10 ways employers can try to contain benefit costs
There is a battle brewing on the benefits landscape, a struggle to strike a balance between the culture of employee entitlement and the need for cost containment. For many organizations, the outcome could decide whether anything like their current benefits offering survives.
Providing an attractive, differentiated benefits plan is a strategic recruitment and retention tool. However, providing such benefits plans often seriously undermines the ability of organizations to build business wealth and stay competitive. Health-care inflation is currently running higher than the consumer price index. This means, for most employers, health-care costs as a percentage of payroll continue to grow unchecked. How long can employers be expected keep up this pace?
According to the 2007 Sanofi-Aventis Healthcare Survey, employees attach a high value to their benefits plan. When respondents were asked whether they would rather have their health benefits plan or cash, 61 per cent said they would chose the benefits plan over $20,000 per year in cash. Why doesn’t this translate into greater employee appreciation of the cost of benefits plans to employers?
Despite the cost-containment struggle, many employers want to maintain benefits as a viable part of total compensation packages. And employees want them maintained too. Most companies that survey employees about benefits will find employees would rather pay a greater amount for their benefit coverage than have an employer significantly reduce or eliminate coverage completely. So where do organizations go from here?
Top 10 ideas on cost containment – back to basics
Employers have delivered benefits that are very convenient for employees such as pay-direct drug cards and open drug formularies. These are great from an employee satisfaction perspective, but convenience has a price. Benefits, administered traditionally, have been an integral part of an employer’s offering. Regardless of how the employer balances attraction and retention versus cost management, it’s time for employers to revisit plan administration and design.
Reducing costs in established benefits plans can take many forms, including managed drug formularies, introducing a flexible benefits plan and prior authorization of specific drug therapies. But there are many simple options for employers that will affect benefit costs.
Review underwriting and funding arrangements. As organizations evolve, many fail to review their underwriting and funding arrangements to ensure they remain appropriate. Underwriting arrangements and their costs vary. They may include:
• a fully insured, non-refund accounting approach where the organization pays the monthly premiums and the financial risk of the plan is fully on the shoulders of the insurer;
• a refund accounting arrangement in which the risk is shared between the insurer and organization; and
• an arrangement in which the organization self-insures the risk and hires an insurance company to administer the plan.
Insurers’ fees for the various underwriting and funding arrangements also vary, with the self-insured arrangement typically attracting the lowest fees. Understanding the organization’s risk tolerance, and choosing an appropriate funding arrangement, can result in cost savings. It is important to evaluate options carefully as some approaches may result in short-term cost savings but have much higher long-term costs and risks.
Establish a long-term relationship with an insurance provider. Because of a vigorous acquisition history, the three largest insurance companies now control about 65 per cent of the marketplace. This consolidation has led to challenges in getting competitive quotations through marketing an organization’s benefits program. An organization should address service or cost issues with its insurer and avoid frequent marketing exercises.
Compare the value received from the broker or consultant with the services provided. In many cases, an organization pays its broker or consultant via the premium rates remitted to the insurer. If an organization isn’t sure what it’s paying, it should ask. The Canadian Life and Health Insurance Association issued disclosure guidelines in 2005 that require a broker or consultant to disclose to clients exactly how they are compensated. Understanding the cost of this relationship — what the broker or consultant is providing in return for payment — allows an organization to measure the value received.
Audit claims. Obtaining a detailed breakdown of where claims are occurring can uncover errors in claim payment by the insurance company and identify cost drivers within the employee population. Errors brought to the insurer’s attention will translate into refunds to the organization and potentially lower premium rates in the future.
Update co-ordination of benefits information. According to the ESI Canada 2006 Drug Trend Report, savings of 10 per cent to 12 per cent of spousal drug plan costs can be achieved if an organization carries out a positive enrolment of dependents and collects current information on co-ordination of benefits opportunities. By directing claims to the correct primary payer, an organization could see a drop in annual claims costs for spouses and dependent children.
Adopt a workplace wellness campaign. Workplace wellness is an increasingly important feature in the employer-employee relationship. Offering a variety of communications and programs around health, diet, exercise and lifestyle can influence employee health and wellness and translate into lower prescription drug costs and fewer disability and death claims.
