While many benefits plan sponsors have traditionally considered moving their plan from an insured arrangement to an administrative-services only model upon reaching a certain threshold of employees, several external factors have impacted this decision in recent years.
Todd Stephen, vice-president of employee benefits and pensions at Selectpath Benefits & Financial Inc., says these factors — including the rise of high-cost drugs, the collateral impact of pooling costs and the cost for those arrangements under the federal Extended Healthcare Policy Protection Plan — have led some small- and medium-sized employers that were considering an ASO arrangement to take a different approach.
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“[These employers] are taking a different angle toward ASO and looking at whether or not it makes sense because now, all of a sudden, you have the prospect of pulling charges that could be 40 per cent of health claims, when they were moving to ASO to participate in underwriting gains or to get a break on risk charges.
“We’re even back to the early days of ASO discussions with that small end of the ASO market, where employers are saying, ‘Let’s only do it for dental. Let’s only do it for vision.’”
The ABCs of ASO
Introduced to the Canadian market in the 1970s, ASO arrangements provide employers with more control by allowing them to self-fund their employee benefits while retaining a third-party vendor to administer them and pay claims with the plan sponsor’s money.
While a traditional benefits plan involves an employer paying a monthly premium to an insurer that, in turn, assumes the risk of the plan, employers in an ASO arrangement assume any risks associated with unexpected or catastrophic claims. As such, the arrangement is typically used to fund health and dental benefits and rarely used for critical illness insurance or long-term disability.
Although ASO arrangements are more common for large employers that can more easily pay for benefits and absorb unexpected costs, Stephen notes his ASO clients range from large companies to those with 100 to 200 employees.
While many of these plan sponsors know the risks and rewards of ASO before entering such an agreement, he adds, others may be enticed by the prospect of savings without fully considering the potential costs. In these cases, knowledge is power.
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“[In these cases], we’ll do some modeling that allows them to see what the bad years can look like or we may anonymize another client’s data that has lived through the good and the bad times. At the end of the day, our role is to educate and be agnostic and make sure they understand the workings of the potential outcomes.”
Multi-employer arrangements
ASO arrangements are just one way plan sponsors can provide employee benefits while taking on fewer costs.
Multi-employer benefits plans — originally established to support industries with highly mobile workforces — such as construction, transportation, entertainment and manufacturing — have expanded since their introduction in the 1960s to include a range of sectors and employers of all sizes, says Domenic Barbiero, a principal at Eckler Ltd. and an advisor to the Multi-Employer Benefit Plan Council of Canada.
“There are hundreds of [multi-employer] plans out there and [more than] a million workers and their families that are covered by these plans.”
Multi-employer plans have been made feasible by economies of scale as they bring together large numbers of smaller employers. Financial savings occur in areas like administration and purchasing of benefits, which wouldn’t otherwise be available to individual employers, particularly small employers. According to the MEBCO, a single multi-employer plan may be national, regional, provincial or local in coverage and anywhere from two to more than 1,000 employers can contribute to a single plan pursuant to several collective agreements.
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In addition to the industries that have traditionally participated in multi-employer plans, the space has grown over the decades to include employers from sectors such as food service and hospitality, garment manufacturing, graphic arts, retail and security.
As employers face rising benefits costs and other financial pressures, multi-employer plans are offering stability and cost-sharing advantages, says Barbiero. As such, there’s no definitive profile of a typical member organization.
“When you look at the past, it was industries like construction [and] transportation with more mobile workforces and seasonal work [and] multi-employer plans really were the only way to get benefits to those members. But today, all you hear about is rising costs. You’re hearing about expanded coverages that are needed. When you’re talking about mental health, we’re talking about all these high-cost drugs.
“It’s really become very difficult to provide these [benefits] and many employers are look-ing to these plans, regardless of their size or the industry or sector they’re in.”
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The roughly 1,600 employees at Smith and Long Ltd., an Ontario-based multi-industry services firm, are enrolled across several multi-employer plans corresponding to workers’ respective unions. Dave Graham, the company’s vice-president of business initiatives and employer trustee for the International Brotherhood of Electrical Workers Local 353 (one of the union’s representing electricians employed by Smith and Long), says a multi-employer arrangement allows the company to negotiate a high-quality benefits plan at a lower rate than a traditional plan.
“Because we’re part of a far bigger machine, the benefits come at a reduced cost because of the buying power.”
