Healthcare trusts can provide employers with a tax efficient and potentially more flexible means of providing health benefits that can be tailored to the needs of their workforce.
But setting up a trust is a complex task with many additional obligations and factors for employers to take on – meaning the role of advisers is vital in detailing the risks and responsibilities they will face.
And while the healthcare trust option can work for larger and smaller firms through a hybrid style approach, industry professionals are less positive on this option’s ability to meet some of the key goals of Sir Charlie Mayfield’s Keep Britain Working Review.
Flexible way to provide benefits
Trusts have a number of benefits including allowing greater control over health and wellbeing offerings and increased flexibility over which benefits are included as part of the scheme.
Unlike private medical insurance (PMI), healthcare benefits are paid for from a trust fund, set up with trust rules, rather than being covered by an insurance contract.
The employer appoints trustees to run the trust according to the rules set out in the membership handbook and trust deeds.
These trustees appoint an administrator who handles the day-to-day healthcare expenditure, administration and claims and treatment costs are then paid out of the fund.
“There is also an option to make periodic payments into the fund, rather than making a single premium payment up front,” explains Axa Health commercial director Dr Ali Hasan.
“Trusts offer potential tax efficiencies too, which means that more of the funding goes towards the health and wellbeing of the employees.
“They are becoming an increasingly appealing option for clients who are keen to explore the benefits they provide to their organisation and employees.”
Transparency and responsibility
Tom Dines, senior healthcare consultant at Gallagher, emphasises large corporate clients consider healthcare trusts when they desire greater control over their medical benefits.
Dines tells Health & Protection: “Trusts can provide that freedom, as well as a transparent view of where the money is allocated, albeit we still see some caution where there is an uninsured liability between the fund and the stop loss attachment point.
“The advantage of a trust is that rather than paying into an insurer’s pot and losing unused funds, the trust can retain unused funds offering greater stability in high claiming years.”
But they are not without their drawbacks and additional workloads.
“Disadvantages include additional governance requirements to establish and run a trust including appointing trustees and adjudicating any claims escalations,” says Craig Brown, data insights lead, director, health and benefits GB at WTW.
“Clients need to be comfortable holding risk and understand their potential financial liabilities.”
Brown also highlights that while standalone trusts work well for large employers where costs are more predictable, hybrid trusts work better for smaller employers.
“Providers offer hybrid trust options where some of the total claims fund can be held in a trust, and clients can vary the level of risk they hold,” Brown continues.
“These options can be more tax efficient and cost effective for small and medium sized employers, where a standalone trust is less attractive.
“Therefore, those groups not already using this type of structure to finance their medical plan have been more likely to switch to this type of contract, as they have become increasingly attractive as costs have increased over the last few years.”
Unexpected fees
But unexpected fees can be an unwelcome surprise for clients.
“Feasibility study and set up costs from professional advisors can be prohibitive, so it is essential for clients to have all costs agreed up front, before trust feasibility is explored, to avoid incurring unexpected costs,” Sharon Harwood-Davis, head of corporate healthcare pricing at Broadstone says.
“Trust-based vehicles are complex, and while the headlines around tax efficiency can seem attractive to clients, we often see a lack of understanding of the implications.
“For example, while master trusts can look attractive on paper, they aren’t always suitable in the longer term, so it’s vital that clients take independent advice from an expert in the trust market.”
Role of the adviser
So the role of the adviser is critical to ensure everyone is aware of their responsibilities.
Iain Laws, CEO – health and benefits at Towergate Employee Benefits, says: “Current or intended trustees may often be poorly prepared and not aware of their responsibilities, such as when compared to pension scheme trustees, and are often overly reliant on their adviser and, or the trust administrator.”
But they do allow employers to take ownership of employee productivity, according to Ian Talbot, CEO of Healix Health.
“Clients who want to take ownership of their employee productivity and support employees to be the best version of themselves are where healthcare trusts work exceptionally well,” Talbot says.
He adds that employers increasingly want to understand the cost of each benefit and how often those benefits are being used.
“This data informs the client to tailor changes to ensure employees receive the best support, seamlessly integrating into their existing benefit provider ecosystem,” he adds.
Rachel Western, principal at Aon, highlights that healthcare trusts are most effective for organisations with consistant approaches and workforce dynamics.
“They work best on groups with stable risk profiles who are prepared to carry the scheme liability and who want to explore greater flexibility across their benefit structure.” Western says.
“They also work best with clients who fully understand the impact, governance and responsibilities of having a trust and trustees.
“We expect any client considering a trust to undertake a trust feasibility report to ensure they understand what they are entering into and whether this is the right approach for them.”
Demand factors
However the jury is out on whether employers have an increased appetite for healthcare trusts.
As trusts assume the claims risk, it’s important high-quality healthcare is sourced efficiently and choosing the right administrator with the expertise, reach and market influence to manage claims effectively is key.
Charlie MacEwan, corporate communications director at WPA, tells Health & Protection demand for healthcare trusts has been largely unchanged in recent years.
“Key for companies is the purpose of their healthcare strategy and constructing it as effectively as possible,” MacEwan continues.
“As alternative funding options become more common, fewer companies are establishing new trusts, with activity focused mainly on larger existing schemes.
“That said, for organisations wanting a fully bespoke benefits approach aligned to their wellbeing strategy, healthcare trusts remain a valuable option.”
However, Kristian Breeze, director of healthcare at Ascend Broking Group, maintains demand for healthcare trusts is likely to grow further, driven by continued NHS pressures, workforce health challenges and the need for more personalised, preventative care.
Carolyn Derrington, head of healthcare master trusts at HCML, says she is seeing growing demand for healthcare trusts as organisations look for more effective and efficient ways to support their employees’ health and wellbeing.
“With insurance premium tax (IPT) rates potentially rising, employers are increasingly looking for both cost savings and greater flexibility in benefit design, enabling them to better meet both business and employees’ needs,” Derrington continues.
“The diversity, equity and inclusion agenda is also driving areas of healthcare that had previously been considered more chronic to be included; for example – gender dysphoria, fertility and neurodiversity.”
Pooling risk
It seems unlikely healthcare trusts will provide a significant answer to Sir Charlie Mayfield’s challenge to develop risk pooling for SMEs to enable their employees to gain access to affordable health and wellbeing benefits.
“Insurers are unlikely to wish to pool insurance risk for profit and competition reasons,” Laws says.
“Doing so in a trust would mean premium changing into trust funding which becomes non-reportable income, thus shrinking the insurer turnover,” he adds.
According to Western, trusts could be a consideration but they carry many complexities that would need to be considered.
For example, age rated SME schemes are already in part-pooled arrangements as SMEs are often not able, in isolation, to carry their own risk.
“Master trusts allow smaller schemes to enter the trust world on an umbrella arrangement but with isolated risk exposures,” Western continues.
“Combining master trusts into pooled structures is a possibility but as with any pooled arrangement you will get winners and losers with cross subsidisation of risk.
“The legal complexities of having one trust would need to be considered as trusts regulation and requirements would need to be adhered to and this may not be possible with multiple entities forming a pooled structure.
“Additionally, trusts are non insurance with open ended liabilities, unless stop loss is purchased.
“Any pooled trust arrangement will likely need some capped liability to avoid an SME carrying an unlimited risk, which is far too risky given group sizes possibly leading to less affordable options than on a pooled insured basis where liability can be capped,” she concludes.