Back in March, a Health Insurance roundtable debate argued the toss over whether or not this year’s hike in insurance premium tax (IPT) from 5% to 6%, with more rises possibly to come, might in time lead to a stampede by employers towards more tax efficient self-funded healthcare schemes.
While opinion was divided as to whether a dire scenario such as IPT breaking the 12% barrier might ever occur, what was eminently clear was that, even with self-funded schemes through corporate healthcare trusts offering the distinct advantage of not typically being subject to IPT, going the self-funded route is not something employers should do lightly or in a hurry.
Making the transition from a traditional, fully-insured private medical insurance scheme (PMI) to a self-funded one is a major transition, one that can throw up important questions over what to cover and what not and how to manage disputes when you rather than the insurer will be in the firing line.
“An insurer’s scheme can feel like a comfort blanket, with the insurer looking after you and you knowing it is their plan,” cautions Howard Hughes, head of business marketing at Simplyhealth, which provides both PMI and healthcare trust administration. “So there is quite a big mental change when you move to self-funded. You are now responsible for the scheme and it is under your brand.”
Nevertheless, in a climate where, as employee benefits consultancy Mercer pointed out in April, medical inflation has been rising sharply, with the cost of providing healthcare and health-related benefits to employees increasing by 4.9% last year (on top of increases in 2009 and 2008), self-funding is up for debate in an increasing number of boardrooms.
“Employers are taking a view that they need to be striking a balance between having a benefit that does a good job and one that is still affordable,” explains Ann Dougan, marketing director at CIGNA Healthcare, another provider of both PMI and healthcare trust administration. “You want a balance between the comprehensiveness of the benefit and the cost you have to pay.”
Without 6% IPT the potential saving on a premium of £500,000 is £30,000, calculates Matthew Judge, technical director at employee benefits consultancy Jelf Employee Benefits, but trustees will need to be thinking beyond the balance sheet benefits.
“A client may want to have more say on what medical benefits are paid for, in what circumstances and how much is paid,” he says. “However, while flexibility in the benefit menu is attractive, a client would need to agree the benefit specification at the outset and appoint an administrator to administer those benefits.”
A self-funded scheme may even allow you to extend cover into areas that a PMI provider might have baulked at, suggests Simplyhealth’s Hughes.
“It can be about having a scheme that is a better cultural fit with your organisation and employees, so it is not all just about cost,” he points out.
Yet it also has to be recognised that it becomes much more complicated to make ex gratia claims in a trust environment because there has to be parity of benefit for all employees, emphasises Sandra Dalchow, senior consultant at Lorica Employee Benefits.
To this end, very clear scheme rules are a vital “must have”, recommends Nick Reynolds, head of intermediary sales at Aviva UK Health, which provides both PMI and healthcare trust administration. This is especially the case if and when a dispute arises, a situation where you can no longer “hide” behind your insurer.
The corollary is that, in a self-funded scheme, employees may think more carefully about making a claim, because they know it will cost their company money rather than some faceless insurer, argues Dalchow. “But when the answer is no and it is a self-funded scheme it is a very different issue,” she concedes.
Involving others within the organisation can be helpful when it comes both to establishing and getting buy-in for a self-funded scheme. Trade union or employee forum representatives can be members of a trust board or simply be involved in consultations over changes, adds Dalchow.
Occupational health practitioners may also be a useful resource to tap into and can be a valuable asset when it comes to the reviewing of claims, suggests Naomi Saragoussi, principal at Mercer.
“Your occupational health provider should have quite a good insight into what the main medical issues are and at what level. If you have, for example, high absence for a particular sort of condition, perhaps dermatitis, then you will be wanting to make a decision as to whether or not to bring that into the scheme,” she advises.
Communicating with staff
However you implement it, ongoing communication is essential, emphasises Dalchow. “Whenever change is made there can be the suspicion that it is always being done to take something away, but that may not in fact be the case,” she says. “You need to be asking what do you want to achieve, what do you want to keep within the scope of the cover or what opportunities are there to make changes, and on what basis?
