Managing Cost and Risk in Group Benefits Plans – Considerations for 2024

What does 2024 have in store for the group benefits marketplace in Canada?

Although predicting the future can be a tough call for plan sponsors, health actuaries will never shy away from a good challenge! Here are a few cost drivers to keep in mind when it comes to your group benefits strategy for 2024.

Your best asset is your people, but…

Many organizations are struggling to attract and retain talent. WTW’s 2023 Canadian Benefit Trends Survey found that competition for talent is the top factor (84%) influencing benefit strategy.

Pandemic era layoffs, followed by the “great resignation”, followed by evolving employee expectations changed the availability of talent, and the talent profile of many organizations. Having a solid understanding of your current population, and even more importantly, of your future one, is essential to budgeting your benefits plan costs. Each demographic group will have their own needs, impacting costs and potential strategies differently across your life insurance, disability, health and dental plans.

Supporting employees more and for longer?

With the pandemic mostly behind us, we now know that the widely expected avalanche of health and disability claims did not materialize, though both disability and mental health claims remain elevated. According to WTW’s 2023 Canadian Financial Benchmarks Survey, Long-Term Disability costs increased by 8.8% on average in 2022. This was slightly down from 9.6% for the previous year^[1].

We’ve learned:

1. An increased proportion of mental health related disabilities is here to stay. Depression and anxiety are still the leading mental health diagnosis behind disability claims
2. Disability durations remain at slightly higher than historical levels, likely due to delay of care
3. While some groups experienced increased incidence, recent data suggests that it is not significantly higher than historical values

Location, industry, and job types are all factors that can contribute to incidence rate fluctuation. Tying it back to demographics, age and gender distribution will impact expected durations, as these will influence the types of diagnosis observed in your plan. To accurately project costs and establish budgets, it is essential to apply data-driven insights to inform your decision-making, such as using appropriate assumptions, and to carefully evaluate all strategies that aim to minimize costs.

Frequency over severity

Diabetes and obesity will be two key cost drivers going into 2024.

From 2000 to 2020, prevalence of diabetes more than doubled in Canada^[2]. While the average drug cost of a diabetes patient in a group benefits plan is not disproportionate to other types of drugs, expected increases in diabetes drug costs, equipment and testing supplies, and new diagnoses along with an aging population and comorbidities should be top of mind when projecting your plan costs.

According to the 2020 Canadian Risk Factor Atlas,^[3] 26.7% of the Canadian adult population is obese, while 35.9% is overweight. As newer and more effective anti-obesity drugs gain popularity, including off-label use of diabetes drugs, growing utilization will also impact benefit budgets.

Black swans

We have all heard of once-in-a-lifetime events that trigger dramatic consequences. Recent extreme weather episodes are one example. And as with climatic shocks, it can seem that these formerly rare events are now occurring more frequently. The same can be said of low-frequency but high-cost group benefit plan claims.

One example is specialty drugs. Most new drugs in the pipeline consist of highly specialized medications that can cost anywhere from $10,000 to $3,000,000. WTW’s Canadian Financial Benchmarking Survey indicates that the proportion of specialty drugs continues to increase, rising to 35% of total drug spend in 2022 from 31% in 2020.

Another example is large disability claims. No one is invincible, and unexpected events can occur at any time. Just a small number of significant disability claims can have a material impact on the cost of long-term disability plans.

WTW’s 2023 Canadian Benefit Trends Survey found that managing plan costs is a key area of focus for most employers (59%).

There are a few ways to deal with financial risk:

1. Accept it: Determine your risk tolerance, and if the potential high claims are within reasonable boundaries for your organization, bear that risk. Interestingly, organizations are often risk adverse from a group benefits perspective, but take on significant business risk in other areas.
2. Avoid it: Implement strategies to eliminate or reduce the risk. This could mean applying a maximum benefit (Life, Disability, Health Care where permissible, etc.). However, this may not align with your benefit strategy. Organizations can also proactively manage risk with good governance and a strategy that drives desired behaviours and outcomes.
3. Transfer it: Shift the burden of risk to someone else. There are many types of pooling arrangements for various benefits. A cost-benefit review of different alternatives should be performed.

Plan sponsors will continue to face challenges and competing priorities in 2024. As you reflect on your priorities for 2024, a few elements are key to a successful strategy:

1. Apply data-driven insights to inform decision-making and measure outcomes
2. Optimize employee experience, including targeted communication and wellbeing initiatives that drive desired behaviours and impact utilization of benefits
3. Implement cost containment strategies to mitigate cost increases where you can
4. Where there are no levers to be actioned, a thoughtful risk analysis is key to optimize pooling arrangements

In the end, providing the right level of coverage for all employees while ensuring long-term sustainability, will continue to remain a balancing act. By taking steps to manage risk, however, plan sponsors can tip the balance in their favour.

Footnotes

1. WTW 2023 Canadian Financial Benchmarking Survey Return to article undo
2. Canadian Chronic Disease Surveillance System (CCDSS) Return to article undo
3. Canadian Risk Factor Atlas (CRFA) Return to article undo

Author

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Frederick Henes

Advisor in group insurance plans | Canadian Health and Benefits actuarial growth and innovation leader

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