In a bid to contain benefit costs, a shift in employer mindset may be on the horizon
Deductibles could be making a comeback
Late last month, management consultant firm William M. Mercer released its Fearless Forecast for 2001. Specialists on some of HR’s most pressing issues made a number of predictions for the year ahead.
If employers don’t act soon to control escalating benefit costs, within five years they could find themselves paying double what they are now.
“For many employers, health costs are increasing at a faster rate than all other benefits. Expect a 15 per-cent increase in 2001,” said Maureen Premdas, of Mercer’s health care and group benefits consulting group.
As for the additional $21 billion government dollars slated to return to the health-care system — don’t expect that to defray any of the costs of your current health-care benefit program. Much of the that money will be likely be used to hire more nurses, doctors, develop home care and new technologies. It is unlikely any of it will go toward covering new drugs or expanding services currently provided, she said.
If anything employers should be taking action now to clearly define what their benefit plans will cover. It is often the case now that anytime the government delists something it automatically falls to the employer. “Changing the focus to defining what is covered by the private plan puts plan sponsors in the driver’s seat if, and as, future government cost shifting occurs.”
Another solution to escalating benefit costs may be to revisit not only what employees are offered but the notion that the benefit is covered from the first dollar spent.
Given that one of the key components of rising costs is drugs, employers should revisit their own philosophy for drug coverage, including what drugs they should offer, she said. The introduction of new drugs has been the main driver of increasing health-care costs. Between 1991 and 1998, 83 new drugs were introduced to the Canadian market but in 1999 that number jumped 33 per cent to 111.
New drugs like Enbrel which is used to treat rheumatoid arthritis is expected to be approved for sale in Canada in March. The treatment is expected to cost about $17,000 per person per year. The human genome project will result in the development of new drugs both for treatment and prevention and will almost certainly spell higher drug costs.
“There are some tough decision that are going to have to be made down the line just because of the new drugs that will be coming,” said Premdas. They will have to consider not only what it means to employees but look at the benefits covering certain drugs may have for the business. Employers may want to consider not providing full coverage for some of the new drugs or introduce some limits like some have done with drugs like Viagra.
“I’m not suggesting that the employers should not cover it,” she said, they just have to consider the value of providing first-dollar coverage.
“Enbrel is doing wonders for people with arthritis,” she said. It’s making them feel much better. When a drug is that effective, it means people will be away from work less thereby offsetting at least some of the cost of covering the new drug. That has to be taken into account.
A move to reconsider drug coverage will likely only be one indication of a larger shift in mindset among employers away from giving employees complete coverage right from the first dollar spent. On average, 20 per cent of employees account for more than 60 per cent of health and dental plan costs. While most employees expect first dollar coverage, they don’t necessarily need it or appreciate it. The deductible will be making a comeback, she said. “Replacing first dollar coverage with a deductible of $250, $500 or even $1,000 frees up money while still providing catastrophic coverage,” she said. While employees may not like the sound of that, the saved funds could instead be used to establish health spending accounts, benefiting more employees and offering more flexibility.
The cost of dental plan coverage will also be going up in 2001. Premdas expects increases to be in the range of seven to nine per cent. That is higher than companies were used to in the early to mid ’90s and is unlikely to drop anytime soon.
Part of the increase is due to escalating fee guides. In Ontario for example, the Ontario Dental Association has called for four per cent increases each year for five years starting in 2002. While fee increases account for part of the extra cost for employers the remainder is less explainable. Apparently, there has been an increase both in the number of visits and the use of more expensive procedures. Which is curious, said Premdas, since younger people don’t have the same amount of tooth decay as was the case 20 years ago.
Employers will also be putting greater emphasis on recovery and return-to-work strategies in 2001 to reduce the costs of disability and employee absences. The median cost of absences now runs at about 3.5 per cent of payroll.
Compensation
While controlling the costs of benefit programs will be front and centre for employers this year, using benefits as an attraction and retention tool in a tight labour market will also be an issue. The Conference Board of Canada expects demand for workers to increase by 1.2 per cent while supply will only go up by 0.5 per cent per year, which will also influence compensation strategies.
While innovative pay structures are all the talk, many organizations continue to use traditional methods to compensate employees, said Jackie Goldman of Mercer’s communications practice. Companies have moved away from broad banding that was all the rage a few years back — too tough to administer, said Goldman — but organizations with 12 to 15 grade levels with a spread of 80 to 120 per cent is still common. But in order to fight the war for talent there is greater degree of flexibility being introduced into compensation plans. For the sake of simplicity, businesses are tying base salaries to market levels, reviewing them every year or so — depending on volatility in that employee market — and then using variable pay programs to differentiate on the basis of individual performance.
Long-term incentive plans like stock options will still be used to reward good organizational performance. Mostly for executive staff, though more senior staff are being given the opportunity.
However short-term incentive plans will more likely be used to reward employees for results over which they have some control, leading to more differentiation among employees. “It will also create a tougher environment where managers and employees must learn to tolerate large pay differences across lines of business within an organization,” said Goldman.
