporting it is advisable to undertake formal audits and, intermittently, satisfaction surveys. The renewal procedure remains unchanged from its insured cousin, as long as the CHT is portable.
• Evolution - There is a danger with any insurance scheme that it goes stale and inertia sets in. In today's climate where "best value" is uppermost in most decision-makers' minds, company healthcare schemes must continually evolve to survive and prosper and meet the needs of their members.
Rachel Riley is director of business development at WPA Protocol
