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October 16, 2013
Prepare now for coming benefits cost hikes, studies suggest

Two independent surveys indicate that, while group health, dental and disability costs plateaued from 2011 to 2013, plan sponsors should prepare for a sharp rise in group benefit costs in the coming years.

According to separate surveys conducted by Towers Watson and the Canadian Financial Executives Research Foundation (CFERF) with the support of Morneau Shepell, the combination of changing demographics and the expanded use of biologic and speciality drugs will likely result in a return to double-digit group benefits cost increases within a few years.

In its review of 193 organizations representing more than 875,000 active and retired employees in Canada, the Towers Watson study found that health care spending rose by just 2.1 per cent in 2012, down from 2.7 per cent a year earlier.   Further more, drug spending actually declined by 0.2 per cent from 2011 to 2012 while dental costs increased by only 1.3 per cent.

The loss of patent protection of many common prescription medications resulting in an increased use of less expensive generic drugs and more robust use of drug plan management strategies by plan sponsors have helped to mitigate waste and improve drug plan efficiencies, the human resources consultant says.

However, plan sponsors should not expect today’s stability to continue indefinitely, particularly as the population ages and the use of biologic drugs continues to expand.

According to the Towers Watson report, biologic drugs are used by less than five per cent of the population but already account for 15 to 25 per cent of total drug expenditure.  That percentage is expected to jump to 30 per cent within the next three to five years, it says, adding significant cost pressures to drug plans.

As well, the on-line study of 1,800 organizations conducted in early 2013 by CFERF, entitled Banking on productivity: Managing employee health costs, suggests that demographic trends will have a significant impact on benefits and that only 15 per cent of organizations it surveyed have taken time to plan for the coming wave of cost hikes.

“Canadian financial executives need to be aware of these emerging demographic and health trends that will have a substantial impact on the bottom line of Canadian businesses,” says Michael Conway, the chief executive officer and national president of the Financial Executives Institute of Canada, the parent organization of CFERF.  “In order to address the perfect storm of factors, chief financial officers will have a significant role to play in maintaining employee health benefits while holding the line on costs and, ultimately, improving productivity.  Health benefits costs are rising due to various factors such as the aging of the workforce.  This trend will only increase as new and more expensive drugs arrive on the market.”

The consolidating of employee health care and productivity under one strategy was also recommended by the Towers Watson report.

“To combat expected health care cost increases, employers can broaden their focus and look at how workforce health and productivity strategies might help control the costs of drug, dental and other benefits,” says Towers Watson Canada Health and Group Benefits Leader Wendy Poirier. “While employers have added more prevention and support to their benefits foundation, more work is needed to understand the cost drivers and to implement specific actions to manage both current and future costs.”

Potential cost saving vehicles include mandatory generic drug substitution, drug supply limitations, preferred provider networks, therapeutic substitution strategies and drug formularies, she says.

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