The question of what or what not to cover is perhaps one of the most challenging faced by trustees when moving into this territory, agree the experts.
With issues such as rising drug costs, the expense of cancer care, “lifestyle” treatments and even IVF there can be a distinct tension between, on the one hand, wanting to engender goodwill and position yourself as an employer of choice and, on the other, not breaking the bank or set potentially expensive precedents.
“A client may decide they want cancer benefits paid in full even if no cure is available, therefore the care becomes palliative,” says Jelf’s Judge. “However, it could not change the benefits mid-term to use any available cancer drug if the terms and conditions dictated at the outset that only NICE-approved drugs could be used. If stop-loss insurance had been purchased it would not pay out on any costs which sat outside of the original terms and conditions.”
“Having said all this, many clients when they move to self-funding replicate the benefits of their previous healthcare arrangements, in most cases an insurance plan, but may want to change some areas of provision,” he adds. “They may want higher levels of complementary medicine or to include dental and optical benefits. Of course they may wish to restrict areas of cover or make changes at the outset by employee categories.”
“What employers need to look at is what they are going to want to cover and what is going to be the potential cost of the scheme,” says Mercer’s Saragoussi. “If you want to exclude, say, varicose veins because you have a high number of employees aged over 50 then that may mean a significant cost reduction, but if your employees are mostly in their 30s then you are probably not going to see much of a reduction.”
“Private medical is an emotional subject and so you have to consider if you are introducing something what about something else?” adds Saragoussi. “If you introduce full cancer cover, what about someone who has a heart attack, do you maintain cover for their pacemaker checks? You have to be careful when you pick on a particular illness or issue that you are sure it is not going to impact on something else.”
The nub is that, even if you aspire to offer some level of cover for chronic conditions, there will inevitably have to be an element of affordability in the decision making, concedes Nick Boyton, principal at intermediary Alexander Forbes Healthcare.
“A lot of employers are paternalistic but also realistic about what they can afford,” he says.
Finally, employee benefits consultants and intermediaries can play a central role in establishing, setting up, positioning and communicating the benefits of self-funded schemes, including ensuring scheme rules are watertight in the event of a dispute. They can also bring an overview of what is best practice in the market.
“Consultants will normally have a lot of experience of the market and running these sorts of schemes, so they will know what providers are going to provide which benefits,” points out Saragoussi. “Working with self-funded schemes, for example, is a major part of our business.”
“You can have a smorgasbord of benefits but it is very important to take advice from a consultant, intermediary or provider,” agrees Simplyhealth’s Hughes. “They can help you understand what your objectives are, which is always a good starting point.”
“You need to be very upfront and clear in your communications around a change such as this,” he adds. “It may even be that the consultant or intermediary can go in and do some presentations about how the scheme works.”
Employee benefits consultancies, suggests Boyton, can work with organisations to help them understand what is realistic and feasible. “They can gauge the drivers behind a scheme and work with the employer to spot any wider trends, such as how perhaps to use PMI to improve return-to-work rates,” he explains.
Paul Moulton, corporate sales director at AXA PPP healthcare, says that EBCs and intermediaries should be able to help when it comes to deciding exactly what the purpose of the programme is and what its underlying principles are going to be.
“In many respects it is almost a risk management role,” says Moulton. “Intermediaries can also bring in a degree of benchmarking, so showing how a particular approach or a particular package of benefits might help to position you as an employer of choice, and show how this compares to other employers within your peer group.”
Richard Saunders, sales director at trust administrator Healix Health Services, agrees.
“Intermediaries have a role in advising how to set up the trust, the rules and benefits but also provide professional advice around having certain benefits in place, the possible effect of any caps, and how those may best be communicated in a positive way,” he says. “The consultant can advise on the process and clear communications.”
Another good call is to employ an effective third party administrator to administer scheme caps.
“They will know at an early stage whether the cap is going to be breached and so then ensure the employee can be managed into the NHS,” adds Saunders.