Traditional group benefits programs are facing unsustainable cost pressures; healthcare costs alone are expected to double in the next five years, based on information included in the 2010 Canadian Health Care Trend Survey Results by Buck Consultants. There are many contributors to the cost pressures, including cost inflation, changes in prescription drug costs and usage, the introduction of new, expensive drug therapies, the increased utilization of paramedical services, the off-loading of expenses by governments to private plans and an aging workforce.

Look no further than the retirement services industry, where a major shift from DB to DC plans is occurring. Why not take that same philosophy and apply it to group benefits programs?

Although it may seem that many of these pressures are beyond plan sponsors’ control, there are actions employers can take to reduce some of the related costs. Look no further than the retirement services industry, where a major shift from DB to DC plans is occurring. Why not take that same philosophy and apply it to group benefits programs?

Define the contributions made by the plan sponsor as opposed to the benefits covered. Shift the more predictable,non-catastrophic benefits (such as vision, paramedical and dental) from a DB to a DC model. Maintain the unexpected catastrophic benefits—drug coverage, out-of-country medical, certain medical services and supplies—within your DB arrangement.

A DB-DC hybrid plan—the combination of these two benefit strategies—may be a possible solution. A benefits program would continue to provide coverage for those losses that may be considered “true insurance” (drugs, out-of-country medical) while using tax-effective DC vehicles such as healthcare spending accounts (HCSAs) to fund the remainder of the programs. The amounts allocated to the HCSA are determined by the plan sponsor, thus providing full control in the allocation of available resources. Any unused allocations are forfeited, according to Canada Revenue Agency rules, back to the organization. These accounts are easier to administer than a traditional flexible benefits arrangement, making them a realistic alternative for all employers.

Benefits for employees
For employees, a DB-DC plan offers considerable flexibility. The DC component provides plan members with a predetermined annual contribution; members may choose how to spend their benefit dollars. This not only encourages a degree of consumerism but also provides employees with choice. HCSAs also expand the list of eligible expenses, increasing the depth of the benefit offering. If today’s intergenerational workforce has taught us anything, it’s that people’s needs are different and that choice is key. Through the introduction of more options and flexibility, you can enhance the perceived value of your benefits program and increase attraction and retention.

Implementing the hybrid approach
A financial analysis of the current program is the first step in determining whether or not this approach is a viable alternative for an organization. Total current benefit costs, claiming patterns, industry inflationary factors and proposed increases to employer contribution levels form the basis for this assessment. Generally, firms with average to above-average vision, dental and paramedical claims (in excess of 30% to 35% of total group benefits costs) are good candidates for a DB-DC hybrid plan. An analysis of this type will demonstrate the potential financial impact of implementing these changes, which, in many cases, is significant.

Once the analysis is completed, employers are able to determine if this concept is right for their plans. There is no doubt that traditional group insurance programs will need to respond to cost pressures currently facing benefits programs. The DB-DC hybrid plan may be the answer.

Michael Trowell is assistant vice-president of Comprehensive Benefit Solutions Ltd.

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Copyright © 2019 Transcontinental Media G.P. This article first appeared in Benefits Canada.

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