According to the experts, healthcare trusts are not a big gamble. Kylie Harrison reports

Setting up a trust can sound like a massive gamble and some employers shrink back from the idea because of cultural reasons. Size is also a factor. The smaller the client, the more volatility they are likely to experience, although Norwich Union healthcare trust manager David Ginger is quick to point out that size isn't everything.

He says: "We don't tend to stick to numbers of employees. Whether a company should opt for a trust is more geared to how stable it is. Employers with claims funds in excess of 300,000 pounds should look at trusts very seriously. Very roughly that equates to at least 1000 employees, although it can go lower."

Other factors also play a part. Employers going through structural change, or those with an ethos to manage risk carefully may not want to go down the trust route. And some schemes, particularly those with retirees, have significant volatility, so might find it worthwhile sticking with the fully insured option.

The risks though, according to Mercer principal David Levey are relatively minor with the right advice, although he does concede that companies with employee contribution are opened up to a tax risk. He says: "If staff contribute there is the potential for the trust to be viewed as providing insurance. We think it is a small risk but it is a risk nonetheless. It hasn't been tested in court and Insurance Premium Tax (IPT) could be payable along with any other sanctions for not being licensed to provide insurance."

Advantages

The benefits are plain; trusts are cheaper than traditional health insurance, and they offer more control and flexibility, allowing employers to tailor them to the needs of their workforce. David Levey says: "The savings are fairly obvious and are very easily calculated. Where clients have gone through the process of deciding a trust is viable from all other aspects, the financial side has stood up and they have tended to go for it."

Most of the savings centre around tax, as trusts do not attract IPT. Cigna marketing director Ann Dougan points out that employers can't simply rely on the scheme type to control cost. They still have to make sure that the appropriate cost-management techniques are being applied.

"Employers still need to look at the best way to manage claims cost by proactive case management: working with hospitals and consultants to ensure they are charging appropriately, the duration of treatment is appropriate for the condition and the treatment is delivered in the right setting, whether that is in hospital, at home or at work."

Flexibility

One way healthcare trusts can help is by helping employers shape their own policies on paying out for expensive new cancer drugs. "It is about controlling costs and controlling benefits," says Dougan. "It is about getting the flexibility to provide the benefits that are right for your organisation but also having more control over the cost of the scheme." This is especially efficient if an employer is taking a greater involvement in their employees health.

The problem, however, comes when trying to find someone to administer it. "Some administration providers are more flexible than others," says Levey. "You might find an administration partner you are comfortable working with, then find out they aren't able to administer exactly what you want. It really depends what the organisation is trying to get out of its medical expenses plan."

For some employers, the design might be critical in order to help them to manage absence, or they might want to include some weird and wonderful limits, or benefits for alternative medicine. "Some companies are thinking about including non-traditional benefit lines, even health screening," says Levey. So what procedures should employers follow to ascertain if a trust is the right course for them?

Slow and steady wins the race...

Organisations need to think carefully before leaving the safety of traditional insurance and rushing after the prizes proffered by trusts. Dougan says: "Moving to a trust is a significant undertaking, because there are legal considerations and corporate governance around how you run one. You have to do it in a considered way with an understanding of the implications."

Employers need to make sure that the benefits they offer are going to meet the needs of the population. The workforce too, should understand the scope of the benefits and why they have been provided in that way. One way employers do this is by moving gradually away from full insurance.

Dougan explains: "People tend to start with an insured scheme then over time they get a sense of the volatility of claims. If they feel they are reasonably stable they could move to a self insured scheme. Once they are comfortable with that they can take a further step moving to a trust."

In order to establish a trust employers need to set up a corporate or individual trustee body, who understands their obligations, although according to Levey, their responsibilities are not as wide ranging as pension trustees. He says: "The internal admin, which is done by trustees, is fairly minimal. It is not a huge burden of work and not much more than an insured scheme, but there are some specific activities that must take place during the benefit year. However, we often find that some processes we recommend as best practice are neglected. Then it is just a case of weighing the costs of implementation against the IPT savings and slightly reduced administrations charges."

Seek advice

But even with such a measured approach, Levey believes clients should also seek external advice. Mercer offers a service to analyse volatility patterns, financial risk and other statutory requirements, and this can be useful in working out trust deeds. Having done that employers can look at mitigating financial risk by reviewing the available stop losses, where employers pay for the claims up to a certain point, beyond which they are insured.

There are also other vehicles that are similar to trusts, in that they purport not to attract IPT, which are also worthy of consideration. Ginger also recommends clients get everything checked by the company's own legal team and securing tax advice. He adds: "It is not an off-the-shelf insurance product. Additional responsibilities have to be undertaken in terms of the mechanics of how it works, but doing it after that is not too onerous."

In contrast to Dougan, who believes employees need to understand it is no longer the insurance company calling the shots, he does not feel that communication is any more important in a trust than with a standard insurance product. "It works both ways. The more you publicise it, the more people will use it. There is no difference in terms of what employees need to do whether it is a trust or insured: the benefits can be replicated. Disgruntled employees might even be more likely to use the insurance if they knew their employer was paying. There are probably no hard and fast rules."