During an economic downturn, employees are more understanding of the need to share the burden. For employers, this recession presents a narrow window of opportunity to implement tough, often long-overdue, but necessary benefit changes. Employers need to ensure the long-term financial sustainability of their benefit programs that support employees in times of need, especially in light of escalating health care costs.

In Asia, however, competition for highly skilled talent is on-going, while economic downturns are cyclical. Employers can still remember the intensified war for talent subsequent to recovering from the Asian financial meltdown, the dot-com crash and SARS epidemic. Given the current financial constraints on compensation that companies have instituted to survive a potentially prolonged downturn, maximum value must be extracted from benefits to ensure that they meet the needs of employees. This will help companies remain the employer of choice once the economy bounces back.

Indeed, cost containment is best viewed as a long-term journey that transcends economic cycles, utilizing a range of short- to longer-term tactics to achieve the greatest return by addressing the primary drivers of health care costs. Immediate cost savings can be generated by benefit cost-sharing which encourages personal ownership for responsible utilization of health care services. Meanwhile, while longer-term interventions reduce program inefficiencies, vendor costs and, more important, address the underlying health risks in employee and dependent populations. So this short window of opportunity presented by the current recession should be used to make decisions that will allow employers to emerge even stronger once the economy recovers on both long-term cost sustainability and competitiveness.

Quick links 

1. Why is it necessary to contain health care costs now?

2. Controlling claims is key to cost containment

3. Benefits design - Best practices and the Flex advantage

4. Benefits delivery

5. Benefits financing

6. Health management

Why is it necessary to contain health care costs now?

Medical cost trends are anything but encouraging. Mercer estimates that premium costs in Asia will double in the next five years. According to the World Health Organization¹, private per capita expenditures on health increased by more than 15% a year between 2000 and 2005 in emerging markets such as Vietnam, New Zealand, Malaysia, Australia, Indonesia and India. In Singapore, which is the regional headquarters for many multinationals, health care spending may rise from a current 4% of GDP to nearly 10%. This would translate to individuals spending 12 to 15% of their income on health care².

In addition, the recession compounds the challenge of managing cost. We continue to experience the usual drivers of health care cost - an aging population, an increase in chronic disease driven by lifestyle changes, expensive new drugs and medical technologies, government health reform shifting costs to the private sector, and rising demand and expectations from the expanding middle class. Economic downturns compound these cost drivers by adding its own unique impact on health care utilization.

Creative health cost containment solutions are needed to combat the seemingly irreconcilable issues of offering meaningful benefits that can help employers retain talent while at the same time trying to control escalating health care costs.

Controlling claims is key to cost containment

Mounting budgetary pressures propel the need for creative cost management, but this idea is easier demanded than delivered. After years of insurance premium rate shopping, companies are finding that it no longer has the same impact. There is also a great deal of money spent on unnecessary diagnostics, prescription drugs and even specialist visits. Therefore, employees must be encouraged to take personal ownership for responsible utilization and spending of health care services typically in the form of:

Some amount of cost shifting gives employees “skin in the game” to think about the value of the benefit or service they are receiving. However, too much cost sharing or continually making benefit cuts at every renewal is not sustainable or strategic. Over time, aggressive cost shifting to employees can make the program uncompetitive and diminish the perceived value of the benefit. Ultimately, the key to long-term cost management comes down to efficiently managing the primary cost drivers of your claims and the health risks within your employee population.

Cost containment solutions typically fall into four categories, which tend to be market-specific:

Benefits design - best practices and the Flex advantage

In our work with clients, Mercer has observed and developed a number of emerging best practices in the categories of benefits design, benefits delivery, benefits financing and health risk management. For example:

Regardless of location, there are keys to successfully designing cost-efficient benefit plans, including:

While these approaches are sound, there is a risk in continually shifting costs onto employees, since it can result in eroding overall benefit value and the employer’s reputation. Thus, less intrusive cost containment tactics should also be considered, as should the needs of specific employee segments. For example, young, single employees have very different needs than older employees with families.

