With prescription drug costs threatening to balloon out of control, many industry stakeholders warn that plan sponsors can’t take much more. But a recent survey reveals that overall, employers are not only doing fine, cost increases are even shrinking.
According to ACS/Buck’s seventh annual Canadian Healthcare Trend Survey, the average annual total trend factor for prescription drug costs has steadily dropped from 16.61% in 2003 to 14.26% in 2007.(See Survey says below for additional results.)
“This reflects what the insurers believe the costs will be,” says Dan Clarry, a benefits consultant with ACS/Buck in Toronto. The survey asks major Canadian group insurers about the factors they use to project employers’ healthcare plan costs for the upcoming year. Eleven carriers participated in this year’s survey, including Great-West Life, Sun Life Financial and Manulife Financial.
The reason for the slower growth, says Clarry, has to do with three major factors. “We’re seeing slightly fewer expensive blockbuster drugs entering the market; there is a steady prevalence of lower-priced generics, and plan sponsors are realizing they can implement strategies like covering only the generic equivalent.” As a result, carriers have softened their projected rate of increase for prescription drugs.
Clarry cautions employers not to be too optimistic. “Despite what appears to be a levelling off, drugs are still at a greater rate of increase than any other cost. Where else do employers see double-digit increases every year?” And that’s not going away.
He says employers should expect their healthcare costs to increase over the next five to 10 years since an aging population will mean a greater occurrence of chronic diseases, such as diabetes, cardiovascular disease and hypertension. Emerging biotechnology drugs will also push costs up and, says ACS/Buck, it is not likely generic versions will be readily available. Jim Keon, president of the Canadian Generic Pharmaceutical Association in Toronto, says generic drug companies are diligently working on biogenerics; however, the regulatory approval process for these drugs still needs to be determined.
In the meantime, Clarry suggests plan sponsors look at plan design and wellness programs to control drug costs for the future. “Plan sponsors have been doing a better job at managing drug costs because it’s a cost that can’t be ignored.” —Leigh Doyle
In addition to prescription drug costs, the ACS/Buck 2007 Canadian Healthcare Trend Survey looked at cost trends for medical plans, hospital and dental care(utilization only).
Overall, healthcare costs look to be stabilizing. Dental care remains the benefit cost with the lowest growth rate and prescription drugs with the highest.
Medical plans experienced a slight increase after dropping more than 1.5% last year.
Dan Clarry, a benefits consultant with ACS/Buck in Toronto, said the increase could be a result of more paramedical services, such as acupuncture, as well as more medical supplies, such as orthodontics, being used.
“Carriers might be playing catch-up,” he speculated. ”They are better [at] recognizing the levels of utilization.”
Rules of engagement
Organizations may decide to change their employee benefits, including making the switch to a defined contribution plan because of proposed new accounting rules, says Darrin Bull, a principal with Mercer Human Resource Consulting.
In March, the Accounting Standards Board issued an Exposure Draft of proposed amendments to the Canadian Institute of Chartered Accountants Handbook Section 3461 on employee future benefits.
First, the funded status of benefits plans must be recognized on the balance sheet. This means that surpluses will be shown as assets, and deficits will be shown as liabilities. Second, plan assets and obligations will be measured at fiscal year-end, not up to three months earlier as currently permitted. And third, footnote disclosures will need to change to become consistent with balance sheet recognition. These changes are designed to increase transparency by putting on the balance sheet unamortized amounts that are disclosed in the footnotes of the financial statements.
“The increased prominence of funded status of plans and the impact on a company’s equity from recognizing the funded status of its benefit plans may cause significant reactions,” Bull explains. Some companies might be reluctant to improve benefits plans as the cost of the improvement will have an immediate impact on net equity. “Other organizations may switch to defined contribution plans or curtail healthcare benefits for future retirees.”
Publicly traded enterprises and non-profit organizations must recognize their plans’ funded status in their balance sheets starting with fiscal years ending on or after Dec. 31, 2007. This requirement takes effect a year later for private firms. There are currently no comparable changes being considered to public sector accounting standards applicable to government entities. —Craig Sebastiano
A step forward?
Early last month, Prime Minister Stephen Harper’s government announced that by 2010, Canada’s 10 provinces and three territories will guarantee citizens timely access to healthcare in one of the following areas: cancer, joint replacement, cardiac care, diagnostics and vision care. Each province and territory will choose one procedure from one of these areas in which it will guarantee care within a certain timeline.
“The interesting thing is that the timelines are different in different provinces, and the procedures are different in different provinces,” says Sharon Sholzberg-Gray, president and chief executive officer of the Canadian Healthcare Association(CHA) in Ottawa. She also stresses that it’s a procedure, not a whole area. A province could choose, for example, radiation therapy, one type of procedure within the whole area of cancer. “I think it’s fine to make commitments to have care within the targeted guidelines or benchmarks. But whether singling out one procedure in each province is really going to make the big difference….” says Sholzberg-Gray.
