Aging demographics. The economic boom. The financial meltdown. The economic recovery. Spiralling healthcare costs. Government off-loading. All of the buzzwords of the last five years have come together to create a benefits environment in which caution is the order of the day. Instead of attraction and retention or plan cutbacks, employers are now in a cautious status-quo mode when it comes to their benefits plans.
Against a backdrop of ever-changing provincial legislation, an uncertain economic environment and constantly escalating healthcare costs, the balancing act between costs and providing for members’ needs has become trickier than ever.
The Economic Picture
Across the West, an economic recovery is beginning to take shape with investment in mining, energy and construction. While national unemployment levels hover around 8%, western Canada’s unemployment is just slightly less, at 6.5%.
According to the Conference Board of Canada’s Provincial Outlook, British Columbia will experience economic growth of 2.8% in 2011, driven by the recovery in the forestry, manufacturing and construction sectors. This decrease from a 3.8% growth in 2010 is expected as the effects of the Winter Olympics wear off and housing markets begin to slow down.
Measured growth continues in Alberta where growth in the traditional drivers of the economy—oil and gas—is being tempered by still-weak labour markets. In 2011, Alberta’s economic growth is expected to surpass its 3.3% in 2010, increasing to 4.1%. This will likely be the result of continued development in oil and gas, combined with stronger housing markets.
Saskatchewan’s expected GDP growth (3.5% in 2010) is 2.9% for 2011, driven largely by the recovery in mining. And Manitoba’s economic growth for 2011 is an expected 2.1%, supported by a recovery in agriculture and manufacturing and a growth in mining. This is a slight decrease from the province’s 2.2% growth in 2010.
Thus, with the exception of Alberta, growth in the West is expected to be slower in 2011 than in 2010.
Prescription Drug Plan
Following Ontario’s lead, Alberta and B.C. have implemented changes that will reduce the cost of generic drugs in each province. Unlike Ontario, in which the changes were legislated, both Alberta and B.C. achieved the cost cuts through negotiations with the pharmaceutical industry. In addition, both provinces implemented a schedule of transition fees to pharmacists designed to mitigate the impact of the changes in generic pricing. In turn, the response from the pharmacies out west has been muted in comparison to their eastern counterparts’ reaction to the changes announced in Ontario earlier this year. Given the large number of name brands that are scheduled to lose patent protection soon, it is anticipated that the proportion of claims filled using generics will increase significantly over the course of the next two years. It’s expected that these moves by Alberta and British Columbia will result in significant cost reductions.
Counterbalancing the expected cost reductions created by the generic pricing reforms is the increasing use and associated costs of biologic and specialty drugs within drug plans. Currently, biologics and specialty drugs represent a small proportion of the prescription drug spend. According to ESI Canada’s 2010 Outcomes Report, of the approximately 275 new drugs expected to be introduced into the marketplace, approximately 50% would fall into the specialty/biologics category. This is expected to lead to an increase in drug cost trend factors within the next three years. In the absence of provincial reforms, ESI estimates a 30% increase in the annual drug spend per person over the course of the next five years. Factoring in the potential impact of the reforms reduces this increase to approximately 10% for the affected provinces.
Shaping Private Plans
With the April 2010 delisting of chiropractic care in Saskatchewan, the process of off-loading provincially covered benefits onto the private sector continues. In Alberta, the changes to the seniors drug benefit announced in the spring were designed to link coverage levels to income. While the implementation has been put on hold, when put into effect, these changes will result in higher costs to privately sponsored retiree healthcare plans. In B.C., provincial premiums increased for the first time in five years and will continue to increase in the future with the cost of inflation.
Most notably for plan sponsors in B.C., however, was the implementation of the harmonized sales tax (HST) on July 1, 2010. This resulted in an automatic increase in costs for administrative services only plans. The ultimate impact of the HST remains to be seen as the government has indicated that all HST revenue will be returned to the system in the form of healthcare funding.
With higher proportions of unionized workers, B.C., Saskatchewan and Manitoba also have a large number of workers covered for benefits through health and welfare trusts. In February 2010, the government proposed changes to the Income Tax Act that may result in the creation of employee life and health trusts (IT-85R2) as a vehicle for group benefits coverage in Canada. This proposed structure contains a number of provisions, which would differ from the administrative practices set forth in IT-85R2. While the new rules would apply to trusts set up after April 1, 2009, it is not yet clear whether trusts set up per IT-85R2 will be required to convert to the new structure.
Bargaining Environment
The economic downturn of 2008 brought with it long-term implications for those working under collective agreements in the West. While the statistics indicate that the rate of recovery in the West has exceeded that in the rest of Canada, unemployment levels are still high relative to pre-2009 levels. For those at the bargaining table, this has resulted in a push for reduced wages and benefits from employers. Additionally, in B.C., there are an estimated 200,000 public sector workers who are covered by contracts that will expire by Dec. 31, 2010. The government has maintained that there will be no additional funding for wage increases as these agreements come up for renewal.
What Does it Mean?
For plans in western Canada, these mixed messages have created a dynamic in which both employers and plan members are in caution mode. Unlike the days of the energy boom where employees were pushing for improvements in perks and benefits, today’s plan members are focused on maintaining their current offerings. At the same time, the potential of lower costs due to generic pricing reform and an improving economic picture has shifted plan sponsors’ focus away from the need for benefits cuts.
Instead, the focus for plan sponsors has started to shift to a risk management approach toward group benefits. While the risks inherent in any group benefits plan are generally well known, sponsors are beginning to focus on digging deeper into plan data to manage those risks. Carriers’ enhanced reporting capabilities, combined with the increased market penetration of pay-direct cards, have spawned an entire industry dedicated to mining prescription drug spend data. In addition, sponsors are looking toward the link between the drug spend as a predictor of their disability claims experience. For those involved with disability claims management, more efforts are being made to collect data related to the operation of their disability plans. By implementing robust reporting processes around their sick leave and short-term absence programs, sponsors are beginning to develop an understanding of these once-silent periods of disability. In addition, for those plans with early intervention programs, sponsors are increasingly looking at involving their financial experts in the planning process to ensure that practical metrics are developed and tracked so that the elusive return on investment can be captured.
Implementation of this detailed analysis and monitoring of plans, combined with the economic backdrop in the West, has led sponsors away from making drastic cuts or improvements to their benefits programs. Instead, while the possibility of such changes might lie on the horizon, today’s sponsors are using this analysis to make intelligent tweaks to their programs in the hope of maximizing the financial gains while minimizing the impact to members.
Avinash Maniram is a group and healthcare consultant with PBI Actuarial Consultants Ltd. in Vancouver.