Review deductibles. Many plans still have a $25 single/family or $25 single/$50 family annual deductible. The impact of a flat $25 deductible or $25/$50 deductible has been significantly eroded over time, to the point where the savings are about two per cent. If an organization wants to continue to have employee cost sharing through a deductible, consideration should be given to making the deductible more meaningful, such as $100 or $200 and increasing it every few years to keep pace with inflation. Alternatively, a per prescription deductible indexed every few years, or a per prescription deductible equal to the dispensing fee, would achieve the same result.
Introduce a dispensing fee cap. Putting a cap on the maximum amount reimbursed by the plan encourages employees in large urban areas to shop at pharmacies that charge less or, at the very least, share in the cost if they choose to shop at the more expensive pharmacies. This may not be a solution if there is little choice in a community or if the employer supports the cognitive services offered by certain pharmacies.
Review reimbursement levels and maximums. Reimbursement of expenses at 100 per cent provides no opportunity for employees to understand and appreciate the value and cost of a benefits plan. Introducing a 10-per-cent or 20-per-cent co-pay, limitations on an overall annual maximum, per-incident maximum or frequency limitation allows an employer to continue offering a comprehensive benefits plan while educating employees about the true cost of coverage and ensuring the plan is sustainable.
Share premium costs with employees. This results in employees sharing in the impact inflation has on health and dental plans.
Governance: What’s good for pensions is good for benefits
Over the long term, organizations need to practice good governance of benefits programs. Governance has long been an integral part of administering pension plans, but organizations are now seeing the value of adopting similar protocols for delivering benefits plans.
Organizations can reduce the potential liability for errors if they carry out a regular review of all plan documentation (insurer contract, collective agreement, employee booklet and company handbook) to ensure consistency. In addition, organizations need to take a proactive approach to disability management.
If benefits plans are to survive, employers have to be proactive. Employees may be entitled to expect a benefits plan to be part of a total compensation package, but cost containment and viability will dictate what that plan offers and how it will be administered.
Linda Clay is a principal with HR consulting firm Mercer in Vancouver. She can be reached at [email protected].
Providing an attractive, differentiated benefits plan is a strategic recruitment and retention tool. However, providing such benefits plans often seriously undermines the ability of organizations to build business wealth and stay competitive. Health-care inflation is currently running higher than the consumer price index. This means, for most employers, health-care costs as a percentage of payroll continue to grow unchecked. How long can employers be expected keep up this pace?
According to the 2007 Sanofi-Aventis Healthcare Survey, employees attach a high value to their benefits plan. When respondents were asked whether they would rather have their health benefits plan or cash, 61 per cent said they would chose the benefits plan over $20,000 per year in cash. Why doesn’t this translate into greater employee appreciation of the cost of benefits plans to employers?
Despite the cost-containment struggle, many employers want to maintain benefits as a viable part of total compensation packages. And employees want them maintained too. Most companies that survey employees about benefits will find employees would rather pay a greater amount for their benefit coverage than have an employer significantly reduce or eliminate coverage completely. So where do organizations go from here?
Top 10 ideas on cost containment – back to basics
Employers have delivered benefits that are very convenient for employees such as pay-direct drug cards and open drug formularies. These are great from an employee satisfaction perspective, but convenience has a price. Benefits, administered traditionally, have been an integral part of an employer’s offering. Regardless of how the employer balances attraction and retention versus cost management, it’s time for employers to revisit plan administration and design.
Reducing costs in established benefits plans can take many forms, including managed drug formularies, introducing a flexible benefits plan and prior authorization of specific drug therapies. But there are many simple options for employers that will affect benefit costs.
Review underwriting and funding arrangements. As organizations evolve, many fail to review their underwriting and funding arrangements to ensure they remain appropriate. Underwriting arrangements and their costs vary. They may include:
• a fully insured, non-refund accounting approach where the organization pays the monthly premiums and the financial risk of the plan is fully on the shoulders of the insurer;
• a refund accounting arrangement in which the risk is shared between the insurer and organization; and
• an arrangement in which the organization self-insures the risk and hires an insurance company to administer the plan.
