In most recent article on BenefitsCanada.com, entitled Benefits cost management: myth or reality, one of the key messages was that despite a lot of discussion over the years there really isn’t a lot of active cost management built into many benefit plans. Based on the feedback I have received to the article, the message seemed to resonate with a lot of people, prompting many to ask the simple question—why?
The answer to this question is obviously complex and very specific to the unique circumstances of each plan sponsor.
Some plan sponsors are limited by collective agreements. Other plan sponsors think they are doing all they can by simply going out to market every couple of years. Many are unaware of opportunities to manage costs other than through cost sharing, deductibles and co-insurance. Some do not understand or appreciate the cost management imperative—or simply do not have the imperative. And most plan sponsors are unprepared to deal with the employee backlash that might come with any change in the benefit promise or how benefits are delivered.
Simply put, we have not yet reached the tipping point at which time many Canadian benefits plan sponsors are prepared to proactively—and aggressively—manage benefits costs. Despite all the focus on increasing benefits plan costs over the years, most plan sponsors have not yet reached the point of saying “enough is enough.” No one wants to pay more than they should, but there is still a willingness to pay whatever it takes to provide a competitive benefits program.
The one exception to this is in the area of post-retirement benefits where a considerable amount of action has been taken. And what is different about this area? The cost of providing this coverage is significant and the business implications are well understood by most chief executives. In this area, we have reached our tipping point. And I believe more plan sponsors are closer to the tipping point for the pre-retirement benefits as well.
The cost issues related to prescription drugs may push more plan sponsors closer the edge. However, what still seems to be missing from the discussion is perspective—a clear understanding of that point in time when enough is enough and action needs to be taken.
Granted, it is perhaps a moving target, but understanding your organization’s tipping point will go a long way in helping you determine your own cost management imperative.
Your tipping point may be framed in a number of different ways.
- Absolute costs – Some organizations are required to manage costs within a fixed budget. The tipping point is fairly well defined in these situations.
- Annual increases – Your tipping point may be defined by how much more you are prepared to pay year over year.
- Benefits burden rate – Most organizations reflect their operating costs in the cost of goods and/or services that they produce or deliver. Obviously, if an increase in the benefits burden rate can not be recovered in the price of goods and services, you have reached your tipping point.
- Employee impact – A change to the benefit promise may have an employee impact. An organization’s tolerance to deal with any repercussions will help frame your tipping point.
- Ability to change – Many organizations are bound by the terms of collective agreements, which limit their ability to change in the short term.
- Risk management – A benefits program is an effective way for an organization to manage operational risks, such as employee absence and employee health. Any discussion related to cost management must be viewed within the context of risk management. And not all risks are financial—they could be, for example, reputational. If your organization is not prepared to stand behind a decision you have not yet reached your tipping point.
- Return on investment – I absolutely believe we need to change the discussion from cost management to return on investment. A benefits program is an investment for which a plan sponsor receives a return—whether in the form of an increased ability to attract and retain employees or a healthier and more productive workforce. Therefore, the amount you invest should take into consideration the expected and realized return.
You’ll notice the external context—what everyone else is doing—is missing from the above list. While directional, I don’t think what others are doing matters in the articulation of your tipping point. Everyone may have similar concerns by the increasing cost of drugs, but how you react to the issue should reflect your own circumstances and your own ability/willingness to pay.
For plan sponsors, defining the cost management imperative starts with answering the simple question—What’s your tipping point?
Mike McClenahan:
Brian,
I enjoyed your article and certainly agree with your points on plan sponsors needing to reach their own “tipping points” before they may take action. I do believe there is another important reason though that some employers have not taken action sooner. Quick frankly, the aggressive, and at times irrational, pricing behaviour of many insurers has allowed them to delay making the tough decisions. Collectively, the industry has made it’s own bed and until major suppliers reduce their reliance on predatory pricing to gain market share, plan sponsors can sit back and allow their plans to be subsidized. Can you blame them?
Monday, March 21 at 7:20 pm |
Bob:
While the concept of “tipping point” sounds reasonable, I do not belive there is one. DB pensions to DC pensions could be used as an example, tremendous risks were taken, people were or should have been aware but did not pay attention. The result was the better program died because the no one looked and it was easier to kill than fix.
Post retirement benefits are there now and soon the rest of benefits will move if not already started to DC type structures.
The problem is the lack of leadership. In the US, large employers, challenged the status quo with drug benefit management, preferred providers, etc. In Canada, the larger sponsors cannot be bothers because it is not large enough issue to address yet and when it is the key will be to end the concept of Defined Benefits.
Where are the consultants leading the way, not sure, maybe it is easier to follow the rest rather than innovate. Of course not we raise the issue “reputational”.
Not necessarily a good direction/solution except for the accounting world.
Sunday, May 08 at 9:16 am |