Ben Goldby
Partner
Article
10
Private medical cover is offered on a group basis by many employers, usually though an insurance policy. But with the cost of medical insurance rising and insurance premium tax reaching new heights, larger employers are exploring other ways of structuring healthcare to meet their needs and control costs. Here we look at why using a healthcare trust to provide cover to employees has become increasingly popular, and consider some of the main features of a trust-based approach.
When it comes to medical insurance, many larger employers already adopt profit-sharing or cost-plus arrangements that are designed to achieve a balance between exposure to risk and cost. A natural extension of this is for the employer to take greater control of this process and to purchase various services separately by establishing its own healthcare trust.
In simple terms, the employer establishes a trust and appoints trustees to manage and administer the medical benefits. As with the insured approach, the trust is funded by employer contributions (and possibly employee contributions as well) but this money is used to set up a claims funds rather than pay an insurance premium. A third party administrator is then appointed to administer payments from that claims fund to provide medical treatment to members throughout each scheme year.
The trust's governing documents, and in particular the member booklet, will set out exactly what is and is not covered under the trust in each scheme year (similar to a policy schedule). However, at the end of each scheme year, the employer can decide what it does (and does not) want to cover members for in the coming year and has the flexibility to use different providers and specialists.
The trust will need to comply with relevant trust law but the regulatory and tax legislation is relatively limited compared with other trust-based arrangements such as a pension scheme or group life trust. In order to comply with tax rules, the trust must be set up on an irrevocable basis, so once the money goes in, it cannot be returned to the employer. However, that money can be set against the future cost of providing health cover under the trust, helping the employer to save money that would otherwise have been paid out as an insurance premium. In years where the cost of meeting treatment claims is lower than anticipated, this can lead to a significant saving.
While the employer is obliged to fund benefits throughout the scheme year, there is no long-term year-on-year obligation to continue the trust. If the employer decides it no longer wants to run the trust (for example after a particularly heavy claims year) then it can bring the trust to a close at the end of that scheme year and return to an insured approach.
Most employers take out supplemental stop-loss insurance when operating a healthcare trust. The purpose of this insurance is to protect the employer if claims in any one scheme year are significantly greater than estimated. Typically the stop-loss threshold might be set at 125% of the claims fund, or it could be set based on the cost of individual treatments (for example £1 million per treatment), and the intention here is that the employer knows it will be protected against costs that are over and above the level it has budgeted for.
Trustee - The trust requires a trustee. Rather than appoint individuals, an employer will often set up a separate trustee company within its own group or appoint an independent third party trustee company. The trustee's role is important, but not complicated. It will be responsible for monitoring incoming contributions and outgoing benefit payments, appointing administrators and other advisers and determining any matters of doubt.
Administrator - The key third party role is that of the administrator/provider. The trustee will generally delegate the day-to-day running of the trust to the administrator, who will arrange treatment, process claims and administer the trust in accordance with the trust deed, rules and member booklets. The relationship between the trustee and administrator is an important one, with tax as well as operational implications, so the trustee should take legal advice before entering into the administration agreement.
Benefit consultant - The set-up and ongoing running of a healthcare trust is a complex process. As well as legal advice on the documentation to set up a trust, the employer and trustee will need the help of a benefit consultant to set the claims fund, choose administrators and work out what treatments to cover members for each year.
If you are interested in using a corporate healthcare trust to provide medical benefits, the first step is to make a project plan and take advice from lawyers and benefit consultants. Contact us if you're interested in discussing a healthcare trust for use in your organisation. We have also published a "top tips" sheet for employers who are considering an alternative approach.
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