For as long as I can remember, employee benefits plan sponsors have been talking about benefits cost management. In the face of double-digit cost increases that have persisted over the last decade—fuelled by such factors as increased utilization, government offloading, the introduction of new, more costly medicines, changing demographics, etc.—the cost management imperative on the surface seems compelling. And the recent economic downturn should have only helped to crystallize the need to manage plan costs. Surely, benefits cost management must be the norm.
In actual fact, benefits cost management is more myth than reality—at least as it relates to traditional cost-containment approaches through plan design and cost-sharing. Mercer maintains a national database of its clients’ benefits plan provisions with the sample size in excess of 3,800 plans. The story it tells about cost containment on benefits such as extended health and dental may be surprising.
Myth and reality
Extended health plans have deductibles – myth – The reality is that more than half (57%) of extended health plans do not have a deductible. For those plans with a deductible, the most prevalent deductible value is $25—an amount that has not changed in decades.
In light of increasing drug costs, per-prescription deductibles are the norm – myth – Actually, only 17% of plans in the Mercer database have implemented a per-prescription deductible.
Dispensing fee caps are common – myth – The majority (76%) of plans do not cap dispensing fees.
Most drug programs are cost-shared with claimants through a co-pay or co-insurance provision – myth – The most common co-insurance percentage for the reimbursement of drug expenses is 100%.
Extended health coverage is often cost-shared – myth – 67% of employers still pay for 100% of the cost of extended health coverage.
Plans have applied caps and deductibles to dental – myth – For dental, the story is similar—only 19% of plans have a deductible with the most prevalent deductible being $25 per single and $50 per family. Similar to extended health, these levels have not changed in decades.
Routine dental expenses are generally reimbursed at less than 100% co-insurance – myth – The most common co-insurance percentage for the reimbursement of routine or basic dental expenses is 100%.
Cost-sharing on dental is growing – myth – It might be growing but at a low rate—67% of plan sponsors still pay 100% of the cost of dental coverage.
It is pretty clear that there is not a lot of cost management being built into benefits plan design. This is not to suggest that no plan sponsor has made plan changes to address plan costs—many have. The point is rather that the response to the issue has been somewhat incremental, certainly within the context of benefits costs being a top priority for many organizations. And many plan sponsors still rely exclusively on a change of insurers to keep their costs in line. It has been a reasonably effective strategy—insurers have been remarkably consistent in their ability to lower plan sponsors’ cost in the never-ending battle to build market share by taking the business away from their competitors. It is an incomplete strategy at best—changing insurers is a costly endeavour, and it does little to address the true drivers of benefits plan cost increases. It is also a horse that you can only ride for so long—sooner or later insurers will get tired of playing the game.
So, does this mean that plan sponsors should continue to manage costs as they have in the past? The answer is clearly no—the future looks dim with regards to benefits plan costs. They are likely to increase dramatically in the years to come—at rates we have never before experienced.
Sponsors, then, should get serious.
Cost versus investment – As an organization, is the money that you spend on benefits a cost or an investment? It is a subtle, but important, difference. A cost is simply that—an amount that you sink into the purchase of a good or service—with the overall objective of paying less. If you spend $1,000,000 on your benefits—all things being equal—you would rather spend $800,000. An investment implies that for the amount you spend, you expect a return. And depending on the return, you may be prepared to spend more (or less). Most plan sponsors view their benefits as a cost rather than an investment that I believe is short-sighted. A benefits program can enhance the overall employee proposition and contribute to a healthier, more productive workforce—all of which generate a return for the employer. The challenge is to quantify the return in order to support the investment.
Define the imperative – What, exactly, is the cost-management imperative? Is it to reduce the absolute cost of the benefits program or the rate of cost escalation, or both? And is it a short-, medium- or long-term goal?
Understand your cost drivers – Before you can effectively manage plan costs, you need to understand the cost drivers. Where are costs increasing, and how might this change in the future? What are the levers that might be pulled to reduce future costs? And where might you get your biggest return? Ironically, most plan sponsors focus on lowering the distribution costs (insurer expenses) rather than managing the cost of the actual claim where the potential return is significantly higher.
Act – If plan costs are a significant issue for the organization, do something about it. There are a broad range of cost-management strategies that could be implemented, each with varying levels of potential return and degrees of employee disruption (which is an obvious consideration). The problems will be bigger in the future, and they cannot be simply resolved by changing insurers.
Own the issue – It is your plan, your employees and your benefits plan costs. You have to own the problem and own the solution. It is fair and reasonable to expect your insurer to help manage your costs, but at the end of the day, it is your problem—not theirs. Effective benefits plan cost management requires the active involvement of the employer.
Benefits cost management in Canada today is more myth than reality, yet benefits plan costs remain a significant issue for organizations across the country. The world is changing and the need to act in a more proactive and aggressive way will become increasingly important.