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Benefits and Pensions MonitorTrends in Healthcare Costs And What Employers Can DoBy: Larry Jackson Since 2002, there has been a steady decline in the rate of total cost increases for prescription drugs and medical plans. Still, employers are wrestling with the high cost of keeping their workforce healthy. Larry Jackson, of ACS HR Solutions, looks at what is happening and what employers can do. Healthcare costs continue to be the fastest growing component of compensation, making healthcare cost increases a primary concern for employers offering group benefit plans. To investigate and analyze trends in Canadian healthcare, ACS HR Solutions conducts an annual survey of the trend factors used by major Canadian group insurers and Blue Cross agencies. The sixth annual ʻCanadian Health Care Trend Surveyʼ identifies the trend factors that group insurers are currently using to project employersʼ healthcare plan costs, according to type of coverage – prescription drugs, medical, hospital, and dental. In general, the trend factors provide for increases resulting from:
Weʼve compared these factors to the factors provided in previous surveys to give you a sense of how theyʼve changed over the years.
What We Found When all of the components of the health plan are blended based on an expected spend of 65 per cent drugs, 20 per cent medical, 10 per cent hospital, and five per cent vision care, the trend has stayed relatively flat compared to last year. However, the overall trend has declined each year since 2002, using the same blend of health plan components. Based on the survey results, weʼve seen a steady decline in the rate of total cost increases for prescription drugs and medical plans since 2002, while the total cost increase for hospital care has remained relatively flat. Weʼve noted a similar trend with dental plans, where the trend has declined slightly this year, but has remained relatively constant over the past five years. The fees presented in the dental fee guides published by the provincial dental associations have risen more this year than in past years, particularly in Ontario, Quebec, and Newfoundland & Labrador. Prescription drugs represent the largest portion of employer healthcare costs. Some of the reasons for the recent decline in the trend for drugs include:
Why Employers Should Be Concerned Despite the recent decline in healthcare trends, healthcare costs continue to be the fastest growing component of compensation. Salaries represent the largest component of overall compensation. Assuming that wage increases average between 2.5 and three per cent per year and that health costs continue to grow at the rate projected for 2006, the proportion of total compensation represented by healthcare costs will increase by approximately 40 per cent by 2010 and more than double by 2015. According to the Organization for Economic Co-operation and Development (OECD), if the current model remains unchanged, total public health and long-term care expenditure in Canada is projected to double as a percentage of Gross Domestic Product (GDP) by 2050, from 7.3 per cent to 13.5 per cent. Even if cost containment features are implemented, expenditures will grow by almost 50 per cent to 10.8 per cent of GDP. When it comes to prescription drugs, employers should expect increased costs over the next five to 10 years due to a number of reasons. As the baby boomers age, the incidence of chronic diseases such as diabetes, cardiovascular disease, and hypertension will increase. The Canadian Diabetes Association (CDA) says that the number of Canadians afflicted with diabetes will increase by 50 per cent by 2010. It is calling for a catastrophic drug plan to help Canadians cope with the disease. They estimate that diabetes currently costs the healthcare system $13.2 billion annually. A June poll of CDA members found that 46 per cent pay out-of-pocket expenses of $50 to $200 per month, and 28 per cent pay more than $200 per month. The emerging field of bio-technology drugs is leading to more effective, but also much more expensive treatment options. For example, Xolair was approved last year for treatment of allergy symptoms in patients 12 years and older that do not respond to inhaled steroid treatment. Annual treatment cost varies from $8,000 to $31,000. Some bio-tech drugs cost as much as $250,000 to $300,000 annually. Due to the complex process required to manufacture genetically- engineered proteins from living cells, itʼs not likely that significantly lowerpriced generics will be available once the patents for these bio-tech drugs expire. Fortunately, the incidence of the diseases that these drugs treat is extremely low. The World Health Organization is encouraging countries around the world to prepare for an influenza pandemic. Experts agree that itʼs not a question of if it will happen, but when. When it does occur, itʼs estimated that as much as 35 per cent to 40 per cent of the worldʼs workforce could be affected within a matter of weeks. The health costs associated with a flu pandemic will pale by comparison to the financial impact on businesses if theyʼre not prepared to handle such an emergency. In the U.S., employers are more worried about healthcare costs than any other business costs. Many employers see the biggest impact on healthcare costs coming from employee perceptions, including:
What Employers Can Do Employers can use a number of strategies to manage pharmacy benefit costs. These strategies include making greater use of generic drugs; having employees participate in health risk assessments and the wellness programs which result; moving to a system of co-insurance instead of co-pays; and linking drug data with other medical and disability claims. On the horizon, we may see employers converting from Defined Benefit to Defined Contribution plans with high deductibles or opting for healthcare spending accounts. These are known as Consumer Driven Health Care in the United States and they are growing in popularity. However, existing tax legislation in Canada relating to healthcare spending accounts limits the amount of non-traditional Defined Contribution benefits that employers can provide. Perhaps this area of legislation needs to be revisited. In addition, promoting healthy lifestyles through wellness programs and health club and fitness discounts or memberships could help reduce not only healthcare costs, but absenteeism and disability costs. Although the baby boomers may be less affected by these initiatives, the good news for plan sponsors that donʼt provide retiree benefits is that the retiring boomers will eventually be replaced by a younger generation that will incur lower costs. Where Do We Go From Here? Even with the stabilizing of the increases, healthcare cost trends continue to increase at a greater rate than any other business costs. Despite all of the cost containment changes that have been implemented, the multi-year rises in healthcare costs continue to put pressure on organizations. Itʼs time to look for long-term strategies to manage these costs. Itʼs clear that while employers can reduce costs for health benefits, long-term savings depend on focusing on appropriate utilization of services and reducing unnecessary costs associated with poor employee health outcomes. After many years of tactical changes to employer plans, including benefit design changes and shifting costs to employees, employers are starting to focus more on strategic initiatives relating to employee wellness, education, and health promotion. Some of these initiatives include:
Employers that are aggressively managing employee wellness in general will enjoy the opportunity to realize a competitive advantage by:
A growing body of evidence supports the position that modifying employee attitudes, knowledge, and skills can help achieve individual and organizational change to manage healthcare cost increases more effectively. How can you go about this? Employers need to ensure that they are:
Organizations that successfully implement long-term strategic solutions will not only enjoy lower rates of increase to healthcare costs, but will also benefit from healthier employees that value the support provided. Theyʼll also potentially benefit from increased productivity, reduced absence and disability, and stronger employee engagement in the company. All of these outcomes lead not only to healthy employees, but to a healthier organization on the whole. Larry Jackson is a senior benefits consultant at ACS HR Solutions. |
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