In turn, the strong benefits offerings across these plans have helped support Smith and Long’s talent attraction and retention strategies, he says. “Over the last number of years, we’ve [focused] on bringing on top talent from the non-union sector into our fold. . . . It’s very attractive to employees and the vast majority of members realize what they’ve got [in these plans] and a lot of the members really appreciate that we’re keeping up with the times.”
United Steelworkers locals also participate in a variety of multi-employer benefits plans. By pooling resources across employers, locals can establish or maintain benefits plans with lower fees and premiums, says Troy Lundblad, the union’s leader of research, public policy and bargaining support.
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“Obviously, the pooled bargaining power can also lead to improved benefits provided to members versus what a smaller employer will be able or willing to provide. When employees and unions participate in the governance of the plan, I think it also makes employees aware of the importance and value of other forms of compensation and encourages members to participate in the design of benefits offerings for their members.”
Employee benefits trusts
Similar to multi-employer plans, benefits trusts also allow more than one employer to participate in the same arrangement.
According to Revenue Canada, under a trust arrangement, trustees — usually with equal representation from the employer and the employees or their union — receive contributions from the employer and, in some cases, from employees, to provide certain health and welfare benefits that have been agreed upon by the employer and the employees.
Under Canadian legislation, a benefits trust can only administer a group sickness or accident insurance plan, a private health services plan, a group term life insurance policy or any combination of these plans. With the exception of a group term life insurance policy, a benefits trust can provide health and welfare benefits under these plans via third-party insurance contracts, directly from the property of the health and welfare trust or through a combination of both.
The Ontario Teachers Insurance Plan established a health and welfare trust in 1977, providing long-term disability and life, health and dental benefits to roughly 220,000 education workers and their dependants across the province. In addition, the province’s four education affiliates — the Association des enseignantes et des enseignants franco-ontariens, the Elementary Teachers’ Federation of Ontario, the Ontario English Catholic Teachers’ Association and the Ontario Secondary School Teachers’ Federation — along with the Canadian Union of Public Employees established a separate employee life and health trust in 2017.
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Key takeaways
• ASO arrangements can provide plan sponsors with risks and opportunities and, as such, must be carefully considered by employers prior to entering an agreement.
• Multi-employer benefits plans have grown alongside rising benefits costs and a growing desire for stability among plan sponsors and members.
• While the full impact of pharmacare on benefits plans is yet to be seen, plan sponsors will have to navigate challenges while searching for cost-saving opportunities.
The four affiliates and the CUPE work closely with the OTIP trust to provide the ancillary benefits and to administer the plans and provide consulting expertise, says Vic Medland, chief executive officer at the OTIP. “Over the years, we’ve evolved from a traditional provider to a forward-thinking organization that prioritizes innovation and member satisfaction.”
The primary advantage of the trust model is that it allows the OTIP to reinvest any surplus funds back into the plan and enhance the benefits and services provided to members. These innovations include the 2023 establishment of a pharmacy for plan members.
“The model also supports our commitment to transparency and accountability, ensuring that our members receive the best possible value for their contributions,” says Medland. “It also enables us to maintain stable and predictable costs, which is crucial for long-term sustainability of the plans and provides us with greater ownership and control that allows us to create our own future and be a leader rather than a follower.”
Potential impact of pharmacare
In February, Manitoba became the first province to sign on to Canada’s national pharmacare program, giving it access to federal funding to cover the cost of birth control, diabetes medications and hormone replacement therapy for menopause.
Under the deal, the federal government will spend $219 million on pharmacare coverage for Manitoba over four years. The cost of contraceptives, diabetes medications and HRTs will be covered with no co-pay or dispensing fee for the patient, but people may have to pay pharmacist prescribing fees or delivery fees.
Read: Manitoba becomes first province to join national pharmacare program with $219 million deal
Given that only the first phase of pharmacare has been rolled out, it’s difficult to determine the total impact on multi-employer plans, says Barbiero, suggesting plan sponsors prepare for both challenges and opportunities.
“There’s going to be potential cost savings and that allows [plan sponsors] to reinvest in their plans and enhance their benefits offerings. . . . What plan sponsors are really going to have to do is look at their plan design and any redesign requirements they’ll need because they don’t want to be in a situation where they’re duplicating what pharmacare is offering.
“The key is coordinating their plans with what pharmacare provides and, by doing so, providing seamless coverage that really eliminates any gaps in coverage.”
Blake Wolfe is the managing editor of Benefits Canada and the Canadian Investment Review.