The increase in IPT is pushing employers and healthcare consultants towards innovative ways of delivering more for less, says Sam Barrett
With insurance premium tax (IPT) increasing from 6 per cent to 9.5 per cent this month, the rising cost of health insurance will force many employers to think twice about how much cover they offer their workforce. And while healthcare trusts are likely to see greater attention, other workplace health options may also come to the fore.
The rise, which applies to medical insurance and healthcare cash plans, will mean a 58 per cent increase in the amount of IPT employers pay on these products. In addition, where these benefits are company paid, the increase will filter down into benefit in kind taxation, pushing costs up for employers and employees.
For JLT head of health and group risk Adrian Humphreys the increased expense will be a catalyst for change. “There’s too much one-size-fits-all in the health insurance market,” he says.
“As well as forcing many employers to consider whether they are buying the right sort of cover, it will drive innovation among the insurers.”
Aviva UK head of client management and propositions Ally Antell says: “Very few of our clients see the IPT increase as a reason to withdraw medical insurance but we’re seeing interest in ways to manage costs.”
For larger employers, the rise will put trusts back on the agenda. Trusts were designed back in 1997 – when the IPT rate was just 2.5 per cent – to give employers greater flexibility and control over their healthcare spend, and the attendant tax savings will only increase their appeal.
“The tax saving is a big incentive now,” says Healix Health Services sales director Richard Saunders. “We have already seen an uplift in interest in self-funding and we expect this will continue as medical insurance schemes come up for renewal. There are still a lot of schemes of £1m-plus that are fully insured.”
A spot of number crunching demonstrates what’s at stake now. Assuming a healthcare spend of £500,000, if this was used to buy insurance, the employer would be looking at the IPT increasing from £30,000 to £47,500.
In comparison, although employers will still pay a small amount of IPT if they arrange stop loss insurance alongside a trust, and will incur VAT at 20 per cent on any administration or trustee fee, because these elements only make up a small proportion of the total expenditure the tax charge is minimal.
Humphreys also believes the IPT tax hike will remove some of the barriers to moving to a trust. “The legal cost of setting up a scheme is around £4,000 to £6,000 so, when IPT was 6 per cent, the saving wasn’t sufficient to justify the set-up costs. But with IPT at 9.5 per cent it becomes a bit more tasty,” he explains.
While the tax saving may be a catalyst for considering a trust, Saunders says the changing face of workplace healthcare is also adding to their popularity. “Employers used to simply replicate their medical insurance benefits within a trust but now they are looking to use the trust as a health and wellbeing hub, integrating other benefits to ensure they’re used as effectively as possible,” he explains.
By giving the claims handlers oversight of all available healthcare benefits, they can direct employees to the most appropriate support, rather than simply authorising a claim.
For example, an employee assistance programme (EAP) may be able to provide counselling to an employee suffering from anxiety or depression, rather than using trust funds to provide support.
“An EAP is rarely used properly but by integrating it with a trust an employer can increase the usage, saving money and helping employees back to work,” Saunders adds.
While trusts are evolving to suit a more integrated approach to workplace health, providers are also looking at ways to extend their appeal to more employers (see box). Some, such as Healix 100, are suitable for smaller groups, while others offer the benefits of a trust without all the administration.
This is a move that is welcomed by The Health Insurance Group commercial manager Carol Porter. “These products are essentially stepping stones between a fully insured scheme and a trust. I would like to see more innovation in this space as appetite for these types of vehicle will grow alongside the increase in IPT,” she says.
But, while trusts are great for larger companies, options are more limited for smaller businesses finding the IPT rise difficult to swallow. Antell says: “There’s more shopping around in this market and we are also seeing more enquiries about mechanisms that can help to control the cost.”
These cost control mechanisms can include traditional methods, such as excesses and benefit limits, but also more recent innovations, such as restricted hospital networks and open referral. But, while Porter agrees there is still room for manoeuvre at the smaller end of the market, she believes some employers will take a more radical approach. “It will force some employers to look at what they offer and make sure it fits with their objectives,” she says.
“I don’t believe they will take medical insurance away but it might be offered to a smaller group of employees with cash plans and preventative benefits put in place to support health and wellbeing,” Porter explains.
Certainly cash plans have a strong position in workplace healthcare. Although they are also affected by the IPT increase, with smaller premiums and more stable pricing, the effect will be less marked. Health Shield chief executive Jonathan Burton says: “We are confident that brokers and their clients will continue to see that cash plans still offer value for money and address a key need for employers.”
But while he thinks IPT at 9.5 per cent can be accommodated, he believes any further increases could weaken the position of the entire insurance sector. “Given the ease of collection of this tax and the potential for the insurance sector to generate future income for the Treasury, we are concerned about the potential for future rises,” he says.
“This would force us to consider an alternative way of structuring the cash plan to make it more tax-efficient and ensure its long term future.”
Further rises are a distinct possibility. When the Chancellor announced the rate rise, he pointed to Europe, where IPT rates are higher – 18 per cent on motor insurance in France and 19 per cent in Germany, for example.
But while there may be room for further rises, the European model points to governments taking a different stance on taxing health insurance products. In Germany and the Netherlands, health insurance is exempt from IPT. Porter believes the UK should follow suit.
“With initiatives such as Fit for Work, there’s a lot more emphasis on the employer looking after the health of its workforce,” she says. “Increasing the tax on medical insurance doesn’t really support this.”
IN FOCUS: Healthcare trusts for smaller employers
While healthcare trusts have traditionally appealed to large corporates with at least 500 employees and a medical benefit spend of over £250,000 a year, providers have developed a number of ways to extend them to smaller companies. Below are some of the options available.
Designed for groups with as few as 100 employees, Healix 100 incorporates 100 per
cent stop loss insurance to give the advantages of a healthcare trust without any risk.
By including 100 per cent stop loss, all claims above the agreed claims fund are covered so employers have the peace of mind that budgets won’t be exceeded but retain the benefit of profit share if the claims fund is not exhausted.
WPA Corporate Deductible
A notional claims fund is calculated based on previous years and a percentage of this is set as the corporate deductible and used to pay claims. IPT-free, this is typically 60 to 85 per cent of the claims fund, to reflect the greater uncertainty over claims among smaller groups, with the balance between it and the notional claims fund becoming a claims reserve, which is paid to WPA with an insurance charge and administration fee. This ensures that any claims exceeding the corporate deductible are covered.
Aviva Corporate Excess
Aviva’s Corporate Excess works in a similar way to WPA’s Corporate Deductible. A corporate excess is set as a percentage of the notional claims fund and a claims reserve, or stop loss, is calculated on the remaining amount. Claims payments are taken from the corporate excess but if this is exhausted, further payments are taken from the claims reserve. If this is also used up, Aviva will meet the cost of any further claims.
Axa PPP Healthcare Master Trust
This provides all the financial advantages of a traditional healthcare trust but Axa PPP Healthcare’s specialist trust administration arm acts as the employer’s corporate trustee. It takes care of all the governance responsibilities, including setting up the trust arrangement and managing the legal and tax aspects. This helps to reduce set-up costs and ongoing responsibilities for the employer.