What Does IPT Mean for the Future of Health Cash Plans?

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Health Shield Chief Executive, Jonathan Burton

Now the nights are drawing in and Christmas is just around the corner summer seems a distant memory. But it was just a few months ago that the chancellor announced his summer budget and took the insurance industry a little by surprise. We weren’t surprised that the insurance sector was targeted for a rise in insurance premium tax (IPT), but the extent of the increase was more than we were expecting. The Government raises almost £3 billion annually through IPT, now set to rise to over £4.5 billion by 2016.

Such a move will have a knock-on effect for businesses, and certainly in our market of health cash plans. While we’ve decided not to pass on the rise in IPT to our members until 2017, some will already be feeling the impact. It raises questions as to whether employers should alter or restrict cover and how we ensure the market is sustainable long-term?

The biggest risk is that it could happen again, given the ease of collection of the tax and the potential for the insurance sector to generate future income for the Treasury. If further significant rises were predicted, health cash plan providers would need to consider an alternative way of structuring the products to make them more tax efficient and ensure that their long-term future is sustainable.

Any further increases in the general rate of IPT could weaken the position of the entire insurance sector, with a disproportionate effect on low cost products, including health cash plans. This is especially true in the individual marketplace where a policyholder could decide that it would be cheaper to fund the treatment themselves rather than pay increased levels of premium. This again could have an adverse effect on absence rates and productivity for employers, as individuals choose to postpone treatment to avoid incurring costs.

For a business, implementing a health cash plan enables an employer to demonstrate their organisation is addressing the duty of care requirements a company has to its employees. More and more companies want tailored health cash plan offerings that specifically work for their employees, rather than a one-size-fits-all approach. Businesses want solutions that match their company needs, and a workforce that looks after its health is likely to be more motivated and ultimately more productive, with fewer working days lost. The increase in IPT means ultimately all providers will be paying more in tax, thus less of the employers’ premiums will be available to offer to their employees in benefits, which is why bespoke plans are a more attractive proposition for many, allowing employers to focus solely on what’s important to their workforce.

Employers may of course elect to restrict the benefits they offer to their employees rather than pay the increase in IPT, but this could lead to dissatisfaction amongst employees who have become used to claiming from the benefits available. But what are the alternatives?

Employers may wish to consider self-funding certain health and wellbeing benefits separately, away from a health cash plan – especially where the take up rate is likely to be high. When offering benefits such as onsite health screenings  and physiotherapy treatments, an employer may be better to source these directly with a supplier rather than using a health cash plan provider who would have to load the premium to cover IPT, commission and expenses.

There could be an opportunity for health cash plan providers to write business through healthcare trusts, although the creation of a trust could introduce layers of complexity and is also likely to be restricted to organisations that have a large number of employees. Whilst setting up a trust may be seen as an attractive proposition now, it is possible that if more providers consider a healthcare trust relationship with employers in an attempt to become more tax efficient, the UK government may reconsider the IPT exempt status of the product – especially if there was to be a significant impact on the amount of revenue generated for the Treasury.

Despite the recent rise in IPT, we feel that the current impact on the health cash plan market should be minimal. We are confident both brokers and their clients will still see the benefits that the health cash plan sector provides, that it still offers value for money and addresses a key need for employers and individuals.