Nick Jeal looks at how the private medical insurance industry can turn the Insurance Premium Tax (IPT) hike into an opportunity.
Since the Chancellor's Summer Budget, the health insurance industry has been busily readying itself for the increase of IPT from 6 per cent to 9.5 per cent that comes into force on November 1st. It's a significant development, affecting all private medical insurance contracts, and is expected to generate around £1.5 billion in additional tax revenue.
Whilst increasing insurance costs is not good news for employers, the IPT hike gives advisers an opportunity to raise their game and increase the value of their service by consulting with clients on options for maintaining cost effective healthcare benefit provision.
These changes mean that, for clients negotiating health insurance contracts from November 1st, prices are more likely to increase. This is compounded by the continuing upward pressure on private healthcare costs that has seen the cost of providing cover steadily increase for the last 20 years.
Considered against the pressure employers are facing to manage payroll costs, PMI could find itself taking an even larger share of the available budget when the IPT hike is factored in. This will be challenging for benefits providers, as clients - led by procurement - sharpen their focus on plan design and look to apply the lever of competition to drive better value.
While this may, on the face of it, present a less than rosy picture, it doesn't have to be this way. Intermediaries are well placed to get on the front foot and take a proactive approach to helping clients to deal with the situation.
Advisers who do nothing and leave their clients to maintain the status quo may find themselves in the unenviable position of seeing their clients' healthcare costs increase for no additional benefits. But help is at hand and there are options such as Health Trusts that can be a viable alternative.
So what do Health Trusts have to offer?
Unlike traditional PMI, Health Trusts are not contracts of insurance. Rather, they're more akin to a pension scheme for administration of health benefits to scheme beneficiaries - the employees of the company.
Health Trusts are separate legal entities, managed by Trustees (generally appointed by the employer) who manage the fund's costs and spending on behalf of beneficiaries. Importantly, as benefit provision is not predicated on a contract of insurance, the arrangement is not subject to IPT, thereby making the forthcoming increase in IPT largely an irrelevance.
Setting up a Health Trust can, therefore, present an attractive opportunity to mitigate the cost of IPT. Additionally, clients get a considerable degree of control in selecting the levels of benefits and services they provide to beneficiaries when compared with a traditional health insurance contract, which usually closely prescribes levels of benefits and service.
The value of the fund that the Health Trust is responsible for managing is determined to a large extent by the company's benefit requirements and intermediaries can add real value here by advising clients on the breadth of available options and steps they need to take to introduce a satisfactory scheme.
What's the catch?
There are, of course, some financial costs to setting up a Health Trust. They are discrete legal entities and intermediaries who advise on them need to ensure that their clients understand the regulatory requirements they will have to meet in order to set up and administer them. It's an undertaking that can require a considerable commitment of time and effort on the part of Trustees and should, therefore, be a consideration for employers who are minded to take this on for themselves.
In addition there are a number of alternatives to the employer ‘owned and operated' approach to setting up and running a Health Trust. For example, a ‘turnkey' approach is available whereby employers engage their administrative services provider to undertake these tasks on their behalf, thereby removing the need for employers to appoint their own people to serve as Trustees (and, it follows, take responsibility for meeting the regulatory requirements this entails).
Whatever the benefit levels and however the Health Trust is administered, the cost savings are clear when compared with a standard PMI contract. In comparison with traditional full insurance, providing employee health benefits through a turnkey Health Trust managed by a provider could generate around a 3 per cent saving and, for employers who are able to recover VAT, a saving of over 5 per cent can be attained.
The health and wellbeing benefits market is constantly changing and, as ever, the most successful intermediaries are those who remain alert and responsive to the challenge of ensuring that the insight and service they provide are up to date and on the money.
The increase in IPT offers intermediaries a fresh opportunity to demonstrate their value by proactively advising on Health Trusts. This should help to ensure the health and wellbeing packages they recommend meet their clients' needs as cost effectively as possible.
Now's the time to start talking about the options. Those who don't may find a rival has gone ahead and beat them to it.
Nick Jeal is head of corporate marketing for AXA PPP healthcare