Three successful initiatives to contain and optimize benefit costs

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The pervasive labor shortage means that employers need to do more to attract and retain talent. Rewards and benefits will play an increasingly important role as candidates look for employers that are aligned with their values and look after their physical, mental and financial wellbeing.

However, the triple threat of medical inflation, potentially challenging renewal negotiations and economic uncertainty means that cost containment is high up the corporate agenda. With the C-suite taking greater interest in benefit plan costs, the pressure on human resources (HR) teams to show value for money grows.

Despite this, our People Risk Report 2022 research shows that just 42% of HR and risk managers surveyed currently have an effective cost containment strategy that combines plan design, health risk management and insurance placement.

Employers should prioritize multi-year and multi-prong containment strategies that focus on improving employee health while keeping expenditures under control. Cutting coverage to save costs on its own risks a disengaged workforce, increasing the potential for more instances of ill health leading to low productivity, absence, increasing staff turnover and damaged reputation.

A global economy in turmoil – why benefit costs are rising

Our Health Trends Report 2023 research found that medical trend rates have increased beyond what was projected earlier this year at 9.5% for 2022, to 12.7% for 2022 and 12.6% for 2023.

Several factors are driving higher costs. Global inflation is increasing per unit costs for services and supplies. Some regions are also seeing higher utilization patterns due to more people accessing services. Globally, almost two in five (37%) insurers say that medical claims activity is being impacted by higher incidences of chronic conditions due to lifestyle changes, with almost three in five (58%) reporting a higher cost per claim owing to more advanced treatments required as a result of deferred care. Especially in Asia, as cities emerge from hard lockdowns and disrupted care, individuals are again seeking medical treatment of non-emergency and chronic conditions.

Economic uncertainty could make renegotiating premiums and communicating these internally more challenging; HR teams will have to answer tough questions throughout the renewal cycle.

How cost containment can help

Against this economic backdrop, it will be harder to contain costs. At the same time, stripping out benefits to save money may result in key talent moving elsewhere. Those employees who remain will need more help managing physical, mental and even financial wellbeing.

Firms that insufficiently protect their workers will have to address the impacts of poor health and increased stress levels. This could lead to significant costs to the business, including from poor productivity, replacement of top-tier staff and the high insurance premiums that come with health conditions that could have been prevented or managed.

Instead of slashing budgets, employers should focus on cost containment and value for money. This means taking advantage of innovations such as virtual care and the long-term savings that can be gained through creating a culture of healthy living.

Three steps to successful cost containment

At Mercer Marsh Benefits, we believe there are three critical steps that employers should take to help to achieve successful cost containment.

Dealing with poor plan design

Benefits programs need to be cost effective, but they should also support employee health. The first step to achieving this is to examine your plan design and make changes to optimize for value. This means evaluating levers to make sure they’re still fit for purpose.

Where medical inflation is high, deductibles and co-pays need to be increased for plans to work as intended. For example, if a program was designed several years ago, US$10 initially might have been high enough to cover a typical routine expense, but no longer creates a pain point. Generally, we find that it works better to share a percentage, rather than a dollar amount, so that mechanisms continue to work as costs rise (ideally with an out-of-pocket cap to ensure that the employee portion of costs is affordable).

While cost sharing is an important step in containment, it’s important to have checks and balances in place to ensure care is affordable for all employees. This might mean flipping the pyramid so that workers earning lower wages receive the most help.

Employers should consider:

Cost-sharing techniques like deductibles, co-payments and co-insurance
Defined contribution approaches that share costs with employees while broadening choice
The role of individual plans through voluntary insurance
Consider telemedicine as part of your model – use tiered reimbursement levels to encourage employees to seek a telemedicine consultation for non-emergency care before visiting a higher cost care centre
Pre-authorization for higher cost treatments, where lower cost alternatives are proven to be effective for most people. For example, in Canada, the cost impact of new expensive drugs is mitigated by the increased use of biosimilar drugs.
Steering people to high-quality care, such as provided at centers of excellence, to maximize quality and minimize misdiagnoses or complications
Paying providers for bundled treatment packages to ensure they have the incentive to manage complications
Evaluating insurers based on claims management and monitoring provider networks

Focusing on prevention to create a healthier workforce

Creating a culture of health and putting prevention measures in place is the next step to successful cost control.

Our research consistently shows that circulatory, gastrointestinal and respiratory conditions continue to drive the top claims in terms of cost and frequency. However, there are simple steps that employers can take to help people make lifestyle choices that keep such conditions at bay.

Making sure people obtain comprehensive pre-natal maternity care or effectively manage conditions like diabetes or asthma is a way to control short-term costs. Tools to manage risk factors like tobacco or fitness play a greater role in controlling costs later down the line while also enhancing quality of life.

Mental health is a growing area of focus. Providing tools and medical services can help employees manage stress, anxiety and depression, leading to a happier, better engaged and more productive workforce.

A diverse approach to cost containment will be extremely effective in minimizing short- and long-term cost increases. However, creating a culture of health including communications are paramount to the effectiveness of your programs. Personalized communications targeted for certain demographics will boost the extent to which your programs can relieve pressure on costs.

Employers should consider:

Support for people with medical conditions — consider multi-disciplinary and engaging condition management programs to halt or stem progression of disease
Managing high-cost claimants — by optimizing care through for example second opinions and, where possible, getting them back to productive work
Whether employee assistance programs are culturally appropriate, and determine if there are different approaches to maintaining a resilient workforce through a broad suite of mental health programs
Customized communications targeted at different employee groups, for example, encouraging participation in screening programs, and promoting or incentivizing participation in chronic disease management programs
Make health “the norm” within the organization by ensuring worksites foster healthy behaviors, leaders demonstrate their commitment to health and well-being teams leverage new approaches like gamification to bring well-being and social initiatives together

Smart financing and placement

As inflation rises, employers should audit their insurance partners carefully, ensuring that pricing is fair and that terms and conditions are competitive. At renewal, effective negotiations is crucial.

Inefficiency in benefit plans often leads to duplication or gaps in coverage. This can lead to wastage or added costs down the line. Harmonization of providers manages this risk while also helping to reduce frictional administration costs.

Check that potential partners can provide the data you need, allowing you to spot claims trends and react appropriately. Weigh the possible cost advantages of moving to a new insurer against the pain points for workers in new claiming processes. Some benefits, such as life insurance, are easier to move, whereas others could introduce friction to the employee experience.

Getting this right means working with a trusted broker that understands the market and can identify the best products and solutions − and at the right price. This can help you spot emerging risks and look for innovative ways to manage them.

Employers should consider:

Alternative risk transfer approaches, such as self-insurance, profit sharing, centralized underwriting, multinational pooling, use of captives and stop loss
Service level agreements and audits, which often can identify sources of fraud and opportunities for refunds
Simplifying and automating administration, to manage administration costs and improve visibility over program costs
Broking regionally and globally, to enhance governance and potential for savings

Look at solutions that increase value

HR leaders are under more pressure than ever. Our research shows that benefits spend rose during the pandemic but that management scrutiny increased at the same time. While its natural to consider cost cutting as a reaction to medical inflation and tightening economic conditions, this can have dire consequences for firms. Instead, employers should look at solutions that increase value, ensuring that workers are well supported, healthy and engaged.

We are facing a long-term shortage and a competitive market for needed skills; and benefits are a critical tool for retaining and attracting talent. However, that doesn’t have to lead to bloated budgets. Instead, by designing for value, focusing on prevention and driving efficiency, businesses can balance cost and empathy – looking after their employees as well as the business.

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