Canadian Health Care Trend Survey Results 2016

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As we do every year, we asked the major Canadian group insurance carriers to provide the annual inflation factors they are using to project health and dental claim costs for the upcoming year in the pricing of their premium rates. We then compared these factors to those provided in our previous surveys in order to get a sense of the long-term health care pricing trends for group insurance plans.

The insurers provided us with inflation factors for each type of coverage: prescription drugs, medical, hospital and dental care. The factors account for the insurer’s expected increases in claims resulting from the following:• Cost inflation• Increases in utilization of services• New services and products entering the market• Legislative changes• Changes in the mix of services• Shifting costs from the public to the private sector

Continuing with last year’s slight increase in inflation factors for all of components of health care, this year the overall trend in cost increases again showed a slight increase. Looking at all of the health care components on a blended basis, insurers are using an average trend factor 11.81%, up from 11.69% last year.

With prescription drug costs representing the majority of private payer health spend, they have the greatest influence on employer benefit cost trends. Insurer’s inflation factors for prescription drugs demonstrate an increase from 11.57% in 2015 to 12.09% for 2016.

Hospital inflation factors have been consistently on the upswing from 2011 to 2014, however beginning in 2015, there was a drop in the magnitude of the increase. The decrease continued again in 2016 with the insurer trend reducing from 9.70% in 2015 to 7.41%.

Expected utilization trend of dental services has decreased slightly from 5.93% in 2015 to 5.86% this year.

Dental cost inflation varies across the country as each province publishes its own fee guide. Our composite fee guide factor shows a slight increase in the fee guide factor compared to each of the last four years. With the rate of utilization slightly decreasing and the increase of dental cost inflation, there was a small anticipated net increase in total dental trend, from 8.02% in 2015 to 8.32% in 2016.

Consistent Results Across Most of The BoardOur 2016 Health Care Trend Survey demonstrates that drug, health and dental cost trend factors have remained consistent with the results from 2015.

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ConsiderationsTypically in benefits, we use the past to determine the future. However, we are at an amazingly unique time in history where scientific advances are curing some previously terminal diseases and making others into manageable chronic illnesses. These advances come at a cost. In the coming years, we will see the increased use of high cost specialty drugs in the marketplace. These include drugs for cancer treatment and drugs for some rare diseases, such as cystic fibrosis. Insurers are leading us to believe that the increase in pooled claims for the coming year could be 20%. Currently Canada has a patchwork of government sponsored drug plans that alleviate the cost of specialty drugs. Will these plans continue? Will they expand to cover all provinces and more drugs? These are questions we cannot answer. We do recommend employers have a benefit strategy that addresses affordability and risk, for both the corporation and the employee. Many plans cover even the most incidental cost for employees. Are claims for affordable services and supplies diverting funds that could save a life? Alternatively, if the benefit plan is a component of compensation, should drugs that cost $500,000/year be covered? These are questions each plan sponsor must address.

There are a couple of trend drivers to consider when setting strategy and planning for the future.

Technology

Technology is advancing at a rapid pace and changing our daily lives. On the health side, technology means not only new drugs, but new ways to administer and monitor treatment. Previously invasive testing can be done with cameras that are swallowed like pills. The internet of things means pill bottles can be monitored to ensure compliance and caregivers can be automatically updated when the routine is disrupted. Genome mapping can help determine the best course of treatment for certain cancers, some mental illnesses and even high cholesterol. Continuous glucose monitors can keep caregivers informed of the blood sugar of a family member or patient 24/7. How this will impact plans is currently unclear. Early detection of illness and improved treatment plan compliance should reduce overall benefit plan costs when we factor in the cost of employee absence. However, the enhancements technology can provide are not free. We may see some health plans expanding to cover the cost where better outcomes are a benefit to the plan. We may see insurers mandating genetic testing as a component of prior authorization for certain drugs. We may spend more time reviewing the cost of absenteeism and presenteeism for data to validate the use of new technology. We believe there will be future benefits from technology that will help to offset the cost.

Employers should have a benefit strategy that address affordability and risk for both the corporation and the employee.

Technology is bringing us amazing treatments and tools that will ultimately provide a benefit that outweighs the cost.

