Add value to the bottom line by taking a closer look at healthcare insurance cover
In your quieter moments, do you ever feel with a slight rising panic that you may be missing something obvious? Perhaps some advice you could be giving to your finance director that offers a significant cost saving that you don't know about. In short, how well do you patrol the margins of your business and look at the not so obvious?
One example might well be the provision of such things as Private Medical Insurance (PMI) for large companies. It is a £5.3 billion market where some £1 billion in various taxes are raised from UK companies. Put another way, a typical large company may be paying a £2 million insurance premium with some £120,000 raised in insurance premium tax and a further £270,000 in National Insurance contributions. In fact, a poorly set-up traditional PMI scheme can mean just under a quarter of the overall spend on employee healthcare goes on tax and unnecessary costs. Today could be the day when you tell the boss that you can save £1/2 million with hardly any effort.
There are two types of arrangement available:
• The Corporate Healthcare Trust (CHT) which lends itself to larger companies with more than 1,000 employees within a private medical scheme
• The Corporate Deductible (CD) which works well for partnerships and LLPs and for smaller companies
The first thing to understand is how traditional private medical insurance works. For larger companies with more than 500 employees, this is pretty simple. The claims made by the company over the past three years are looked at and a forecast made for the next year. This is called the claims fund. Depending on the perceived riskiness of the group, based on employee numbers, claims history, industry type, etc, the insurer will set a risk fee, typically between 5% and 10% of the claims fund. This also covers the cost of ‘reserving’ the capital to meet regulatory requirements. The insurer will also make an administration charge of roughly the same amount to cover the costs of running the scheme. Commission may well be added at a further 3% to 5% of the fund to pay an intermediary. The whole is calculated as the insurance premium on which insurance premium tax (IPT) of 6% (as at 4 Jan 2011) is levied. The expense to the company of premium plus IPT is then subject to employer’s National Insurance at the current rate of 12.8%. A typical large scheme with a claims fund of £1 million would thereby attract additional costs and taxation of some £410.000.
A CHT arrangement works well for larger companies with a claims fund of over £1 million. For this size of scheme, the claims fund is far less volatile and likely to be more predictable, which means that the need for insurance diminishes and the client may consider simply taking out far cheaper stop loss insurance at, say, 120% of the claims fund. It is true that this exposes the client to an additional risk, but this is offset by the savings made should the company spend less than the expected claims fund. Under this arrangement, it is the client’s money not the insurers. The administration fee remains the same, but as this is a self-funded arrangement, no insurance contract (apart from the stop loss) is in place and hence no IPT on the money paid out in claims. There is a small downside that the administration fee attracts VAT, but this is a fraction of the taxation that would have been taken as a fully insured scheme.
A CHT does incur some up-front legal costs in setting up the trust and it comes with a number of complications surrounding the tax position of partners. It may therefore not be suitable for partnerships and LLPs, but certainly works well for large companies; the fact that well over 50% of the UK’s largest companies now use CHTs to provide their medical benefits attests to this fact. Large partnerships and LLPs should not rule out a CHT. Many use a CHT for employees and a similar insured scheme for partners, which still brings the majority of the savings.
A Corporate Deductible arrangement has only recently been developed by WPA and introduced to the market earlier this year. Again a claims fund is calculated and an administration and insurance charge is derived as a percentage of the claims fund, to arrive at an overall insurance premium in much the same way as for a fully insured scheme. A proportion of the claims fund ranging from typically 80% to 150% is then taken as a Corporate Deductible. This could be described as the ‘risk-free’ portion of any insurance premium in that it is almost certain to be used to meet the claims payments for the year. The fully insured premium is thereby reduced dramatically with the only charge now being made for the administration of the scheme, including the deductible, and the small stop loss insurance charge. This very much smaller premium still attracts IPT. Figure 3 lays out this method and the savings to be made more clearly.It is strange that this type of arrangement, so widely used in the shipping and oil industry, has not been used before in the field of PMI to date. As with the development of the modern CHT, some concerns were raised surrounding the proper treatment of IPT and P11D calculations for employees. WPA has sought advice from both tax counsel and HMRC resulting in a clearly defined structure that has now been adopted by a number of large companies across the UK.
One of the great benefits of the Corporate Deductible is that it avoids the individual partner’s tax liabilities that can occur with a CHT. This means that for the first time both employees and partners can be members of one simple or multi-layered scheme with the same ease of set up of a fully insured arrangement.
Until the recent major squeeze on costs across UK plc, this area of a company’s expenditure probably seemed a little arcane and of little value. However, it is an example of how patrolling the margins of the business can derive real value for your company’s bottom line without the need for extensive research and development.
Peter Pallot has worked for The Daily Telegraph since 1980 – first as a staff feature writer and health services reporter, then covering health issues for the overseas edition of the paper. Much of this revolved around international medical insurance. He is former winner of the top award in medical journalism and editor of the British Medicine