Enhancing employee healthcare: how do corporate medical trusts deliver benefits to employers and staff?

A tried and tested alternative to company-paid private medical insurance, corporate healthcare trusts offer all the benefits of a traditional insured model along with others that insurance cannot deliver.

For larger employers facing annual increases in medical premiums for their staff cover, a trust-based structure brings greater flexibility, ownership, simplicity and, crucially, efficiency. Smaller employers can enjoy some of those benefits too, but with a few strings attached.

How do healthcare trusts work?

Imagine a traditional insured arrangement. The employer pays its medical insurer a fixed premium each year, based on past claims experience, and an estimate based on future risk and the predicted cost of meeting claims for the range of benefits covered under the policy. Valid claims are met and administered by the insurer, but because it’s insurance, the premium includes a 12.5% supplement for Insurance Premium Tax (IPT) and, even if the estimates are out and claims are lower than expected, the insurer gets to keep the full amount that the employer paid.

There’s nothing surprising in that, of course. It’s how insurance works, and sometimes the insurer can end up paying out more than the premium it received. But it will probably expect to recover those costs by increasing the employer’s premiums in subsequent years, quickly negating any unexpected, temporary bonus experienced by the employer.

Compare that with a company-funded medical trust. Here, the employer operates the arrangement for itself, via a simple employee benefit trust that it sets up, and with trustees that it appoints. As the creator of the arrangement, the employer may also have much greater scope to design its benefit structure to suit the needs and expectations of its workforce.

Working with an employee benefit consultancy who has expertise in the area, benefit claims from the trust will be estimated and a personalised funding programme will be devised and adhered to each year, with funds being paid directly into the trust to be applied in the delivery of medical treatment to employee members and their family.

Although it is funded directly by the employer, the responsibility for applying those funds and administering the delivery of benefits will usually be contracted out to a third-party administrator who can also be appointed with the help of the employer’s benefit consultant.

What are the benefits of a healthcare trust?

As a self-funded trust, it is the employer who bears the principal claims risk during years where estimates are off and claims exceed the predetermined funding plan. However, the employer also indirectly enjoys the benefit of years where claims are lower than expected, as any surplus left in the trust fund at the end of each year can be used to pre-fund costs for the coming year rather than going to increase an insurer’s profits.

A further benefit to the employer (although one that is incidental to the others mentioned) is that it is plainly not insurance, so the employer saves itself 12.5% on its funding costs, annually, totalling hundreds of thousands of pounds each year in the case of many larger employers – money that can be put towards extending the range of medical treatment that can be provided from the trust, or spent on other parts of the business’s employee benefit and wellbeing programme.

Weighing up the advantages

Medical cost inflation is a continuing source of pressure on the range of benefits that can be made available to employees. Consequently, the main benefit of a medical trust will be cost control, rather than cost saving, but another advantage is flexibility. Unlike traditional health insurance, which often has limited options and coverage restrictions, a healthcare trust can be tailored to meet the specific needs of the employer and its employees, enhancing employee satisfaction and retention and allowing the employer to invest in the long-term health of their workforce through preventative care initiatives.

Additionally, the trust model can promote transparency and accountability. The trustees that the employer appoints will have direct access to the funds allocated for healthcare expenses and can monitor the utilisation and effectiveness of the programme, allowing them to make data-driven decisions and identify areas for improvement.

Employers who are interested in finding out if the self-funded medical trust option is right for them should assess their current benefit plan with input from their employee benefit consultant. It is also sensible to obtain legal advice at the start, on the structure of the trust, its benefit design and any contractual arrangements that need to be made with third parties but, once up and running, a well-established trust will often require very little outside legal assistance.

If you are an employer and have questions or concerns about setting up a healthcare trust or other employee benefits arrangements, please contact Kevin Gude.