Actually, the CHA has been wary of the concept of guarantees from the start. “We thought that the issue of wait times was more complex than a simple guarantee and that a guarantee was sort of a simple answer to a complex situation.” Furthermore, a “guarantee” means the process and the rules have to be in place. “What happens if the deadline time for treatment has not been reached one hour later?” she asks. “Does it mean the patient and some of his relatives get transported? And to where? And for how long? Our association has always said if you’re going to have a guarantee, it has to have funds to operationalize it—but it also has to have clear rules.”
But the rules aren’t clear. This announcement is more of a “political promise,” she adds, than any kind of guarantee. Sholzberg-Gray says actual wait times need to be measured, and it needs to be determined if targets are being met. And if they’re not, why not? “Make a commitment to meet [the targets]—whether that commitment has to be in the form of a travel fund or a guarantee or what not—then that discussion takes place after we see whether we’re meeting the targets, not before.”
But could the Patient Wait Times Guarantee still be a step forward? Sholzberg-Gray doesn’t think so. “Nobody can tell me that all that counts is one particular procedure out of the hundreds or thousands of treatment areas that people need to have access to.” It may be symbolically OK, she says. “[Except] by choosing the easy thing it makes it look simple.” —Brooke Smith
Report on reports
Report 1: 2006 Survey on Pension Risk
By: Conference Board of Canada and Watson Wyatt Worldwide
Info: Chief financial officers (CFOs), vice-presidents of human resources and others (such as directors of total compensation)from 187 Canadian organizations were asked for their personal perspectives on pension risk issues.
Key findings: Of the CFOs who responded, 80% believe there is a widespread defined benefit(DB)plan crisis. In addition, 61% think the crisis will persist over the next few years. Two years ago, only 59% of CFOs believed there was a problem, and only 20% thought it would be persistent. Approximately 41% indicated they still have some type of DB arrangement. Of these respondents, 26% say they have in the past 24 months or will in the next 12 months reduce the normal retirement benefit accrual rate. About 39% say they have or will reduce or eliminate other ancillary benefits, and 50% have or will increase required employee contributions.
Report 2: Attitudes and Intentions of Canadian Defined Benefit Plans Towards Foreign Investment
By: MFC Global Investment Management
Info: Two years after the federal government eliminated the foreign property rule, this survey asks 148 Canadian defined benefit plans with assets between $75 million and $10 billion about their intentions toward foreign investment for the next two years.
Key findings: Over the next two years, 39% of plans surveyed expect to decrease their proportion of Canadian equities. The majority of them will reduce Canadian holdings by less than 5%. About 21% of plans expect to increase their U.S. equity, but by no more than 5%. Some 29% of plans intend to increase international equity with 86% planning no more than a 5% increase. Also in the next two years, changes to asset classes are expected. Net increases are anticipated in real estate and alternative investments. Almost no respondents intend to decrease allocation to these asset classes, but more than 20% expect decreases in allocation to equities. For more information about these surveys, go to www.benefitscanada.com/reports.
Notes on a scandal
The recent allegations of pension fraud in the Royal Canadian Mounted Police(RCMP)may motivate plan sponsors to revisit their governance practices.
Earlier this year, former senior and current RCMP officers testified at a public accounts committee that they believed millions of dollars in inappropriate charges were made to the force’s plan. Allegedly, the pension fund had been used to hire friends and relatives of senior members of the force, staff were overpaid for work, and funds were used to cover work not related to the plan. In addition, the officers claim deliberate actions were taken to hide how the fund was managed.
“It’s an unfortunate situation where the watchers need to be watched,” says Bill Mackenzie, director of special projects, Canadian Coalition for Good Governance in Toronto. “Obviously, controls were not as tight as one would have hoped, but you have what sounds like almost a criminal act. It’s pretty hard to put in controls to stop criminals in these situations.”
In a report from November 2006, Auditor General Sheila Fraser wrote that Ottawa police had turned up “abuses…nepotism, wasteful spending and override of controls by management” of the RCMP plan. Fraser said that another $1.3 million had been paid out for unnecessary services. No charges were laid in the wake of her findings; however, two senior officers resigned and the force reimbursed the pension plan for $3.4 million.
“I never thought that someone would steal from the Mounties fund, but it appears that has happened. The message is that no system is perfect,” says Mackenzie. “The mere fact this was uncovered will send out a message to the pension community generally to say ‘Here’s a wake-up call. Let’s go have another look at what we have in place to make sure we don’t have an RCMP plan issue cropping up.’”
David Brown, with the firm Davies Ward Phillips & Vineberg LLP and former head of the Ontario Securities Commission, has been appointed by the federal government to lead an independent investigation to determine if RCMP officials covered up the misappropriation of funds. —Leigh Doyle
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