The Belgians pay 9.25% tax on their health insurance premiums, the Greeks 10% and the French 7%, so ...
The Belgians pay 9.25% tax on their health insurance premiums, the Greeks 10% and the French 7%, so our 5% UK rate looks an easy target for the Chancellor's next Budget.
Insurance premium tax (IPT) was first introduced in the UK in October 1994, at a starter rate of 2.5%. It rose to 4% in 1997/98 and currently stands at 5%. However, most of the market predicts that this will rise again when Gordon Brown makes his Budget statement to the House of Commons on Tuesday 21 March this year.
The healthcare product particularly affected by IPT is private medical insurance (PMI) and this affects both the individual and corporate markets. However, for companies that find a further hike in their PMI premium, there is a realistic alternative to incurring IPT on premiums and this could be where the future lies for large private medical schemes.
Aligning with Europe
Even if IPT is not increased this Budget, many people feel it is only a question of time before it will be. For the Chancellor to make just a 1% rise in IPT means the Treasury coffers will benefit by a further £250m.
It has been suggested that our taxation system should be more in line with Europe. Aligning us with France, for example, will bring in extra taxation revenue of £500m a year just from insurance premiums.
However, there is one positive lead which the UK might follow and that is to tax health premiums at a lower rate than other insurances. France, for example, has a 9% tax on most insurances, but this is reduced to the 7% rate for health premiums.
To help slow down ever-rising costs, some PMI insurers have recently introduced a number of initiatives, including setting up hospital networks to increase particular hospitals' throughput and securing cost savings through pre-planned bulk business.
However, there is no consistent proof that such networks achieve their cost-saving objectives. There are also incentive schemes for consultants who use these networks and who charge in line with the PMI provider's fee scale structure. The 5% bonus given to the consultant provides a paradox of its own by actually increasing costs in a bid to save money.
Tax liability
Despite these price rises, corporate PMI business is booming. The number of company-paid subscriptions rose by 6.4% in 1998, reflecting both the strength of the economy and the number of new and hi-tech companies that see PMI as a valuable tool to help recruit and retain quality staff.
The issue for many companies, especially the largest ones, is whether they need 'insurance' at all, because if there is no insurance as such then there is no tax liability.
For individuals and small companies, insurance is still the best route because there is a certain pooling of risk. This is necessary in order for claims costs to be spread across the many policyholders that do not claim in any one year.
For some years, many of the larger corporates have been writing their group PMI schemes through health trusts or medical benefits trusts. By using a medical benefits trust, companies can minimise the insurance premium tax liability and this is becoming increasingly important with every Chancellor's Budget.
Also, from this coming April, employers will have to pay National Insurance Contributions (NIC) on employees' taxable P11D benefits - 12.2% in 2000/2001, reducing to 11.7% from April 2001. This is already the case for company cars but now it applies to other benefits as well and includes PMI premiums.
The Treasury press release following last year's Budget explained this move as 'a further step towards tax/NICs alignment'.
Using a trust means, quite simply, that premiums are not paid to an insurer and therefore are not liable to insurance taxation. Any adviser familiar with trusts-for-life policies will understand the principle. For large clients the claims costs of a PMI scheme are usually easy to estimate accurately within a few thousand pounds each year, so instead of paying premiums to an insurance provider a sum of money can be put aside and used to pay the claims.
The risk pool for a large enough company is the actual workforce itself. Usually the only insured element is a stop-loss insurance and this will incur a small tax liability based on the premium value, rather than the total claim fund.
The employer funds the trust, putting in sufficient capital to pay for claims payments and the trustees' costs. Employees are entitled to benefit from the trust in much the same way as they would under an insured scheme, but, because there is no insurance, IPT is avoided for most of the scheme. The stop-loss insurance, the only insured element, eliminates the risk of a single claim or series of claims taking claims costs over the budgeted limit. What is needed to run such a trust scheme is a dedicated third party administrator as most employers lack the administrative expertise to service the healthcare claims.
Trusts, in particular, are becoming increasingly fashionable, with 150 already thought to be set up in the UK. The costs for a trust compare favourably with an insured scheme where the risk premium plus the insurer's expenses are just some of the costs added. Also to be covered within the traditionally-insured PMI premium is the insurer's solvency margin, any policyholder's protection levy, the cost of meeting the insurer's DTI reporting requirements plus the percentage for IPT based on the total value of claims and risk premium.
Bespoke schemes
The whole idea of tailor-made healthcare, often referred to as 'bespoke' schemes, is growing in importance, and knowing how such schemes work should be part of an intermediary's armoury.
There are nine third party administrators currently listed in Laing's Healthcare Market Review 1999/2000, although some insurers are now offering TPA services too. Laing & Buisson, independent analysts, believe the charges for TPAs to manage a corporate scheme are around half that of an insurer, probably because TPAs do not carry the same heavy infrastructure.
The boxed example illustrates just how well the concept can work in practice, with claims costs over the last three years not even rising by as much as inflation - effectively standing still. This is good news in a market where insurers themselves have announced a huge escalation of PMI costs over the same period.
The TPA solution
How can a TPA apparently achieve what insurers have so clearly failed to do? The solution is simple. When a TPA develops a scheme for an employer it looks at the needs of the company and the needs of the staff, specifically designing a unique scheme that meets those precise needs.
It is not an off-the-peg UK-wide scheme that tries to be all things to all people. This greater focus, coupled with access to significant research and the experience of dealing with a large number of clients, means a good TPA should always undercut an insurer over the medium term. Over shorter periods of time, insurers may 'buy' business by cutting their margins to almost suicidal levels but, over the longer term, they cannot buck the underlying trend.
Add to this the saving in IPT for a health trust and the cost savings become clearer still. Laing & Buisson estimates that 7.9% of the PMI market is now made up of non-insured arrangements - covering some 383,000 people in 1998 - and that figure is expected to grow significantly. The trend is certainly towards health trusts.
So any intermediary should bear three things in mind when advising about corporate PMI business. Are there 500 members or more in the scheme? If so, a health trust could be the best way forward. Are the existing claims costs spiralling out of hand? If so, what are the alternative solutions. Is a TPA arrangement going to be appropriate for this client? If so, check the track records of third party administrators and pick the brains of a specialist.
Total flexibility
With a TPA scheme, the front end stays consistent, which is all the employee sees, while behind the scenes the administrator has total flexibility to match the most appropriate funding vehicle, changing this from year to year to secure the best options and price. This can apply to the traditional fully-insured schemes as well as to trusts.
More and more intermediaries are finding that TPAs can be a key part of the solution when it comes to corporate healthcare needs. Whatever the Chancellor announces on 21 March, intermediaries and TPAs can show there is nothing inevitable about double-digit medical inflation, and we now have the figures to prove it.
Andy Dean is group sales and marketing director at Medisure