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Millennials/Multigenerational Workplace

The next generation is already in the workforce. As this group will soon overtake the baby boomers as the largest cohort in the workplace, benefit plans will need to evolve to reflect their needs. This generation is delaying parenthood, so they do not have the same needs for coverage to protect their families as in the past. However, their needs will also change. In the current market, employers are limited in the options they can provide for this generation. The typical employer benefit plan requires participation of all eligible employees in order to prevent anti-selection; that is people coming into the plan when they need it and leaving the plan when it is not required. Anti-selection drives up plan costs, as only people who are confident they will claim elect coverage. As a result, insurers require evidence of insurability for participants who join the plan late and for certain coverages under small group plans. Evidence of insurability protects insurers from risk and may exclude employees from obtaining coverage. If benefit plans are to remain a tool for attraction and retention as the labour market shrinks, plans will need to evolve to address the need, or perceived need, of the new generation of employees.

All employees in the multigenerational workplace do not value the benefit plan in the same way. The marketplace is limiting employers’ alternatives.

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Health CareInsurers are projecting higher increases in Health Care claims than in any of the previous four years, as shown in the table below.

Overall Blended Health Care Trend (non-blended rates only)

2012 11.67%

2013 11.79%

2014 11.56%

2015 11.70%

2016 11.81%

Where insurers did not provide a blended health care factor; this was calculated using a breakdown of 70% for drugs, 25% medical (including vision) and 5% hospital.

While the trend factor used by insurers to project Health costs has remained relatively stable over the past five years, we note the steady escalation over the past three years and the projection for 2016 is the highest. It is also important to recognize the impact of increases of this magnitude compounding year over year. Additional commentary follows by component.

Health Trend Factors by ComponentThree insurers provided trend factors for each of the health components separately versus using one trend factor for all components of health care. This provides an opportunity for a deeper analysis of the utilization of plans and cost drivers in the marketplace. This table shows the factors, broken down by component for those insurers who provided the breakdown.

Coverage Average Annual Total Trend

Prescription Drugs

2012 12.11%

2013 11.69%

2014 10.64%

2015 11.57%

2016 12.09%

Medical Services and Supplies

2012 11.14%

2013 13.18%

2014 13.68%

2015 12.94%

2016 12.62%

Hospital

2012 8.41%

2013 9.73%

2014 11.24%

2015 9.70%

2016 7.41%

Survey Results

11.67%

11.79%

11.56%

11.70%

11.81%

12.11%

11.69%

10.64%

11.57%

12.09%

11.14%

13.18%

13.68%

12.94%

12.62%

8.41%

9.73%

11.24%

9.70%

7.41%

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-3.0%

2.0%

7.0%

12.0%

2012 2013 2014 2015 2016

InsurersTELUS

12.11%

-1.94%

11.69%

-0.94%

10.64%

1.95%

11.57%

3.55%

12.09%

Prescription Drugs

The trend for Prescription Drugs no longer reflects adjustments for the generic price reforms or the patent cliff that we saw as the block-buster drugs such as Lipitor came off patent. Instead, insurers are focused on the increased usage of drugs and the new high cost treatments coming into the market. The chart highlights the insurer projected trend for prescription drugs since 2012 compared to the actual increase in the cost of drug claims reported for each year by TELUS Health. TELUS adjudicates the pay-direct drug claims for several of the largest insurers in Canada.

Insurers are anticipating higher increases in the cost of drugs in 2016 than in 2015. This is the only component with a higher trend factor than last year. There are several new expensive drugs reaching the market that insurers expect will target a larger population than high cost drugs of the past. This includes recently introduced drugs for the treatment of high cholesterol and severe asthma. The recently released drug trends from TELUS suggests that the utilization of the high cost drugs for the treatment of Hepatitis C is on the decline, as it was a single course of treatment that cured the condition. There are other drugs in development which will provide important treatment with a high cost for drug plans.

Ongoing plan management is key to sustainable drug plans. Mandatory generic substitution, prior authorization and employee co-payments can have a favourable impact on escalating drug costs. Several insurers are focused on initiatives to eliminate waste and improve compliance in an attempt to help plan sponsors maximize their return on investment. At this time, there are few statistics to indicate these initiatives have been successful. As, historically, there is limited cross analysis between medical treatment and absence/disability, these benefits may never be fully quantified.

Medical Services and Supplies(Excluding Prescription Drugs)

The expected inflation has decreased again from its high in 2014, although it has the highest trend factor of the three components of Health Care. Claims experience under most plans indicates increasing utilization under many of the catergories under services and supplies. A recent claims study by Green Shield indicates rapid escalation of utilization of paramedical services by young employees and by dependent children. The study went on to determine that most paramedical services did not have a favourable impact on the drug claims of the individual.

Many of the covered services and supplies include an annual limit that restrains the inflation. While costs may be rising for a service such as physiotherapy treatment, the annual limit holds. This may result in the plan member receiving less treatment for the same cost to the plan, controlling the plan cost increases but shifting the cost to employees, potentially undermining the value of the benefit. In the typical benefit plan, medical services and supplies account for significantly less of the total plan cost than drugs.

