The healthcare challenges that confront employers worldwide are unlike any experienced before. Canadian organizations can at least take comfort knowing they are not alone in tackling rising costs, consumerism, legislative change, medical technology and the declining rate at which public programs respond to health needs. All of these issues put more responsibility on employer health programs. The challenge for employers is to meet the demands of employees while controlling costs.

In most countries, benefits range from 20% to 40% of payroll. Companies want to ensure that investment helps improve quality, increases revenue per employee and reduces the turnover of high performers. More plan sponsors are discovering that an effective health benefits strategy, integrated into a total rewards package that is aligned with business objectives, can make the most significant contribution to the organization's overall success.

In the U.K., where there is a public and a private healthcare system, 93% of firms that participated in a recent Towers Perrin survey say they offer private coverage to at least some plan members. They do so because it is necessary to recruit and retain employees. Timely and effective medical treatment also helps employees return to work as soon as possible after an absence.

By offering immediate access to prompt medical care, as opposed to the uncertainty of National Health Service (NHS) waiting lists, U.K. employers reduce their exposure to other absence costs such as short- and long-term disability, replacement workers and reduced productivity.

The majority (69%) of these organizations also provide health screening to executive and senior management to identify and treat medical issues before longer-term health problems occur. As well, one-quarter of U.K. plan sponsors surveyed now offer health screening to more junior plan members, while more than three-quarters of respondents with 5,000 or more employees provide on-site screening services within their own internal occupational health centres.

U.S. APPROACH
There have been tremendous cost-driven changes in the U.S. healthcare system. Employers must now decide whether to continue providing healthcare benefits or pursue a more passive approach--betting that, if they help employees become more educated consumers, they will be more receptive to managing their own healthcare needs.

To date, most U.S. employers have absorbed increases in healthcare costs and have not passed them on to employees. In the near future, traditional control measures, such as greater cost sharing with employees, looking for new health plans and introducing new vendor management measures are likely to continue.

In the U.S., there is a growing interest in defined contribution (DC) plans that pass more healthcare costs on to the employee. The DC plan is a health insurance structure in which the employer provides each employee with a predetermined amount of money each year. Individuals use the funds to purchase health coverage from a plan sponsored by the organization. Unlike traditional approaches where employer contributions increase with rising benefits costs, the money allocated to a DC plan does not necessarily increase as health costs rise.

Companies in Canada have adopted a similar approach in the form of health spending accounts. But domestic employers have not taken the next step, which is to encourage employees to purchase individual healthcare insurance, with the minor exception of out-of-country coverage.

Despite the DC movement in the U.S., some employers clearly worry that limiting healthcare coverage may hurt the organization in the long run. A recent study of U.S. organizations reveals that high-performing companies are less likely to use a DC approach than their counterparts. These organizations place more value on health benefits as part of their total rewards package than the savings they could achieve from a DC plan.

Flexible benefits were implemented in the U.S. and Canada some time ago. They are another solution gaining ground worldwide today. Flex benefits are part of a trend towards using benefits to build a culture of increased responsibility, recruit and retain, increase employee awareness and understanding of benefits, communicate benefits as part of the total rewards package, manage and control costs and improve business performance.

In keeping with the concept of flex plans, studies suggest that the new best practice in much of the developed world is a benefits package that employees can customize to meet their own needs. In the U.K., for example, plan sponsors are taking a significant step away from traditional benefits plans and adopting comprehensive packages that offer everything from annual health screens and critical illness insurance to educational sabbaticals and even loans for season ticket purchases for entertainment or sports events.

While 63% of U.K. organizations surveyed still have traditional benefits plans, only 12% indicate that they will retain these plans over the next three years. As well, the integration of European labour markets is seeing this trend spread to all employers in the European Union.

Organizations around the world are keen to contain their healthcare costs. In Canada, controlling health benefits expenditures has focused primarily on drug coverage, which constitutes 75% to 80% of benefits expenses and has been rising at about 15% to 20% a year. The high cost of drugs is an international concern, although in Europe plan sponsors have the advantage of only covering those drugs that are not on the state plan formulary.

The U.S. is facing similar hikes in drug expenditures (some sources say they are higher) as Canada. Ironically, employers there cite drug management as the healthcare issue that they are least prepared to address.

The cost control methods that Canadian employers have typically implemented include generic substitution, different levels of reimbursement for brand name drugs and generics, a higher level of reimbursement for drugs ordered through wholesale or designated pharmacies, controlled formularies and limited coverage of dispensing fees.

Despite these efforts, many companies feel they are losing control over their claim incidents and amounts. In light of this concern and given the competitive business climate, organizations are analyzing all of their health and sickness plans in a more holistic fashion to align them with their human resources and business objectives. The goal is a more complete assessment of how organizational health dollars are being spent and the impact of benefits on the business.

This new focus on organizational health is taking hold in many countries, most notably in the U.S. and the U.K.

The payoffs are cost control, workplace differentiation as well as attraction and retention. In the absence of a proactive healthcare strategy, employees will simply continue demanding more from plan sponsors to fulfil their needs, or they may simply look elsewhere. BC

Jim Murta and Wendy Poirier are consultants with Towers Perrin's health and welfare practice in Calgary. murtaj@towers.com; poiriew@towers.com.