The predictions have begun to come true for most plan sponsors: the flat (or declining) cost trends of recent years have been replaced by significant annual increases. As a result, re-evaluating existing plan designs has become a priority in the strategic planning process for benefits.
Here are a few important considerations for plan sponsors to keep in mind as decisions are being made for 2017 and beyond.
1. Quantifying existing plan design performance:
A fundamental mistake many plan sponsors make is forgetting to quantify how well their existing plan design is containing costs. It’s important for the following reasons:
- How can a plan sponsor assess the viability of the current design if it can’t quantify how well it’s containing costs today? Which specific aspects are working well and as intended? Which are not?
- How can a plan sponsor convince key stakeholders (management, labour relations/union stakeholders, plan members, etc.) of the need to make a change to protect the sustainability of the plan and prevent unnecessary cost-shifting without concrete, quantitative proof of what is (or isn’t) happening right now?
For example, if 0.7 per cent of the submitted amounts to a plan were not eligible for reimbursement, and 99.3 per cent of everything claimed was eligible, how easy will it be to keep a plan like this sustainable?
- What if your plan is seeing materially diminishing returns in value of existing plan design in managing costs responsibly? What if the current plan design is having less than one-third the impact today that it had three years ago in mitigating inefficient spending? Does that change the urgency for action?
2. The past doesn’t dictate the future in health benefits:
The biggest mistake plan sponsors make in strategic planning around benefits design is relying on their past experience as a guide to what will happen moving forward. That doesn’t work. Unlike insured benefits such as life, accidental death and dismemberment and to some degree disability, where the past is a reasonable predictor of what a plan can expect moving forward, the same is not true with health benefits – particularly drug benefits.
Why? Because the demographic and disease state profile of a given plan population is dynamic, how/when disease states are treated is constantly changing, and the introduction of new therapies can dramatically impact plan costs and/or utilization. Obvious examples include disease states like diabetes, hepatitis C and psoriasis.
The solution is to complete detailed predictive analytics that quantify financial risks to the plan based on its own unique demographic, geographic and disease state profiles.
3. Removing inefficient spend responsibly:
The key to successful plan design change is doing so responsibly and in a manner that doesn’t adversely impact plan members and their health. The big advantage to plan sponsors is that focusing on the appropriate areas to optimize can produce a meaningful annuity of savings moving forward given the recurring nature of these savings. This supports the continued sustainability of the plan and the opportunity for reinvestment into areas of greatest need.
- The approach here is to quantify each of the areas of inefficient spending. What’s it costing the plan today? How has that changed from last year?
NOTE: Be careful to avoid back-of-the-napkin math based on, “Well, I’m told if I make change A to my plan, I should save B per cent of my spending based on my vendor’s book of business.” Someone’s book of business has nothing to do with your specific plan experience and priorities.
- The next step is to assess possible impact to members for each of the areas identified, the key being to find ways to remove inefficiency that doesn’t adversely impact the plan or its members in any way. Responsible change is the key.
- From there, opportunities should be ranked in order of greatest return with least negative impact to members in areas of modest return and/or significant negative member impact.
- The final step is to solve for Z in the following equation:
X – Y = Z, where:
X = Predictive financial risk to the plan if nothing happens to the plan design; and
Y = Impact of the current plan design in containing costs
That leaves us with Z, which is the existing gap between X and Y.
Therefore, a plan will need to line up the prioritized items it has identified and quantified that it knows can responsibly reduce plan inefficiency and find efficiencies removing at least Z per cent of plan spending to stay even. If a plan can find more than that, then there are opportunities for reinvestment into other areas of need.
If a plan sponsor can answer the benefits equation and solve for Z, as well as determine which paths works best for that plan to achieve Z, the plan stands a better chance of a successful change that meets financial targets without adversely impacting members.
These are the views of the author and not necessarily those of Benefits Canada.