Insurers expect new high cost drugs to target larger populations.

Note: Telus data is “actual”, therefore only 2015 is available at the time of publication.

Prescription Drugs (Non-Blended Rates)

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Hospital

Hospital trend expected by insurers decreased again this year from its 5-year peak in 2014. With the shift toward outpatient care, shorter hospital stays for routine procedures, the use of drug therapy administered outside the hospital and hospital overcrowding, utilization may be falling slightly. Hospital claims account for a small portion of costs in the typical benefit plan.

2012 2013 2014 2015 2016

8.0%

9.0%

7.0%

10.0%

11.0%

8.41%

9.73%

11.24%

9.70%

7.41%

Hospital (Non-Blended Rates)

The pooling threshold should reflect the policyholder’s tolerance for risk of unexpected high claims.

Insurer Cost Shift

Recognizing the risk of new high cost drugs to their bottom lines, insurers are moving quickly to change pooling arrangements and increase pool charges. While inflation has been the driver of cost for some time, we are seeing a new trend toward escalation of pool charges at a much higher rate than Health Care trends. Some insurers are no longer offering pooling limits of $10,000, while others are increasing the cost of this level to make it unaffordable. Health claims pooling shifts the risk of high claims from the policyholder to the insurer. The pooling limit is the risk threshold, for each plan member or each employee and dependent unit. It is generally determined by the policyholder in mid-size and larger plans, and the insurer in small plans. Claims in excess of the pooling limit are removed from the experience, shifting the cost of these claims to the insurer. The results recently released by TELUS indicated that in 2015, drugs claims in excess of $10,000 accounted for 23% of the drug costs reimbursed. This is up 9.5% over 2014. We asked insurers to project the increase in high-cost claims for 2016 and the four carriers who responded to this question provided a range from 10% to 40%.

Naturally, the pool charge imposed by the insurer should reflect the plan design and the risk of claims. The pooling threshold by contrast, should reflect the policyholder’s tolerance for risk of unexpected high claims. Pooled premium, while non-accountable and not experience-rated, is predictable for the policyholder, but a sudden significant claim may negatively impact cash flow.

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Dental CareDental trend factors are made up of two components. One is a utilization factor representing the expected increase in utilization of dental services from one year to the next. An increase in utilization may reflect more plan members using the benefit, but more frequently, due to the aging population, it reflects a shift from lower cost treatment, such as a filling, to a higher cost treatment, such as a root canal. Each insurer sets this factor according to its own experience and projections. The other component is the increase in fees charged by dentists for dental services from one year to the next, as determined by the provincial dental associations.

Utilization

The anticipated trend is down slightly from 2015’s 5.93% to 5.86% for 2016, possibly reflecting the entry of the millenials into the workplace, the overall awareness of the importance of good dental hygiene or more cost effective technology in dental treatment.

Fee Guide

Dental fee guides are published annually by the Dental Associations in most provinces. In the annual review, the Dental Associations determine the cost adjustment of each procedure code. A blended trend is used by insurers reflecting the typical spread of dental procedures claimed and the distribution of the population of a group throughout the provinces. To determine the five-year trend in overall fees, we developed a composite fee based on the distribution of Canada’s labour force according to recent StatsCan labour statistics. The trend increased in 2016 to 2.46% from 2.09% in 2015.

An increase in utilization may reflect more plan members using the benefit or a shift from lower cost to higher cost treatment.

Dental utilization is increasing at a slightly slower rate than last year, but still ahead of the prior three years.

2012 2013 2014 2015 20163.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

5.21%5.50% 5.47%

5.93% 5.86%

Dental Care (Utilization Only, All Carriers)

2012 2013 2014 2015 20161.0%

1.5%

2.0%

2.5%

3.0% 2.78% 2.77%

2.34%

2.09%

2.46%

Dental Care (Fees)

Fee guide changes are determined annually by the provincial Dental Associations.

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Dental Care Trend (Utilization And Fees Combined)

Pricing for employer dental plans incorporates trend factors that combine both the utilization and fee components depending on the location or distribution of the workforce. The trend for the combined utilization and fee components increased from 8.02% in 2015 to 8.32% in 2016.

2012 2013 2014 2015 20166.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

7.99%

8.27%

7.81%8.02%

8.32%

Dental Care (Utilization + Fees)

Provincial General Practitioner Fees

The following shows the average increase in general practitioner fees set out in the fee guides published each year across Canada by the provincial Dental Associations. The results show five provinces have a higher increase than in 2015, four provinces have a lower increase than in 2015 and one province has the same increase as in 2015.

