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Tackling The CAP Guidelines And Healthcare Costs

By: Joe Hornyak

The CAP Guidelines and rising healthcare costs continue to dominate the attention of group insurers, according to Benefits and Pensions Monitor’s ‘2005 Group Insurance Report.’ This year, the report talks to industry experts from across the country about the challenges facing both the group life and health and group retirement areas.

In 2004, our group insurance industry experts cited healthcare costs and the CAP Guidelines as the dominant issues. On the group life and health side, Mike Sampson, of Great West Life Assurance Company, suggested we may have reached the top of the cycle of increasing healthcare costs and may even have been in the early stages of a slightly downward cycle. In fact, his prediction appears to be correct as a Watson Wyatt Worldwide survey found employer healthcare costs in the U.S. are up 10 per cent this year, a decline from the 12 per cent increase in 2004 and a long way from the 18 per cent in 2002.

Despite this, employers are still looking for ways to control healthcare costs, say Tenny Carter, vice-president of corporate development for Saskatchewan Blue Cross Companies, and Markus Mueller, actuarial associate for group product development at Equitable Life of Canada, in this year’s Benefits and Pensions Monitor ‘2005 Group Insurance Report.’

Group Retirement Services
On the group retirement side, with a December 31, 2005, deadline looming for compliance to the Joint Forum of Financial Regulators’ Capital Accumulation Plan Guidelines, it’s not surprising that the CAP Guidelines are still front and centre. However, one of the dilemmas is that the amount of attention being paid to the guidelines is becoming a function of the size of the company, says Barry Shea, vicepresident, group retirement services distribution, at Group Retirement Services – Great West London Life – Canada Life.

Granted, in many ways, it only makes sense that the larger the company, the more focused it is on this issue. A large company may have one person to just look after the pension program. They would be totally focused on that. “However, the 50-life group down the street,” he says, “may only have one person looking after the pension, the life, health, payroll, HR, and everything else.” So the CAP Guidelines don’t get the same attention.

Shea says, for the most part, plan sponsors do understand what’s being asked of them in terms of the CAP Guidelines. If they do not, the providers and consultants are doing a good job of spreading the word. “The ones that really have a handle on this thing understand that it really isn’t a whole lot different. Some of the things they did before were in compliance, but maybe they didn’t document them. So it may be something as simple as defining, in writing, why they have that GRSP.”

Andree Charest, vice-president, sales – group savings and retirement, at Standard Life Assurance Company says, however, that plan sponsors are concerned about what they see as the heavy fiduciary obligations being placed on them by the guidelines. Because of this, she says all sponsors need to pay more attention to managing the expectations of their plan members. Indeed, this is “the biggest issue we’re seeing,” says Charest. “Plan sponsors should really be managing plan participant expectations because the biggest risk right now is for the employees to expect something from the plan that is not in line with the intention of the plan sponsor.”

And, the reality is that, in many cases, employees may expect their pension plan to replace up to 70 per cent of their income at retirement, not appreciating that an employer pension plan is only one part – along with the Canada Pension Plan and personal retirement savings – of what they’ll need for retirement.

Charest suggests there are any number of reasons for this misconception. For example, they may expect that the retirement income they will receive will be comparable to what civil servants receive, failing to realize that most civil servants not only belong to DB plans, but that they contribute a lot towards their retirement during their entire career. Some are putting eight, nine, or 10 per cent of their salary into retirement savings. And therein lies the real dilemma for DC plan sponsors. A big part of managing expectations is making members understand that they too have a responsibility to save for retirement.

Plus, they must understand the more money they make, the more they’ll probably want in retirement. “If someone makes $20,000 a year, the government more or less takes care of replacing the income they will need to keep the same standard of living at retirement. But if an employee makes a lot more than that, they need to set aside more personal savings,” says Charest. It’s a tall order as many people don’t really understand their savings and how they can optimize their returns. They don’t understand the consequences of making the wrong investment choices. That is why managing expectations, by clearly communicating to members how much they will have at retirement based on their current saving patterns, is a big issue.

“Frankly, we survey employees and have found out that the old cliché is true, you spend more time preparing for your summer vacation than planning for your retirement. As an industry, we need to help people understand what they need to do to get where they want to go because this is going to be the longest vacation of their lives.” Finally, as Shea notes, “the guidelines are taking us down some paths that we wouldn’t normally travel. But, anybody who doesn’t think that this is a serious issue should shake their head because the first time there is a legal battle between an employee, or group of employees, and an employer, the judge is just going to look for the standard of care. The only thing we have for a standard of care is these CAP Guidelines.”

Group Life & Health
Despite indications that healthcare cost increases are slowing, sensitivity to cost is still the key issue, say Tenny Carter, vicepresident of corporate development at Saskatchewan Blue Cross; and Markus Mueller, actuarial associate for group product development at Equitable Life of Canada. Unfortunately, says Carter, the price hikes are due to utilization and inflation and this “is a difficult sell sometimes because people don’t always understand what really drives the increase in costs.” While continual education is necessary to demonstrate that these are the reasons why these costs are going up, it may also create a need for additional, and more complex, reporting to make people aware of these trends, she says, as “we don’t see any softening of that. We just see it as an ongoing issue.”

To help control costs, sponsors are looking at various alternatives. Some may just be looking for advice on redesign of plan. This, however, can be difficult because it’s always hard to “take away benefits that you’ve given to employees in the past.” Others want more creative plan design and are talking about going away from a risk-based environment to a health spending account and capping it. “We’re seeing a little more interest in health spending accounts than we ever have in the past,” says Carter.

Mueller, too, is seeing a trend towards healthcare spending accounts. However, sponsors are asking for unique options such as, for example, allowing funding levels that aren’t used to be transferred into an RRSP. Generally, employees are receptive to the concept of health spending accounts. However, there is some education involved because problems can arise if the employee runs out of money. The difficulty is educating the employees to use them appropriately.

“The interesting thing is if everyone went to a healthcare spending account, I would suspect you would actually see healthcare costs come down just because there aren’t the dollars out there to pay them all. You’d have X amount of dollars, but that has to be distributed to the dentist, the chiropractor, the physiotherapist, and everybody else.” Long-term disability is another area where sponsors are taking steps to control costs. “Basically with LTD, the focus now is getting people back to work. Sponsors are starting to understand how expensive it is to keep somebody on disability,” says Mueller.

tying small critical illness packages to their LTD. “Usually, it’s for, say, $2,500 or $5,000, maybe tied to three or four major diseases such as cancer, heart attack, and stroke,” says Mueller. Some carriers are offering multiple tiers of CIs so “if you want the platinum edition of the plan, then you might cover 10 things.” Beyond plan design, Carter is also seeing an interesting offshoot of the mergers and acquisitions that have taken place in the industry.

“We’re seeing a lot more quotations than we ever have. I think that’s strictly as a result of there being fewer players to approach to put on your spreadsheet. You have to have a comparative if you’re trying to do a market survey or a study.” As a result, it is getting harder and harder to get a broad spectrum. At the same time, “we’re seeing small providers who are, all of a sudden, coming out of the woodwork. They’re becoming extremely competitive in certain group sizes. “We’re seeing a lot more players in certain market segments, not necessarily in the larger segments, but certainly in the smaller ones.”

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