If you have been following our articles you will know that we have been advising sponsors of employee benefits plans to budget for annual cost increases of approximately 9% for the coming year. We also expect that rate of annual cost increases to continue into the foreseeable future. We are encountering a perfect storm that is driving these increases – an ageing and less healthy Canadian population means more people are accessing their benefits plans and they are also accessing them more often. As well, the average cost to use the benefits plan continues to rise as we see more and more high cost specialty drugs.
So what are you going to do? For the most part, likely nothing based on recent experience. We are not trying to be argumentative here or attempting to insult anyone but the reality is Canadian benefits plan sponsors have not made any significant plan design changes in well over a decade, not even during the Great Recession around 2008-2010. That said, we believe the pressure is building but it really boils down to “how proactive are you” or “how proactive do you want to be”? Based on that response, what types of plan design changes are you going to consider and why? How extensive will the changes be – simply evolutionary or somewhat more revolutionary?
Here is a brief summary of potential plan design changes to contain costs, particularly around prescription drug plan costs, and some commentary on each:
- Deductibles – You could require employees to pay an arbitrary flat dollar amount ($25 to $200) of the cost of the first claims each year. That certainly shifts costs from the benefits plan to employees but does so in the worst possible way. In particular, it does not involve employees in decisions or influence best behaviors. More importantly, you may be punishing your healthiest employees who rarely use the plan and essentially get nothing covered whereas your most unhealthy employees have no problem paying this amount in order to get thousands of dollars in claims paid.
- Coinsurance – You could require employees to pay a specific percentage of each claim cost (10% to 20%). Again, that certainly shifts costs from the benefits plan to employees but can it influence behaviors. Studies have shown that you need employees to pay at least 20% of the bill for them to be active consumers who might question the need of the services being provided, assess alternatives available, shop the service to other providers, etc. Are you willing to reduce your 100% drug reimbursement to 80% and face complaints from your employees? For example, are you prepared for an employee who goes on a $25,000 a year specialty drug to be able to pay their 20% portion ($5,000) from after-tax earnings?
- Maximums – You could institute annual or lifetime plan maximums on your plan. In the short term, you may not see any immediate savings but your plan will certainly be well protected from the costs of, for example, a couple of specialty drugs that run $100,000 to $500,000 per year for the rest of your employee’s life (with more of these drugs in the development pipeline). However, are you willing to face your employee if the benefits plan that they rely upon only reimburses $50,000 per year and they need a $250,000 drug, particularly if they do not have alternative coverage (i.e., spouse’s plan). If this not like buying home insurance but leaving out the fire and earthquake coverage? Aren’t catastrophic claims what insurance is really for?
- Drug Formularies – You could adopt insurer or government-based programs that specify which drugs are covered and which are not. Again, there could be some significant cost savings here by denying coverage to an employee for a specific drug claim. However, given that most provincial governments will not cover a new drug for two or three years after Health Canada approval (when most benefits plans currently cover them), are you ready to face employees who may not be able to get coverage for their health condition even when it is available. And who is making these decisions and are you willing to stand behind them when it comes to your employees?
To address future cost increases benefits plans will have to change but the question is really a matter of when and, in particular, how proactive a benefits plan sponsor wants to be. Employee benefits plans are part of a total rewards offering that helps attract, retain and engage key workers, so, if you change your plan prior to your competitors doing so, are you putting yourself in a poor competitive position? Should you wait for your competitors to make the changes first and then follow suit? Or perhaps should you wait a bit after they make changes to take advantage of your superior benefits plan, only to make similar changes later on? Benefits plan sponsors really need to better understand why they offer these plans, how important they are in the scope of their broader total rewards strategy, and how they will manage the escalating costs relative to their broader business plans until they make changes.
Each organization’s needs are unique and warrant a customized solution. We would be pleased to discuss your specific situation with you to identify the best strategy with respect to your employee benefits program. Should you have any questions on the above, please don’t hesitate to contact me or a member of our team.
At ZLC Financial we are not the world’s biggest benefits advisor but we are large enough to have the best people, resources and clients in Western Canada. Our goal is to work with you to find a better way for your employee benefits plan. We provide this value to you by leveraging one of the most skilled benefits teams in the city – over 250 years of experience within our team of 13 employee benefits specialists. We have been working with businesses ranging from 4 to over 10,000 employees for the past 30 years.
