Cost Containment: Flexible Solutions
By: Wendy Howe & John Tompkins
With employers everywhere wrestling with the rising cost of healthcare benefits, some are finding that flexible solutions can provide some relief. Wendy Howe, of IBM Canada, and John Tompkins, of Hewitt Associates, look at how this solution worked for IBM.
With healthcare costs rising at an ever-increasing rate, employers are compelled to consider options to keep these expenditures in check. At the same time, they are concerned with keeping their benefit plans competitive.
For many organizations, attraction and retention are a challenge now – one that will likely only grow as baby boomers become eligible for retirement. They cannot afford to put employee satisfaction at risk.
Are the two objectives of containing benefit costs and meeting employee needs as mutually exclusive as they sound?
IBM Canada would argue to the contrary. Its experience demonstrates a solution that not only contains healthcare costs, but also empowers employees to make the right healthcare decisions for themselves.
Just how much have healthcare costs gone up? Chart 1 tracks the increase in medical and dental benefits as compared to the Consumer Price Index over a 14-year span.
Dental costs have increased more than twice as much as inflation over this period, while medical costs were more than 350 per cent higher than the CPI by 2003. Reason and logic – and plenty of research – would suggest that healthcare cost increases are only going to continue to escalate.
An employer has various alternatives to contain benefit cost increases. Imagine the options along a spectrum. At one end, companies can do nothing and absorb all cost increases themselves. At the opposite extreme, organizations can provide nothing and thereby eliminate cost increases.
The challenge, of course, is that as employer liability for increases in healthcare costs lessens, there is often a corresponding decline in employee satisfaction.
One way to balance these two competing interests is a flexible benefits plan. How does a flexible benefits plan help contain benefit cost increases?
Contrary to perception, the cost savings are typically not generated by employers expecting employees to bear part of the burden.
Rather, the primary advantage of flexible benefit plans as a cost containment measure is the fact it allows employers to set in place a more clearly defined mechanism for controlling costs over the long term. In a traditional benefits program, benefit cost increases can certainly be managed, but generally only by cutting back benefits or passing along higher costs to employees – neither a very good option in terms of employee satisfaction. A flexible benefits plan introduces a third option – allowing employees to trade off among coverages.
In IBM’s case, its successful flexible benefits program has been in place for 10 years. Based on employee feedback and ongoing analysis of the plan’s competitiveness, IBM has continued to make changes with the mandate of exploring ways to maintain the balance between containing costs and employee satisfaction within the ‘flex’ framework.
Start With Philosophy
IBM’s starting point for addressing the cost containment issue was for the company to back up and think ‘big picture’ by determining its philosophy towards employee benefits. IBM concluded it would maintain its original approach of cost sharing. As costs rose, IBM and its employees would share the increase.
In addition, both sides would be responsible for trying to keep increases to a minimum – IBM through its purchasing decisions and employees by becoming educated consumers of healthcare products and services.
Even with this well-defined strategy, IBM knew it faced challenges in containing healthcare costs, some of which were beyond its control. These concerns included:
- The delisting of provincially- covered products and services, along with employees’ expectation that IBM would pick up items that were no longer covered under provincial plans.
- The trend toward increased consumption of healthcare services along with the high price tag of some new drugs. Even if employee usage remained constant, containing costs would be a struggle, so increased usage could make the task impossible.
- It takes time to change employees’ entitlement mentality. Employees have long memories when it comes to the benefits they’ve had in the past.
- Changing demographics would likely result in an older workforce, probably with increased healthcare needs.
Plans Go Into Effect
Despite these potential obstacles, IBM was not dissuaded from implementing a healthcare cost containment plan. Keeping its cost-sharing philosophy in mind, it developed specific objectives for the plan:
- provide employees with flexibility and choice
- change employee behaviour by promoting employee ownership, involvement, and joint responsibility
- utilize technology to provide self-service, convenience, and cost management
To accomplish these goals, IBM implemented certain measures. To help employees become better consumers of healthcare products and services, IBM educated them about healthcare costs. In addition, employees became responsible for pharmacy dispensing fees. This fee became the actual deductible so if employees wanted to save their own money, they were motivated to find pharmacies with the lowest dispensing fees. Prior to this, there was limited awareness of the variances in dispensing fees.
To control costs, IBM introduced a drug card with a formulary. This move was a value-added convenience for employees as they no longer had to pay upfront for prescriptions out of their own pockets. The drug card also allowed IBM to monitor pharmacy ingredient mark-ups. In addition, the formulary introduced a two-tier reimbursement system for drugs.
The end result was employees were empowered to make their own decisions regarding their healthcare choices – and the attendant costs – without IBM imposing its preferences. Employees became partners in the move to control healthcare costs.
IBM achieved further cost control success by fully utilizing technology to attain operational efficiency. Online self-service tools were introduced, providing additional convenience for employees. These tools included:
- Direct Deposit – IBM saves on postage and employees save time by having claim cheques deposited directly into their bank accounts
- Online Explanation of Benefits Documents – IBM saves paper and mailing costs, while employees have the convenience of readily accessible information
- Paper Drug Card – Employees are able to print off another copy of their drug card if they lose it or it wears out and IBM doesn’t have to cover the cost of plastic cards.
- e-Claims –Submitting claims electronically rather than on paper saves time, paper and postage. IBM also offered online benefits enrollment, along with the convenience of inyear changes, and online access to information provided by IBM’s carrier, its outsourcing partner, and IBM itself. This creates one-stop convenience for all the benefits information employees need.
There is no doubt transitioning to a model where costs are shared with employees is difficult and won’t happen overnight. It takes some time and effort before employees will lessen their entitlement mentality. However, this attitude is bound to change eventually.
IBM also found some of the measures it adopted earlier were too aggressive – items like a two-year lag in the dental fee schedule and a modified co-ordination of benefits (COB) restriction. In fact, it had to back off on these features and retreat to what others continued to do in order to maintain its competitive position. That experience convinced IBM to let others lead in some areas and take advantage of their learnings. IBM introduced a drug card after this practice was more well-established and, instead of reducing COB, implemented a 20 per cent top-up plan, with 100 per cent reimbursement still available as an option.
What has been successful is IBM’s integrated healthcare strategy. IBM is now offering additional flex credits for employees who demonstrate a healthy lifestyle and record their physical activity using an online tracking tool. In addition, the employee assistance program includes preventive care and wellness services such as nutritional counselling and online health risk assessment tools. Moreover, there is a differentiation of life insurance rates after only $10,000 for smokers and non-smokers.
The result of IBM’s efforts is that employees continue to grow their knowledge about the cost aspects, the action they need to take, and the ‘what’s in it for me’ factor. More are becoming responsible healthcare consumers.
Wendy Howe is manager, employee benefits and global well-being services, at IBM Canada. John Tompkins is a senior benefits consultant in Hewitt Associates’ Toronto office.
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