A specific solution that is especially relevant now is flexible benefits, or Flex, which encompasses a menu of benefits and cost-shifting mechanisms. For companies that do not currently offer Flex, its implementation will involve costs, but the investment can pay off significantly in the long term. Flex allows employees to choose the mix of health insurance and other benefits that suit their personal needs while increasing the employer’s control over total benefit spending. The cost-shifting aspect of Flex can reduce employer expenditures as health care costs continue to rise.

Flex lives up to its name by being responsive to the individual needs of employees in dynamically changing or challenging economic conditions. Additional voluntary benefits can be added as part of the Flex program without incurring extra costs, and can include individual insurance programs that can financially protect employees between jobs by allowing them to buy highly discounted insurance for hospitalization, accidents or loss of income. Compassionate employers may consider subsidizing coverage over a period of time to ensure that employees and their families have adequate cover. This approach can help companies retain their reputations as good employers. Flex programs can also include reimbursement of training costs for employees who must learn new skills to prepare for new jobs.

Benefits delivery

Best practices in benefits delivery focus on improving vendor cost, processes, accuracy, timeliness and quality. Employers are evaluating the aspects of program administration that are best done by their own organization, insurers, outsourcing firms, niche vendors or other third parties. Recent examples of employer efforts around Asia include:

Controlling claims and reaping the benefits of improved claims experience require proactive steps on the part of organizations, including a fiscal responsibility to audit insurers, third-party administrators and other claims payers. Employers need to know the kind of quality controls their vendors apply to verifying eligibility, paying the right type of benefit, applying cost sharing accurately and ensuring that the provider has submitted an accurate bill. A best practice to consider is auditing the vendor prior to the “live” date to ensure that the plan is set up accurately, thus avoiding errors at a later time. Employers also need to know that they will get credit for any savings that come from audits or recovering funds that another carrier should have paid. It’s also vital to assess whether your providers will offer rate guarantees, and if it is possible to consolidate vendors for economies of scale.

Benefits financing

Large multi-nationals (MNCs) are turning to multinational pooling networks to reduce premium pricing and provide for dividend refunds from favorable claims experience. Some employers are also reducing their HR and benefits costs by consolidating their insurance with a single broker that negotiates all their regional insurances and provides full outsourcing to handle their employee administration needs. Other financing opportunities include renegotiating vendor and insurance fees, and volume purchasing deals with preferred provider networks for large employee populations.

Health management

Establishing cost-saving health management programs requires some key proactive steps:

1. Companies must obtain demographic and health data so that they can begin to build a health profile for their organizations. These data help employers evaluate what type of high-risk populations and illnesses they have so they can choose appropriate health risk-management interventions that are targeted and not wasteful. Companies also must recognize and address the employee stress issues that are exacerbated by the insecurity and uncertainty of the current financial turmoil. And prevention initiatives should be based on the biometrics of specific employee profiles in order to generate ROI.

Best practices in health management are emerging, as well.

2. Value-added features such as Employee Assistance Plans (EAPs), health portals and Health Risk Assessments (HRAs) can differentiate health plans, serve as attraction/retention tools and help to drive wellness and attendance up and costs down. HRAs allow individuals to assess their own level of health risk by answering questions related to medical/health history, lifestyle, occupational history and biometrics (for example, blood pressure and cholesterol levels). HRAs can be delivered electronically, via telephone or on paper. A best practice would involve having a health professional follow up directly with an individual to provide health coaching or encouraging them to participate in a care management program.

Mercer’s 5-step approach to health cost containment

Ultimately, the success of these cost containment strategies lies in their fit with each individual organization’s benefits, employee health profiles and cost drivers. These elements differ from firm to firm, as an effective solution is not "one size fits all." Mercer recommends the following 5-step approach to prioritizing your program:

Despite the current economic turmoil, longer-term strategic issues should be considered. Sustainable savings and the maintenance of a strong workforce call for a combination of short-, medium- and long-term approaches to health benefit cost containment. By adopting a combination of these approaches and by applying innovations such as Flex, organizations can thrive and not merely survive the economic downturn. Success and sustainability take time to build, so it is never too soon to implement the necessary measures to emerge even stronger once the Asian economy recovers.

Notes

1. World Health Statistics 2008, World Health Organization

2. "Spending on health care bound to go up', the Straits Times, 11 September 2008