Relief from rising benefit costs ‘short-lived’

Retiree benefits, cost-containment, reducing absenteeism key priorities for employers: Report
By Amanda Silliker
|Canadian HR Reporter|Last Updated: 12/18/2012

Canadian organizations had a modest reprieve from an increase in benefit costs in the past three years, but the relief will be short-lived, according to a Conference Board of Canada report.

The average increase in benefit costs in 2010-11 was 6.2 per cent, down from 9.7 per cent in 2008-09, found Benefits Benchmarking 2012.

“It’s been tempered a little bit not because employers are doing a better job at containing costs and changing the design of their benefit plans, but really because of some external changes in the market,” said Karla Thorpe, director of leadership and human resources research at the Conference Board in Ottawa.

“A number of brand name prescription drugs have come off patent, making some generic alternatives more widely available — which has led to some cost savings for employers.”

But this relief is only temporary because the drugs that recently came off patent were highly utilized and those coming off patent in the next few years don’t have the same utilization rate, said Margaret French, a partner at Mercer in Toronto.

“So you won’t have that reduction in certain drug costs that are offsetting the costs of the new drugs that are now being introduced to the market.”

Over the next few years, a number of biologic mediations will be entering the market which will have a significantly higher price per prescription than more traditional therapies, and this will mean an increase in costs for employers, said Thorpe.

In light of these rising costs, cost-containment is a key priority for employers, as 50 per cent cited this as a “very important” objective in 2012, compared to 41 per cent in 2009, found the report, which surveyed 356 Canadian organizations.

The average cost of providing benefits to employees is 10 per cent of annual payroll, or just slightly more than $7,000 per full-time equivalent employee.

One strategy around cost- containment is cost-sharing arrangements, said Thorpe. Employers are paying upwards of 80 per cent to 90 per cent of the premium costs associated with group benefit plans and they should be looking at ways to share this with employees, she said.

Employers could also consider capping the amount they are willing to pay for pharmacy dispensing fees to encourage employees to shop around and find a better deal when filling prescriptions, said Thorpe.

Absenteeism represents $7.4 billion in lost wages

Another high priority for employers is reducing absenteeism, cited by 75 per cent of respondents as an “important” or “very important” objective, found the report.

Absenteeism — including sick time, short-term disability and long-term disability — currently costs Canadian employers an average of 1.2 per cent of payroll per year. This represents $7.4 billion in lost wages annually in Canada, found the report.

“There are direct costs to the organization — someone’s away and (the employer is) continuing to pay their salary when they’re gone — but there are also a number of indirect costs to employers, such as a loss of productivity, and they may have to hire replacement workers to come in,” said Thorpe. “Absenteeism collectively represents a really significant cost to employers.”

One way to reduce absenteeism is by focusing on disability management and return-to-work practices, found the report.

“There is a new kind of renewed interest in balancing between managing costs and making sure you’re attracting and retaining employees,” said French. “As employers are increasingly feeling the impact of restrained resources, you almost see the cost of the management programs as an investment to get people back to work because they need these skilled people at work.”

Employers are also investing in wellness programs, found the report. But there’s no silver bullet, said Thorpe, so organizations should conduct a health-risk assessment to determine which risk factors are the most prevalent and target wellness programs at the specific risks.

“Health and wellness programs do have a positive impact on an organization’s bottom line,” she said. “Those investments will pay off in terms of savings to the organization, either in terms of a reduced use of benefits, reductions in absenteeism, reduction in disability leave.”

Fixed or traditional plans still most popular

When it comes to the types of benefit plans, nearly three-quarters (73 per cent) of employers offer a fixed or traditional plan, while just 27 per cent offer a flexible plan, found the report. Fixed benefit plans offer many advantages to employers — they are simpler, easier to communicate to employees and cheaper to administer, it said.

To provide some flexibility, more than one-half (56 per cent) of employers are offering health spending accounts (HSAs). The average employer contribution per employee is $1,049 — and is fully tax-deductible, according to the report.

Employees can use the credits based on their individual needs, including hearing aids, in vitro fertility programs, laser eye surgery, wheelchairs and other eligible expenses outlined by the Canada Revenue Agency.

“When you solve (the flexibility issue) by just adding a benefit as simple as an HSA — it’s such a cover-all and so much easier to administer and there’s so much less work involved — that I think that’s why they’re still staying with the traditional plans,” said Michael Smith, president of benefits consulting firm BCI in Edmonton.

Retiree benefits

More than one-half (51 per cent) of employers offer benefits to all or some employees post-retirement, according to the report, which is really surprising, said Thorpe.

And almost one-half (49 per cent) of employers with retiree benefits have plans that are still open to new employees.

“It’s a very emotional issue when you talk (about) retiree benefits — nobody wants to take them away,” said French. “Many employers believe they can’t change them, so retiree benefits are kind of cast in stone, despite what’s happening in the external market… so that’s what makes it such a hot issue.”

To sustain these plans in the future, employers may need to explore reducing coverage and moving toward greater cost-sharing models, according to the report.

The most frequently offered retiree benefits include prescription drug coverage, vision care, hospital accommodation, paramedical services, dental care and group life insurance.

Employers that do not already have retiree benefits are not looking to introduce them, said Jeremy Greening, a senior benefits consultant at BCI.

“The downside of it is because of the aging population and people are living longer, the cost to sustain such a program is prohibitive, so people are shying away from that.”

DC benefit plans may become popular

Down the road, some employers may turn toward a defined contribution (DC) style benefits plan, according to the report. Employers would offer employees a fixed amount they could use to purchase outside coverage from an insurance company.

“Things are headed in that direction,” said Greening. “They’re headed in that direction on the pension side so it’s logical it’s going to happen eventually on the benefits side.”

Add Comment

  • *
  • *
  • *
  • *