Healthcare trusts a ‘cost effective and flexible’ alternative to PMI, says lawyer

The cost of private medical insurance is soaring as market pressures push up the cost of PMI schemes. Yet, according to research published by polling company Savanta, one in five business leaders said they were considering adding private medical insurance to their employee benefits package in the next year. The boss of one UK business with more than 15,000 employees told the FT his company had given its entire staff private medical cover, in response to the pressures on state healthcare. Whilst PMI remains the standard model for most employers, is a healthcare trust a better option? There is a definite trend in that direction, especially for large employers, so what are the benefits of a healthcare trust? We’ll ask a tax specialist who is advising clients on this issue.

Healthcare trusts enable employers to provide self-funded medical cover to employees. Unlike private PMI healthcare benefits are paid from a trust fund, set up with trust rules with the value of the fund based on an estimated annual claims bill. There is an option to make periodic payments into the fund, rather than a single premium payment up front, and there and cover can be fully or partly funded by the employer. 

In response to the level of interest in healthcare trusts, Employee Benefits ran an article on this in April. They report how one of the main appeals of the healthcare trust is it offers employers greater control over health offerings, with increased flexibility over the benefits included. Employers can tailor cover to meet the exact needs of their workforce to include areas such as neurodiversity, gender dysphoria, infertility, and family-friendly services.

The other main advantage is a tax saving. Employers do not have to pay insurance premium tax on healthcare trusts, therefore creating a saving of 12%, and they avoid the employer’s national insurance on that insurance premium tax. However, employers opting for a standalone healthcare trusts will still have to pay for initial set-up costs and there will be administration fees to pay, and any stop-loss insurance required to safeguard against unusually high claims levels. It means healthcare trusts may not be cost effective unless an employer’s healthcare spend amounts to several hundred thousand pounds  a year. Healthcare provider, Healix, estimates that over 75% of corporates which pay over £2 million per annum on healthcare benefits already use a healthcare trust and that figure is set to rise as ‘medical inflation’ takes hold with expensive scans, new technology and the rising numbers of people opting into private health insurance driving up the cost.   

So let’s hear more about why healthcare trusts are in fashion. Earlier I spoke on the phone to tax specialist Chris Thomas:

Chris Thomas: “There has been quite a large rise in private medical insurance costs over the last year or so. I think there are a number of reasons for that. Some of it is inflationary pressures, some of it is  the aging and sicker population, some of it, quite a lot of it I suspect, is the problems with the NHS that, sadly, we're all very much aware of that are driving more people towards private healthcare and all of this has, I think, contributed to rapidly rising health insurance costs which a lot of employers are struggling a bit with because, obviously, it's a very valuable benefit and they want to be able to provide this to their employees but the cost of doing it has been spiralling, I think, for quite a lot of employers.  Now, obviously it's not going to solve all of those problems that I've just outlined because some of the rising costs are equally applicable but there are a number of reasons why this might be attractive. The first one is that it's effectively a form of self-insurance, I suppose. So it's only really going to be suitable for employers who've got, say, 500 plus employees so they've got a big enough kind of pool of risk, if you like. One of the advantages is because it's effectively a type of self-insurance you're not paying the risk premium that insurers would charge. So if, actually, you have a slightly better year than you might have predicted, you can have the upside of that whereas, obviously, the insurer will just keep it, ordinarily. It saves insurance premium tax if it's structured properly and that’s a 12% tax charge which is quite a hefty amount that's going to get put on top of whatever the premium would otherwise be. Also, it can allow you to bespoke your benefits a bit more than maybe you would do under a standard private medical insurance because, obviously, the insurer is effectively just acting as administrator. They're administrating your claims, they're doing all the back-office stuff that an insurer would do, but they're not actually on risk and so what that means is you have more flexibility to design exactly what benefits you want for your employee population and that may vary between different categories of employees of course.”

Joe Glavina: “As I understand it, there is more than one type of healthcare trust and there is the option of having a hybrid arrangement, mixing PMI and a healthcare trust. Can you talk me through that?” 