Insurers’ fees for the various underwriting and funding arrangements also vary, with the self-insured arrangement typically attracting the lowest fees. Understanding the organization’s risk tolerance, and choosing an appropriate funding arrangement, can result in cost savings. It is important to evaluate options carefully as some approaches may result in short-term cost savings but have much higher long-term costs and risks.
Establish a long-term relationship with an insurance provider. Because of a vigorous acquisition history, the three largest insurance companies now control about 65 per cent of the marketplace. This consolidation has led to challenges in getting competitive quotations through marketing an organization’s benefits program. An organization should address service or cost issues with its insurer and avoid frequent marketing exercises.
Compare the value received from the broker or consultant with the services provided. In many cases, an organization pays its broker or consultant via the premium rates remitted to the insurer. If an organization isn’t sure what it’s paying, it should ask. The Canadian Life and Health Insurance Association issued disclosure guidelines in 2005 that require a broker or consultant to disclose to clients exactly how they are compensated. Understanding the cost of this relationship — what the broker or consultant is providing in return for payment — allows an organization to measure the value received.
Audit claims. Obtaining a detailed breakdown of where claims are occurring can uncover errors in claim payment by the insurance company and identify cost drivers within the employee population. Errors brought to the insurer’s attention will translate into refunds to the organization and potentially lower premium rates in the future.
Update co-ordination of benefits information. According to the ESI Canada 2006 Drug Trend Report, savings of 10 per cent to 12 per cent of spousal drug plan costs can be achieved if an organization carries out a positive enrolment of dependents and collects current information on co-ordination of benefits opportunities. By directing claims to the correct primary payer, an organization could see a drop in annual claims costs for spouses and dependent children.
Adopt a workplace wellness campaign. Workplace wellness is an increasingly important feature in the employer-employee relationship. Offering a variety of communications and programs around health, diet, exercise and lifestyle can influence employee health and wellness and translate into lower prescription drug costs and fewer disability and death claims.
Review deductibles. Many plans still have a $25 single/family or $25 single/$50 family annual deductible. The impact of a flat $25 deductible or $25/$50 deductible has been significantly eroded over time, to the point where the savings are about two per cent. If an organization wants to continue to have employee cost sharing through a deductible, consideration should be given to making the deductible more meaningful, such as $100 or $200 and increasing it every few years to keep pace with inflation. Alternatively, a per prescription deductible indexed every few years, or a per prescription deductible equal to the dispensing fee, would achieve the same result.
Introduce a dispensing fee cap. Putting a cap on the maximum amount reimbursed by the plan encourages employees in large urban areas to shop at pharmacies that charge less or, at the very least, share in the cost if they choose to shop at the more expensive pharmacies. This may not be a solution if there is little choice in a community or if the employer supports the cognitive services offered by certain pharmacies.
Review reimbursement levels and maximums. Reimbursement of expenses at 100 per cent provides no opportunity for employees to understand and appreciate the value and cost of a benefits plan. Introducing a 10-per-cent or 20-per-cent co-pay, limitations on an overall annual maximum, per-incident maximum or frequency limitation allows an employer to continue offering a comprehensive benefits plan while educating employees about the true cost of coverage and ensuring the plan is sustainable.
Share premium costs with employees. This results in employees sharing in the impact inflation has on health and dental plans.
Governance: What’s good for pensions is good for benefits
Over the long term, organizations need to practice good governance of benefits programs. Governance has long been an integral part of administering pension plans, but organizations are now seeing the value of adopting similar protocols for delivering benefits plans.
Organizations can reduce the potential liability for errors if they carry out a regular review of all plan documentation (insurer contract, collective agreement, employee booklet and company handbook) to ensure consistency. In addition, organizations need to take a proactive approach to disability management.
If benefits plans are to survive, employers have to be proactive. Employees may be entitled to expect a benefits plan to be part of a total compensation package, but cost containment and viability will dictate what that plan offers and how it will be administered.
Linda Clay is a principal with HR consulting firm Mercer in Vancouver. She can be reached at [email protected].
