Few products can boast the sort of growth dental plans have seen over the last couple of years. Figures from Laing & Buisson show there was a 30 per cent rise in terms of subscribers and premium in the company-paid dental cover market in 2006.
Current economic conditions are forcing employers to focus on the cost of the benefits they provide their employees. And, with medical insurance premiums spiralling upwards, self-insuring through a healthcare trust is looking an increasingly attractive option for many companies.
Healthcare trusts are legal arrangements allowing an employer to self-insure its healthcare costs, often outsourcing the administration to a specialist, which could be a medical insurer or third party administrator. As claims can exceed the fund, it’s common for employers to put stop loss insurance in place alongside a trust to limit their liability to 120 per cent of the claims fund or more.
It’s a popular option and already there’s been a considerable shift towards healthcare trusts in the corporate market. Figures from the Association of British Insurers show that 623,000 companies had trusts in place at the end of 2007, covering 1.14 million employees and their dependants. This represents an increase of 6.5 per cent on the number of schemes in place a year earlier and is an increase of more than 50 per cent on five years ago.
“The market is maturing rapidly now with most of the well-advised companies already in trusts but there are still opportunities out there. We’ve seen growth of 20 per cent year on year and, although many companies have already moved to trusts, the economic climate should continue to drive growth,” says Adrian Humphreys, managing director of corporate clients at WPA.
Damian Lenihan, head of client management at Bupa, also believes there’s plenty of potential left in the market. “The market isn’t very old and as processes get slicker and employees start to recognise trusts as an employee benefit, more and more employers will fall into the trust bracket,” he says.
Given the current economic conditions, the potential savings are not to be sniffed at either. Humphreys says that an employer who moves from an insured scheme to a trust can save around 30 per cent year on year.
Savings come from the way tax is dealt with (see box) and more efficient use of the benefits by staff.
“There can be additional savings from refining the benefits and having a cheaper administrator in place,” says Adrian Norris, managing director of Buck Consultants. “Employers also save as there are no insurer reserving charges, typically cutting a further couple of per cent off the cost.”
But, in spite of the benefits they offer, trusts aren’t right for every employer. For starters, size is important. Norris believes an employer needs to be looking at a medical insurance premium of around £500,000 a year before it’s financially feasible. “You can do it for smaller schemes but you really need to have this level of premium. Even then, some employers aren’t comfortable with the additional risk.”
Trust providers are also recognising this and a couple of plans have been launched that could provide some reassurance to the nervous employer.
A year ago Healix launched the 100 scheme, designed for companies with more than 100 employees. This is an off the shelf trust product that incorporates an option to arrange stop loss insurance at 100 per cent of the anticipated claims fund. This means that any risk is eliminated.
Axa is also in this market with its fixed liability trust. Like Healix’s product this uses stop loss insurance to replicate a fully insured scheme within a trust arrangement. “There are lots of risk averse companies, for whom moving from insurance to a trust is a big jump,” says Chris Rofe, head of client relationships at Axa PPP healthcare. “This gives them a middle option.”
He says there are two key advantages to this approach. The first is that the employer has a known, fixed cost at the start of the year. Secondly, they also harness the benefits of trust IPT savings without the risk of a full trust. He adds: “We don’t expect employers to be on the contract forever though, perhaps just one or two years as it’s really a stepping stone for those who want to move from traditional insurance to other advantageous funding vehicles such as trusts, without immediately taking on any additional claims risk.”
Employers using these types of products do have to forfeit some of the trust benefits in return for removing the risk. Because a higher level of stop loss cover is put in place, the IPT savings are reduced. Additionally, with more insurance in place, the total cost to the employer is higher.
Employers may also find there’s less flexibility within the trust design. For example, on this scheme Axa does not include trustee approved services such as providing cover for claims that wouldn’t normally be covered. “These negatives aren’t showstoppers and they’re negated if the client then moves to a cost plus arrangement,” adds Rofe.
Whether an employer goes for a full trust or one of these fixed liability products, there can be other stumbling blocks too. “Some companies don’t want the additional burden of administering the scheme. They feel they ought to appoint employee representatives as trustees or have senior executives in these roles and this can mean they don’t introduce a trust at all,” says Norris.
Humphreys agrees that this can be a problem, but says it is largely due to employers’ experiences of pensions. “There’s a huge amount of work involved as the trustee of a pension scheme but this isn’t the case with healthcare trusts. There’s less paperwork and you don’t need to have the meetings that a pension scheme has.”
Advisers also face resistance because of the additional work, and cost, required to set up a trust. However, the providers argue that this shouldn’t cause a problem, with some off-the-shelf trusts up and running within six weeks. “Trusts are easier to set up than you think and Remedi even has a scheme arrangement which offers an alternative to creating a trust structure,” says Howard Hughes, sales and marketing manager at BCWA, which owns third party administrators Medisure and Remedi. “You’re not tied to the administrator either. Trusts are fully portable so it’s easy to move to another provider if you want to.”
As well as winning over management, communicating the change to employees can also cause problems. When replacing an insurance scheme with a trust it is necessary to write to the membership to explain that it’s a discretionary arrangement. “If an employer’s moving to a trust to save money then chances are the employees will see through them,” says Lenihan. He recommends being open about the reasons for the move but also adding in some extra benefits as a sweetener.
The tax savings available through healthcare trusts can also make some employers hesitant. Given HM Revenue & Custom’s (HMRC) suspicion of anything trust based, it’s not impossible that it would rescind the tax advantages. However, while he admits that the Revenue could attack healthcare trusts, Lenihan thinks it’s unlikely. “There’s no guarantee they’ll remain in their current format but, even if they did attract tax, there would still be advantages to having this form of self-insurance in place,” he explains. “Further, if the Revenue did close down healthcare trusts, this would have a knock-on effect on a whole variety of other trusts too.”
But while it might require change, and faith that HMRC won’t change the rules, once in place healthcare trusts are delivering significant benefits. “It is quite different to having insurance in place but I haven’t come across a single company that has moved back once they’re set up a trust,” says Norris. “The benefits are very attractive.”
Expert view: How savings of around 30 per cent can be made
Experts say savings of up to a third of total premium cost can be made be switching to a healthcare trust. The first of these savings, accounting for just less than 5 per cent, comes from the different tax treatment of trusts. Rather than being subject to insurance premium tax (IPT) at 5 per cent, the claims fund, which makes up around 85 per cent of the total spend, is tax-free. VAT is payable on the administration service, which although a higher rate of tax than IPT, only applies to around 10 per cent of the pot.
If a stop loss arrangement is put in place this will attract IPT, but at only a few per cent of the spend, again negligible.
Next up are savings related to the scheme itself. Savings can be made from getting a cheaper administrator in place.
Perception can also make a difference. Because trusts can be labelled as the company’s rather than an insurer’s, employees will often think twice about claiming. Adrian Humphreys, managing director of corporate clients at WPA. explains: “With some insurance schemes a consultant might see an employee and although he might give them the all clear he may suggest further treatment such as a series of physiotherapy or an MRI scan. The employee might not think twice about accepting this if the fat cat insurer is footing the bill, they might be less inclined to if they know it’s their company’s money, and therefore their bonus, that would be spent. This can result in savings of between 10 per cent and 20 per cent.”
A further benefit of trusts, which can also potentially save employers money is their discretionary nature. While medical insurance gives employees a contractual right to the benefits listed, this isn’t the case with a trust. “Removing this right means an employer doesn’t have to face a long-term responsibility to provide all the benefits there might be under medical insurance,” says Humphreys.