New thinking needed to help contain rising benefit costs
Conference Board warns organizations need more effective cost-containment strategies
Dec 11, 2012
By Claudine Kapel
Rising benefit costs are already a challenge for many organizations – and a myriad of factors will make this an even more significant issue in the future.
The Conference Board of Canada notes in its new Benefits Benchmarking 2012 study that the focus on benefit cost containment “has intensified in recent years.” Half the organizations in the 2012 study report containing benefit costs is a very important objective of their benefits strategy, up from 41 per cent in 2009, when the Conference Board conducted a previous study.
The Conference Board also points to a number of trends that will put added pressure on organizations to better manage benefit costs in the future, including:
- Rising levels of absenteeism.
- An aging workforce.
- Increasing premiums for employer-sponsored benefit programs.
- Emerging high-cost treatments and drug therapies.
The Conference Board findings suggest some new thinking is needed to help ensure benefit programs are sustainable going forward. Part of that thinking needs to include a greater focus on employee wellness.
As the Conference Board notes: “Traditionally, employers have focused on achieving cost savings in their benefits premiums rather than focusing on reducing the number and cost of claims, which are driven primarily by the health of the employee population.”
The growing focus on benefits cost containment is not surprising. The Conference Board notes benefit plans represent a significant – and growing – cost for employers. According to its findings, the average cost of providing benefits to active employees is 10 per cent of gross annual payroll – or just slightly more than $7,000 per full-time employee.
The Conference Board adds that historically, it has not been uncommon to see benefit costs escalating at a rate of 10 per cent year-over-year. This level of escalation has eased somewhat in recent years. In the 2012 study, more than half of the participating organizations (53 per cent) indicated benefit costs rose by an average of 6.2 per cent between 2010 and 2011.
But the Conference Board cautions this relief is coming primarily from external changes in the market, rather than from the implementation of benefits cost-containment strategies on the part of employers. It observes patents have expired for some widely used description drugs, which has opened the door for less expensive generic alternatives. Generic pricing reforms have also led to a decrease in the cost per prescription.
“These changes have been significant enough to offset the increase in drug utilization,” the Conference Board notes. “This has left employers feeling optimistic that they have become more effective at containing benefits costs.”
But it warns “this recent reprieve is not a long-term trend,” adding employers will need to “remain focused on the long-term sustainability of their benefits programs and look to a variety of strategies to contain costs, shift costs to employees and educate employees on how to use the benefits plan more responsibly.”
The Conference Board suggests in the future, organizations may need to rethink their approach to delivering benefits in a bid to address the challenges of rising costs. This could include the move to defined contribution style plans where employers offer employees a fixed dollar amount that could be put into a health care spending account to pay for eligible health expenses or used to purchase private health insurance.
While such shifts could help the bottom line, they may not align with strategies for attracting and retaining talent. And more significantly, they won’t remedy the broader challenges identified by the Conference Board, particularly with respect to rising absenteeism levels and an aging workforce.
To truly optimize productivity and performance, organizations need holistic strategies that address employee wellness while also encouraging employees to be better consumers of health care. Because ultimately, a key lever for cost containment is to reduce the need for health care and drugs in the first place.
Claudine Kapel is principal of Kapel and Associates Inc., a Toronto-based human resources and communications consulting firm specializing in the design and implementation of compensation and total rewards programs. For more information, visit www.kapelandassociates.com.
Claudine Kapel is principal of Kapel and Associates Inc., a human resources consulting firm specializing in compensation design, performance management, and employee communications. Claudine is also the co-author of The HR Manager’s Guide to Total Rewards and Straight Talk on Managing Human Resources.