Healthcare trusts have provided a cost-effective means of delivering medical insurance benefits in the large corporate market for some time. But, with healthcare budgets under pressure, providers are now exploring trust options for smaller and smaller companies.
“The large end of the market is already well covered so growth will come from smaller companies,” says Paul Walker, director of intermediaries Essential Health. “Employers will have to balance tight budgets with the need to provide employee benefits to retain key employees. This will make trusts an attractive option.”
Certainly there are advantages to moving from medical insurance to a trust arrangement. First up is the cost. Not only do employers save on insurance premium tax (IPT), currently at 5 per cent, but insurer overheads also fall out of the equation. There is some tax to pay though with the administration service, which accounts for around 10 per cent of the total cost, attracting VAT, and any stop loss insurance, which will make up an even smaller part of the total cost, liable for IPT.
Further savings can be generated as a result of the trust being branded as the company’s rather than an insurer’s. This can make employees less inclined to push through any claims they can.
“Savings do depend on the scheme but we’ve seen employers save as much as 30 per cent a year after they move from an insured scheme to a trust arrangement,” says Charlie McEwan, corporate communications director at WPA, which offers healthcare trusts through its arm WPA Protocol.
Costs have also come down when it comes to setting up a trust. When Damian Lenihan, head of client management at Bupa Health and Wellbeing, first started arranging trusts, the average set-up cost was around £10,000. “We can provide expertise and documentation for free now,” he says.
As well as potential savings, the other key advantage of offering a trust is the flexibility. “Benefit schedules have been dictated by the insurers but trusts allow employers and their advisers to step back and design what they want,” says Jack Briggs, intermediary sales and marketing director at Simplyhealth.
This flexibility has resulted in everything from cost control measures such as removing or capping high claims areas such as cardiac, cancer and psychiatric, to extending cover to more unusual areas such as a weekly neck massage.
“If it can be administered, it can be included as a benefit within a trust. We have one client that only provides one benefit – assisted reproduction support. It’s important to them and we can administer it,” Briggs adds.
We’ve seen employers save as much as 30 per cent a year after they move from an insured scheme to a trust arrangement
Given these advantages it’s not surprising that smaller employers want to move from insurance to trusts. But, when it comes to numbers, opinion varies on how low you can go. Walker says he has a number of trust arrangements covering only around 20 employees but admits this is unusual. “These are set up on a goodwill basis really where the employer is aware of the risks involved,” he says. “Fifty is a good starting point to create a large, stable claims fund but you can go lower if they’re prepared to pay more into the trust.”
Revelation Healthcare, which was taken over by General and Medical this January, is also happy to look at small groups. “If a scheme has a claims fund of at least £30,000 then we can design a trust arrangement. We have a lot of schemes that have claims funds of between £50,000 and £100,000,” says Maurice Smith, general manager of Revelation Healthcare.
Healix also offers cover to smaller companies through its Healix 100 product. As the name suggests the minimum group size is 100. Steve Hook, group sales and marketing director at Healix, adds: “Once you go below 100 you don’t have the critical mass to cover the cost of exceptional claims. Most of our schemes are between 250 and 1,000 members, although we do have a lot between 250 and 500.”
To help determine whether a small group is suitable for a trust arrangement Hook looks at the claims history on the medical insurance. He says that where this has been consistent for the last three years or so then it’s reasonable to assume this pattern will continue. “I’d also look at the member profile,” he adds. “If it was heavy on retirees it’s not ideal for a trust. You need consistency on the claims fund.”
But although the products and appetite are there, many feel uneasy about offering trusts to smaller groups.
Stuart Scullion, sales and marketing director at the Private Health Partnership, isn’t convinced. “For us, the optimum number for a trust is 500 members. Once you’ve got a group of this size, a trust is usually the best option. We would look at 250 plus in some circumstances but it’s too dangerous below that number so we would tend to talk them out of doing it,” he explains.
Small groups face another potential problem. Stop loss insurance, which is used to safeguard organisations from a series of high claims, can be expensive where claims history is volatile. “It can be prohibitively expensive, leaving employers unable to take it out and facing potentially higher costs than on medical insurance,” adds Scullion.
Although Walker will set up trusts for smaller groups he admits that, at this size, the employer must be prepared for how different it is from medical insurance. “Because of the risk of shortfalls, management tends to be more closely involved with claims, which goes against the purpose of a trust,” he explains.
The other area where Walker says small schemes can struggle is with retirees. Although some of the insurers running trusts will offer continuation options, this isn’t always the case.
“This is possibly an advantage to having a trust with an insurer,” he says. “Being re-underwritten at 65 can make cover very expensive if you’ve had a few claims. You can keep your retirees within the trust but, as claims accelerate at age 65, this can get expensive. It is tricky and you need to make sure this is communicated well to members.”
Additionally, even where a continuation option is available, former members of heavily bespoked trust arrangements can find themselves with a very different set of benefits.
While smaller employers do risk busting their claims fund, product development and tax changes could enable trusts to sit more comfortably in the small group arena.
There’s no doubt that some or all of a cash plan’s benefits could be moved into trust arrangements
There are opportunities where small groups band together to form affinity scheme style arrangements and Hook says this is the most repeated request he receives from advisers. “It is possible to organise a trust for a collection of small groups but you do need critical mass for it to succeed otherwise the claims pattern can be very volatile,” he says.
Other factors can also sabotage these schemes. For example Healix administered a scheme of this nature, made up of members of a Chamber of Commerce in the North East. This, Hook says, ran very smoothly with stable claims costs until last year. “The threat of redundancy meant that members used the scheme to pay for any treatment they might need so claims costs rose. This was unusual but, if we can get a guarantee of volume in the first year, then this is an option we’d be happy to explore,” he adds.
As well as developments around the nature of the group a trust covers, product development is also likely around the benefits included in a trust. Lenihan says he has seen more companies looking to bespoke the benefits they offer.
“Employers are thinking more about the benefits that help to keep employees at work rather than replicating the benefits on a standard medical insurance scheme,” he says.
This would certainly help to reduce the size of scheme that would be suitable for a trust. With the benefits focus on the types of treatment that help employees stay healthy and in work, for example physiotherapy, orthopaedic surgery and diagnosis, rather than the potential big ticket claims of cardiac, cancer and psychiatric care, costs could be controlled and the number of members required reduced.
Briggs agrees. As an example, and perhaps because of the product range offered by Simplyhealth, he says that cash plan benefits would be ideal within a trust.
“There’s no doubt that some or all of a cash plan’s benefits could be moved into trust arrangements. We’re already talking to employers about doing this and the greater claims certainty of these benefits would definitely open up the trust market to smaller groups,” he explains.
Any increase in IPT would also make trusts a more compelling option for large and small alike. With the government keen to increase its tax take, this is seen as a likely target for an increase. Briggs says: “There are rumours that IPT will rise, perhaps to 10 per cent but potentially as high as VAT. If this does happen then more employers will find the tax savings compelling but it will also make it much more likely that other benefits that are subject to IPT, for instance cash plans, will be moved into trust arrangements.”
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