Understanding Healthcare Costs

The first step in understanding healthcare costs is to determine to what degree each health service category is responsible for the cost increase.

Service Category Average Annual Increase
Drugs 18%
Hospital -4%
Paramedical 38%
Other Services & Supplies 8%
Overall 10%

*Drugs account for a very large portion of claim costs and is the main driver of rate increases

Cost Drivers
Now that we have a better understanding of the sources of cost increase, we need to explore the reasons why costs are rising. The two main aspects of claim cost increase are utilization and claim cost.

To understand why healthcare costs are increasing and to ultimately manage costs, we need to know what factors are causing plan members to make more claims as well as the factors that increase the cost of each claim. These factors are called cost drivers.

Increase Utilization Increases Claim Cost Plan Design
Aging Population Aging Population Deductible Leveraging
New Therapies New Therapies  
Advertising & Awareness CPI Inflation  
Government Cost Shifting General Increase  

Employee Perception
There are many reasons why an employer will implement a Member Benefits Program.

  • Attract and retain qualified employees
  • Create corporate policy
  • Keep employees happy and healthy

In many cases, a Member Benefits Program only accomplishes the creation of Corporate Policy.

Most employees consider Member Benefits as standard and have come to expect their employer to provide some form of program.

Many employees do not understand the considerable time and costs involved in implementing and maintaining a program.

Employee Communication: The only way to achieve employee satisfaction in a benefits program is through education, specifically through third-party information and employee communication meetings.

Emerging Trend in Member Benefits: An emerging trend in Member Benefits is the implementation of pensions and/or Group RRSPs. Employees receive immediate satisfaction, and future costs can be fixed and budgeted.

Five Year Forecast of Benefit Cost

“Understanding what cost increases have been, a baseline cost scenario can be developed for the next five years.”

The table below establishes a five-year cost projection, based on average rates of benefit increases observed in the past and predicted into the future.

This baseline is not meant for budgeting, but rather for plan management purposes only.

Benefit Renewal Year 2 Year 3 Year 4 Year 5 Total Annual Growth Rate
Life: $345 363 381 400 420 1,909 5%
AD&D: $216 216 216 216 216 216 0%
LTD: $1,164 1,245 1,333 1,426 1,526 6,693 7%
Health: $1,727 2,020 2,364 2,766 3,236 12,112 17%
Dental: $5,186 5,600 6,048 6,532 7,055 30,42 18%
Total Average Growth Rate: 8.7%

Based on the table above, one can anticipate an Average Annual increase in Member Benefits costs of roughly 8.7%.

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