Chris Thomas: “Yes, that's right. So, this always has to be run through a trust which effectively is just to make sure it works for tax purposes. So there needs to be a trust for HMRC to accept that it works and they’ve issued what you might call a safe harbour where they'll accept, if certain conditions are met, that fundamentally it should. There are two broad models in the market. So one of those is where the employer has its own trust, it acts as trustee of that trust, and it will then engage your AXA, or BUBA, whoever that might be, to act as administrator. The other model is what’s called a master trust where your AXA or BUPA or whoever it might be will act as trustee and take care of all that for you, essentially, as well as doing the admin so and they will sell that on the basis that it's easier, and in some ways it is although there isn't really all that much governance that you actually need to do in practice. Now, the advantage of having your own trust, I suppose, is that it's a bit more flexible because you can easily take it with you. If you decide to switch to another provider, or you decide to do something different, you’re not locked in. Now, some of the providers do allow you to transfer any surplus you might have over to another scheme but practice does vary a little bit on exactly how that works so having your own scheme is probably the most flexible but some employers just don't really want the responsibility of acting as trustees and they prefer just to let the administrator do it.”

Joe Glavina: “Just thinking of our HR audience, perhaps the HR Directors, listening to this, and thinking that a healthcare trust might be good way to help attract and retain staff. How should they go about selling it the board. Why would the board be interested?”

Chris Thomas: “Yes, so in terms of why the board might be interested I think first and foremost, as is often the case, it comes down to the bottom line of cost in the sense that you should be able to deliver something that is just as good as what you're currently providing and in fact, potentially, better in some respects in that you can bespoke it a bit more over and above what you could do with PMI, but potentially at quite a significantly lower cost. Now, I can't put exact figures on it because it will vary but once you take out the insurance premium tax, that's going to be a 12% reduction in what you're paying, and you'd also hope to be making some savings around, yes, you're paying the administrator to deal with the admin, but they're not charging a risk premium so, again, you've got a saving there. Then from the employee's perspective, I think the key message there then as I said, you can be a bit more creative around what you offer and don't offer but, fundamentally, the key message to them is probably one of reassurance that, look, fundamentally, yes, we might be switching the way we're providing this but, ultimately, the nature of what you're getting, there be no prejudice to it, it will be at least as good and, actually, it might potentially be better. Obviously, there is a distinction from insurance in that there needs to be enough money in the trust for them to be entitled to the benefits they're getting but, obviously you as employer, that's in your gift to make sure there is.”

Joe Glavina: “Anything else to add, Chris?”

Chris Thomas: “Yes, two things, really. So one thing, which I probably should have mentioned previously, is you may be thinking well, hang on a minute, what if we have a really bad year here? Aren't we on the hook for an unlimited potential amount of claims costs? Well, the solution to that is that you can take out a ‘stop loss’ policy which goes to the point you made previously, Joe, around hybrid structure in that you can take out what is an insurance policy but you can set it for 100% or 110%, or wherever you want to set it, so that it gives you some comfort that in a really bad year you are not on the hook for unlimited amounts of costs. Then in terms of trends, I think we are definitely seeing more interest in these. These healthcare trusts, they're not new, they've been around for probably 25 years in some form or another so it's not like there's something new and racy. It's just that they're sort of coming more to the fore, I think, just because of the increasing costs of the PMI option, and we are seeing quite a lot of employee reward and benefit teams looking at this and saying, well, actually, is there another way we can deliver this benefit? We know it's a very appreciated benefit but on a more flexible, or more cost-effective basis and, actually, we've been helping quite a lot of clients with helping them to understand and brief their boards, or whatever, on the key implications and what they need to do to make this work.”

If you think a healthcare trust might be worth considering for your business and you’d like to know more then please do get in touch with Chris Thomas – his details are there on the screen for you. Alternatively, you can contact your usual Pinsent Masons adviser.

Buyer's guide to healthcare trusts - Employee Benefits