Province 2012 2013 2014 2015 2016Alberta2 4.24% 3.79% 3.77% 3.66% 3.62%

British Columbia 2.22% 2.42% 1.86% 1.96% 2.97%

Manitoba 3.24% 3.21% 3.16% 3.00% 2.56%

New Brunswick 3.30% 2.11% 2.89% 2.04% 2.04%

Newfoundland & Labrador 4.29% 4.97% 2.64% 1.76% 1.54%

Nova Scotia 2.58% 2.53% 2.09% 2.20% 3.31%

Ontario 2.66% 2.20% 1.97% 1.51% 1.91%

Prince Edward Island 2.34% 2.80% 2.24% 2.22% 2.46%

Quebec 2.29% 3.05% 2.23% 2.09% 2.53%

Saskatchewan 3.00% 4.17% 2.49% 1.98% 1.88%2 Since the Alberta Dental Association does not publish a Fee Guide, it is common for insurers to use their own experience to determine increases required in conjunction with CLHIA data.

Combined Trend by Province

As noted above, the trend factor that insurers use in their pricing of dental services consists of a combination of the utilization factor and fee guide increase and the province of residence of the employees. The following table shows the combined utilization and fee guide trend by province. As in previous reports, Alberta stands out as having the highest expected cost increases. This year, Nova Scotia shows the second highest expected cost increase at 9.17%. The remaining provinces fall between 7.40% and 8.83%. The cross-section shows that there is significant variation among the provinces. Five of the provinces showed an increase in the expected cost increase from 2015: British Columbia, Nova Scotia, Ontario, Prince Edward Island and Quebec.

Province 2015 Increase 2016 IncreaseAlberta 9.59% 9.48%

British Columbia 7.89% 8.83%

Manitoba 8.93% 8.42%

New Brunswick 7.97% 7.90%

Newfoundland & Labrador 7.67% 7.40%

Nova Scotia 8.13% 9.17%

Ontario 7.44% 7.77%

Prince Edward Island 8.15% 8.32%

Quebec 8.02% 8.39%

Saskatchewan 7.91% 7.74%

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The projected trend varies significantly among the provinces. Alberta has the highest projected trend at 9.48%, while Newfoundland and Labrador projects 7.40%.

AB

BC

MB

NB

NL

NS

ON

PE

QC

SK

9.48%

8.83%

8.42%

7.90%

7.40%

9.17%

7.77%

8.32%

8.39%

7.74%

2016 Dental Utilization and Fee Guide by Province

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ConclusionMedical, prescription drug and dental care coverage makes up an important component of employees’ total compensation. The coverage provided by an employer’s plan is invaluable as it is almost impossible to obtain as an individual. This means generally, employees recognize the value of the benefit plan and appreciate the security it brings, but, as benefit plans are quite personal, each employee attempts to maximize it to their advantage.

A changing population and advances in technology suggest that the trends will continue upward for the foreseeable future. Prudent plan design may help control the cost escalation without impacting health outcomes. Ultimately doing the right thing through plan design, partnered with encouraging a healthy lifestyle for employees and embracing the advantages technology brings may help contain costs while engaging employees and attracting new talent.

If you would like to discuss the details of your plan and possible enhancements or modifications to better align with corporate objectives or to reduce the trend rate of your plan, please contact us.

Qualification and CommentaryThe trend factors in this survey reflect insurers’ projected rates of inflation/claims trend in health and dental care costs.

The final premium rate adjustment requested by an insurer may also reflect:• Actual plan experience which is higher or lower than originally

projected• Changes in the insurer’s administration expenses• Cost of capital and risk charges• Funding of any insurer reserve requirements • Changes in any explicit margins for conservatism • Recovery of any prior period losses

Plan sponsors therefore may see annual premium rate adjustments that differ from the health care trend factors summarized in this report. Our Canadian Health Care Trend Survey is conducted and published annually, although some insurers may update their trends more frequently.

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Participating OrganizationsDesjardins Financial Securities Great-West Life Green Shield Industrial Alliance Manulife Financial Medavie Blue Cross SSQ Financial Sun Life Financial

Contact UsPromoting a culture of health in your organization has never been more important. We can help you develop, update, or enhance your health care programs to keep your offerings competitive, your costs under control, and your employees healthy and productive. To get started, contact Lizann Reitmeier at 416.644.9280 or by email at lizann.reitmeier@xerox.com.

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