Inflation has always been and continues to be a significant issue for employee benefits plans. Over the past 25 years, annual inflation in this area has fluctuated each year but has generally averaged about 6% per year. However, the issue of inflation is even more topical these days as consumer inflation has jumped to levels not seen in 40 years, albeit inflation has been decreasing in 2023. The “perfect storm” continues to impact the costs of group benefits: more employees are using the plans, using them more often, and using them for more expensive items.
Despite these ongoing and persistent financial factors, businesses are under continued pressure to maintain and also enhance their employee benefits plans. Employees always place a high value on group benefits plans when choosing to join an employer and when choosing to stay with an employer. Employees’ perceptions around the quality of these benefits plans have risen over the past couple of years to levels not observed in almost 25 years. As well, employees continue to feel entitled to receiving employee benefits as part of their employment offering.
For 2023, we projected that the cost of employee benefits would increase approximately 8% as compared to 9% for 2022. Note that actual historical inflation levels have generally been very close to the projections prepared by ZLC Employee Benefits Solutions. Unfortunately, employee benefits plan costs will continue to increase in the near future at levels still higher than general inflation (CPI).
Life
For the majority of Canadian companies, annual renewal adjustments are driven primarily by changes in the insurers’ broader block of business (aka, manual rates). In general, the Canadian working population continues to age. It is also not expected to ease for another decade until most Baby Boomers and Gen-Xers exit the workforce. For Life insurance, we are not expecting any material impact due to factors beyond general aging. We are expecting annual Life benefit increases to be about 3% to 5%.
Long-term disability
In the same way as for the Life benefit, the aging population will continue to drive disability rates. We have seen added pressure over the past 15 years due to the increasing incidence and duration of mental health claims. In particular, over the past couple of years with the COVID-19 pandemic and the risks of a recession, consumer inflation, and global uncertainty.
As well, disability claims continue to be further complicated by a general reduction in the quality of health care in Canada with significant increases in delayed surgeries and untreated conditions. On a slightly more positive note, the higher interest rates we have seen since the beginning of 2022 will eventually help reduce disability rates from an actuarial perspective. Lastly, most plans require employees to pay for the LTD premiums to ensure a non-taxable benefit, so inflationary pressures in this area are ultimately borne more often by employees rather than the company. We are expecting annual Long Term Disability benefit increases to be about 6% to 8%.
Extended health
The “perfect storm” for employee benefits plans is felt the most in the Extended Health area. We know that general market inflation, including pressure on wages, has likely been increasing the operating costs for most medical service providers, so we expect the Reasonable and Customary fees around paramedical claims to rise higher than historical norms in 2024. On a positive note, we are hopeful that the surge in claims we saw in late-2022 and 2023 driven by delayed services during the pandemic will have subsided.
As well, we will see some claims reductions resulting from the BC Government announcement earlier in 2023 around providing coverage for contraceptives to all British Columbians. These savings could be significant given that this class of drugs currently accounts for approximately 2-3% of all drug claims, but this would only be for groups in B.C. Also, claims for Ozempic increased significantly in 2023, including “off label use” by people using it for weight loss, but we expect claims to decline in 2024 as the majority of insurers are implementing stricter protocols to restrict coverage to Diabetes, but not as a first line therapy.
Lastly, the continued introduction of biosimilar drugs, particularly for groups with employees outside B.C., which was an early adopter for biosimilar drug strategies, should yield financial savings to group benefits plan sponsors. We believe that overall inflation for Extended Health Care will be about 6% to 8% in the coming year.
Dental
For the past decade and longer, annual dental inflation ranged from 6% to 8% each year but it jumped significantly in 2022 and 2023, primarily driven by dental fee guide increases being much higher than historical norms. Additionally, the increase was also affected by higher utilization of dental services as members became more comfortable with in-person treatments. We are unsure as to what the fee guide increases will be for 2024 but hopefully, they will return to levels more consistent with historical norms. Like with Extended Health, we are hopeful that the surge in claims we saw in late-2022 and 2023 driven by delayed services during the pandemic will have subsided. We are expecting inflation for Dental care this year at about 7% to 9%.
From there, it is really just simple math – Life accounts for about 5-10% of total benefits plan costs, Long Term Disability accounts for about 15-20%, Extended Health accounts for about 40-50%, Dental accounts for about 20-30%, and other benefits (i.e., Employee Assistance Plan, spending accounts) account for up to another 10% (running more at general inflation levels). When you put it all together, we are looking at a weighted average of approximately 7% projected annual inflation for 2024. If your plan has additional cost drivers (i.e., older population, higher historical utilization, high turnover, etc.), you could be looking at higher increases. We recommend using an inflation assumption within a range of 5% to 10% if you are doing any multi-year business planning.
We would be pleased to discuss your specific situation with you to identify the best strategy for your employee benefits plans. Should you have any questions on the above, please do not hesitate to contact any member of our team.
Dan Eisner is an employee benefits advisor for ZLC Employee Benefits Solutions.
Originally published by ZLC Employee Benefits Solutions.
