Employers approach benefits cost containment with caution

By David Brown
|Canadian HR Reporter|Last Updated: 02/09/2005

For the past few years, Howell Pipe & Supply in Georgetown, just outside of Toronto, has been taking steps to rein in spending on benefits.

“Costs were going up and up,” explained vice-president of HR and operations Jason Braam. It wasn’t sustainable, so something had to change. Working closely with a benefits consultant, Howell took a number of actions, to at least slow the increases.

New limits and maximums were introduced on things like basic dental services, though the company wants to leave therapeutic benefits untouched, he said.

One of the most important changes is an expansion of co-insurance practices, asking employees to pay a percentage of some benefit transactions like dental and drugs. It is not a huge portion, said Braam, but it forces employees to think more about the costs of what they are getting.

In return, the company increased its share of the benefits premium. So employees actually have less money taken off of their paycheques.

While rising benefits costs are an almost universal HR problem, it would seem not all employers are ready to tackle the challenge by introducing more cost-sharing. A survey of 252 employers across the country by consulting firm Morneau Sobeco found that just 13 per cent of responding organizations are considering reducing their share of health-care benefits premiums.

Given the substantial cost increases for employers in recent years, it is a little surprising more organizations aren’t looking to increase the employee share of health-care costs, said Jean-Guy Gauthier, a partner in Morneau Sobeco’s benefits consulting practice in Montreal.

“My sense is that (rising benefit costs) have not been given the attention it warrants at this time,” he said. If the organization is in a cash crunch then it feels obligated to act, otherwise it’s working on different priorities, he said.

But if employers look at the costs and then make projections for four or five years down the road they may realize now is the time to act, he said.

“It is still a cost that is not huge, but that is growing fast.” If an organization is spending $1,000 or $1,500 per year on medical (excluding dental) benefits, then five years from now, with 12- to 15-per-cent increases, that will be close to double.

So HR professionals or benefits managers need to be looking for solutions now, before their finance manager comes to them and says the company can’t support it anymore.

Many organizations are looking at cost-sharing tactics but are moving very slowly, said Tim Clarke, a senior benefits consultant in the Toronto office of HR consulting firm, Hewitt Associates. “We are seeing a lot of employers considering cost-containment initiatives and some are acting on them. But they are very conscious of what employee reactions will be.”

Organizations have to look at the impact of cost-sharing from a broad business perspective and then consider what it will do to employee relations. “Some might save $10,000 or $20,000, but is that enough to risk upsetting thousands of employees?” he asks. “When those numbers start to be hundreds of thousands of dollars (in savings) to upset 1,000 employees, then it starts to make more sense.”

In another recent survey of nearly 1,400 Canadian HR professionals by Mercer Human Resource Consulting, pension and benefit cost containment was most cited as a top priority for 2005. (Almost 26 per cent identified pension and benefit cost containment, slightly ahead of attraction and retention at 24.6 per cent. Third was succession planning at 18.9 per cent.)

“I think that benefits have got the attention of the C-suite,” said Alison Schofield, a principal in Mercer’s health care and group benefits practice.

Benefit costs now represent between seven and eight per cent of payroll and are going up by an average of eight to 12 per cent per year.

In recent years, overall increases were close to 15 per cent, so the rate of increase is down slightly, in part because drug costs have levelled off somewhat. But that could be temporary, she said. It is likely drug costs in the near future could push benefits expenses upward again.

Employers are looking for ways to share more costs with employees, she said.

Other Mercer research from last year found 18 per cent of respondents are considering increased employee contributions to benefit premiums and another 15 are considering asking employees to pay some share of benefits claims.

“We think it is really preferable for employees to share in claim costs rather than premiums, because it provides a financial incentive,” she said. If employees are only asked to pay more of the premium there is little motivation for them to make cost-conscious decisions.

Getting employees to make more informed decisions about their benefits was the primary motivator for Howell to go the co-insurance route, said Braam. Some drugs can be acquired at discount locations, for example. “If they want to go to a place which charges more but gives them better service, that is fine, but they have to pay more for it.”

The change has helped, said Braam. Aside from encouraging employees to be better shoppers, the benefits provider also issues employees an annual usage statement so they can see exactly the value and the cost of the benefits plan.

Employee response has been pretty positive, he said, adding that he only had one person complain to him. The company explained to employees the situation, said Braam. If they wanted to keep things as they were, premiums would have been going up at a rate of between 25 and 33 per cent. After making the changes, premiums have actually been going down for employees.

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