How to manage Britain’s rising private medical insurance costs using healthcare trusts

The UK health cover market grew by over £800 million last year, reaching a total value of £7.59 billion and experiencing the sharpest rise in a decade, according to analysts LaingBuisson.

There are ways in which this can be managed using healthcare trusts. The advantages include saving insurance premium tax and insurer risk premium, and offering a more flexibility to accommodate bespoke benefits, however, there is a very specific regulatory and tax regime that needs to be navigated to deliver the benefits.

What is a healthcare trust?

Healthcare trusts are essentially a means of self-funding healthcare cover for employees. Rather than paying an insurer to take on a risk, the employer funds a trust which is then administered by a provider.

This runs on annual cycles, much like PMI, so there is no long-term commitment. The administrator calculates the necessary fund based on claims experience, deals with all the claims handling and back office functions and works with the employer to develop the member booklet, setting out what is and isn’t covered. If properly structured, the trust broadly replicates the tax treatment of PMI and delivers a very similar experience to the employees, but generally at lower cost.

Advantages

A healthcare trust isn’t insurance, meaning it is outside the scope of insurance premium tax, meaning employers can save 12% on costs. Additionally, the absence of risk premiums charged by insurers can lead to significant financial benefits.

Any surplus funds can be carried forward to offset future costs and reduce funding levels, but cannot be returned to the employer, if claims come in below projections.

Employers can also tailor healthcare benefits to meet the specific needs of their workforce more easily, including coverage for neurodiversity, gender dysphoria, infertility, and family-friendly services. There may also be greater flexibility to choose specialist service providers.

Healthcare trusts allow periodic payments into the fund, rather than a single premium payment upfront. Employers can adjust contributions based on annual claims estimates.

Issues and considerations

Despite their advantages, healthcare trusts come with certain considerations that employers should be aware of, although most can be mitigated or overcome:

Claims Exposure

An inherent implication of self-funding is that the employer bears the risk of a bad year as well as the upside of good years. This can, however, be mitigated through stop-loss insurance, which can be set at, for example, 125%, 110% or even lower, and can also be applied at the level of individual treatments. Some risk may already have been assumed through cost-plus or profit sharing built into existing PMI policies, in which case a trust just takes that a step further.

Set-up costs

Initial establishment and administration fees can be significant, although this should be a one-off expense. The cost of stop-loss insurance, if applicable, also needs to be factored in.

Size of workforce

Healthcare trusts are generally recommended for employers with a medium to large workforce, typically at least 500 employees, in order to pool the risk.

Tax and regulatory compliance

Trusts must be set up carefully, and operated within certain parameters, in order to avoid unexpected tax and regulatory consequences, for example being treated as insurance or employees being taxed on benefits received. It is important to seek appropriate legal and tax advice in order to ensure these risks are managed.  

Trustee role

Someone, usually a group company, will need to act as trustee, which involves certain fiduciary duties, although the role is quite limited in practice and many groups will be familiar with the trustee role from other contexts, including a death in service scheme or an EBT. For employers who prefer to avoid this, there is the option of joining ‘master trusts’, offered by many of the providers, where they will act as trustee in return for a fee.

Lead time

This can be significant, and planning will ideally start a few months prior to renewal.

Employee contributions

It may be that some employees are self-funding their cover, such as for family members or in the case of employees at lower grade, and while this is still possible with a trust, there are some legal and tax considerations around how best to structure this, and implications for the trust drafting.

Moving forward

The first step is likely to be initial discussions with a benefit consultant, who can help to work through the financial implications, modelling and choice of provider, and with legal advisors who can advise more fully on the pros and cons of a healthcare trust in your circumstances and whether your own trust or a master trust is likely is suitable.

Once a decision is made to proceed, legal advice on the drafting of the trust deed will be required, alongside a likely review of the administration and stop loss agreements offered by your provider, which will typically take the form of standard documents. It is advisable to seek some advice on operating the trust in practice, dealing with employee communications and trust registration, with an aim of minimising legal and tax risk.