I was talking to a client recently about the potential implications of a particular biologic drug on their future benefits plan costs. The client listened intently but at the end of the discussion indicated they understood the issue but couldn’t do anything about it. At that moment it struck me­—most employers manage benefits plan risks retroactively.

What is wrong with this? Plenty. Risk by its very nature is dynamic and never static. Prudent risk management suggests that your risk management strategies should evolve as the nature of the risk changes. However, the majority of plan sponsors review their risk management approaches infrequently and often only after a significant claim has impacted the financials of the benefits plan. They manage risk through a rear view mirror.

Let’s look at the example of biologic drugs. The potential costs are significant and it is becoming increasingly likely that all benefits plans will be impacted by claims in the future.

Under most drug plans, biologic drugs are already in the top 10 of claims paid and both the number and value of these claims will only increase over time. The risk is relatively well known but few plan sponsors have taken steps to manage this risk through the underwriting basis and/or plan design.

When asked about pooling protection under their extended health plan, one organization told me, “We think pooling protection is a waste of money. We are large enough to self-insure the entire risk.” It was a large organization, but they will likely change their position when they are hit with a $250,000 drug claim.

So how do we change this propensity to react to risk versus actively manage it? There are several things that can be done.

Step 1 – Understand the risks
It starts with understanding the nature of risks that could potentially impact the benefits plan together with their probable financial consequences. Every organization should complete a risk assessment of their benefits plan—every year.

Step 2 – Stress test the plan
Once you understand the nature of risk, you need to stress-test your benefits plan. Can your benefits plan withstand a significant increase in cost? How do your current risk management approaches protect you from these costs? If you incur a significant claim, what might be the impact on the cost of these risk management approaches?

Step 3 – Ensure appropriate underwriting
There are far too many organizations that are inappropriately underwritten given the dynamic nature of risk. There are differences in how insurers underwrite and manage risk. It is appropriate to review the options from time to time to evaluate how various insurers might help you manage your risk. For example, insurers handle health pooling protection differently—it is important to understand these differences.

Step 4 – Evaluate and discuss
You should elevate the discussion. Benefits plan risks are potentially significant. Senior management needs to understand these risks and they need to be a part of the decision-making process.

Proactive risk management is not easy. But, the likelihood that all plan sponsors will be impacted by a biologic drug in the future is high. The timing and/or exact financial consequences may not be known, but it doesn’t make sense to roll the dice and ignore the possibility.

Benefits plan risks have changed considerably in recent years. You can continue to manage these risks through the rear view mirror, however you may not like what hits you from behind.

Brian Lindenberg is a senior partner and the health and benefits leader at Mercer Canada.. He has more than 30 years of experience in the employee benefits field.

These are the views of the author and not necessarily those of Benefits Canada.

Copyright © 2020 Transcontinental Media G.P. Originally published on benefitscanada.com

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Jack Kwicien, CLU, ChFC, RIA:

Brian: Take a look at: http://www.smartadvisors.biz
Benefits strategic planning addresses the employer concerns mentioned in your most recent article. Please let me know what you think, and if you’d like to learn more.
Regards, Jack Kwicien

Monday, June 13 at 4:12 pm | Reply

Scott Warner:

Decent article on Risk Management – might have broadened the talk about risk being more than just dollars and cents … but still makes the point that we find all too often that when talking about risk most people revert to “underwriting” as a tool or the exclusive risk management stratedgy. Thing about biologics and risk is that there is no solution you can plot or method to mitigate the decimation of your plan once you start to pay for these treatments. The only prudent mitigation technique with these treatments is to eliminate them from your offering.

Tuesday, June 14 at 7:33 am | Reply

Andrew Block, CEBS:

Brian’s comment that employers are managing drugs (biologics) retroactively is brought on, in part, by the kind of work insurers are doing with respect to adjudication and the quality of information some consultants/brokers are providing to their clients. In November 2010 we did a survey of insurers asking if they were adjudicating Special Authority Drugs in BC. The replied they were, and then they started trickling back with ‘oh no we are not.’ One insurer stated they did not want to inconvenience the employee, a convenience which is at the expense of the employer. As an example, Humira is a biologic that is eligible for Special Authority in BC and it is costly. A number of insurers have pulled up their socks but some are still hit and miss.

Tuesday, June 14 at 11:51 am | Reply

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