Health Costs to Rise at Double-Digit Rates for Canadian Employers, Says Mellon Survey

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TORONTO, February 23, 2005 � A survey of major Canadian group health insurers shows that cost increases for prescription drugs provided under employer-sponsored health care benefit programs will continue at double-digit rates in 2005, although the increases are slowing. Insurers expect high level cost increases for 2005 at 15.13%, down from their estimate of 15.6% for 2004.

The 2005 Canadian Health Care Trend Survey by Mellon’s Human Resources & Investor Solutions (HR&IS) Canadian business also studied medical, hospital, dental and vision costs. Twelve Canadian health insurers participated in the survey conducted late in 2004, Mellon’s fifth annual.

Prescription drugs comprise the largest cost component of employer-sponsored health care programs in Canada. Although the employer cost increase is slowing, it remains higher than the general trend in Canada. Total drug spending increased 8.8% in 2004, according to estimates by the Canadian Institute for Health Information (CIHI).

“Cost increases are slowing because of fewer new expensive drugs entering approved usage, together with the withdrawal of several blockbuster drugs over safety concerns,” said Larry Jackson, national practice leader with Mellon’s health & welfare consulting practice. “This trend is likely to continue as Health Canada and the Federal Drug Administration in the U.S. apply increasing rigor to their drug approval processes, and adjust to increasing pressure to introduce after-market monitoring for long term side effects.”

While U.S. and Canadian employers’ drug costs are rising at about the same rate, Canadian brand drug prices are still highly attractive to U.S. consumers. Canadian brand drug prices are generally lower than those in the U.S. because of price controls set by Canada’s Patented Medicine Prices Review Board. On the other hand, generic drug prices tend to be higher in Canada due to pricing requirements established by the provincial formularies (e.g., Ontario Drug Benefit formulary) that tend to dampen competitive pricing among generics in the same drug category.

Canadian employees have not been significantly affected by prescription drug price increases. “For the most part, employers are simply absorbing cost increases,” said Jackson. “However, we are beginning to see a limited impact on Canadian consumers as some employers start to implement dispensing-fee caps or increase prescription deductibles.”

The Mellon survey shows medical plan costs are expected to increase by 13.76% in 2005, down from 15.1% in 2004. Hospital benefit costs are expected to grow 10.95% in 2005, down slightly from 11% in 2004. Dental benefit costs related to utilization are expected to increase by 4.38% in 2005, down from 4.96% in 2004. Finally, vision benefit costs are expected to increase 3.2% in 2005, down from 3.5% in 2004.

Mellon’s report summarizes the trend factors used to project employers’ future health care plan costs for the calendar year 2005, and compares these trends to results for each year back to 2001. Health insurers use trend factors to calculate the premiums they charge to employers. Trend factors are also segregated into two components of total trend � utilization and inflation. (Dental costs are compared on utilization only until all provincial dental associations have posted their 2005 fee guides.)

The survey results show insurers generally expect that the impact of inflation and utilization on health benefit costs in 2005 will be slightly lower than their expectation for 2004. Utilization is defined as the use of health care related products and services by plan members.

Mellon’s Canadian Health Care Trend Survey Results 2005 can be found on our Web site at www.mellon.com/hris/pdf/canada_english_healthcare_trend_05.pdf.

Mellon’s HR&IS Canadian operations provide human resources, actuarial and financial consulting services in the areas of retirement benefits, health and welfare benefits, tax and legal, communications, and investment consulting, as well as pension and benefits administration outsourcing services. HR&IS operates Canadian offices in Toronto, Montreal and Ottawa.

Human Resources & Investor Solutions is the worldwide human resources and shareholder services business of Mellon Financial Corporation, a global financial services company. Headquartered in Pittsburgh, Mellon is one of the world’s leading providers of financial services for institutions, corporations and high net worth individuals, providing institutional asset management, mutual funds, private wealth management, asset servicing, human resources and investor solutions, and treasury services. Mellon has more than US$4.0 trillion in assets under management, administration or custody, including US$707 billion under management. Its asset management companies include The Dreyfus Corporation and U.K.-based Newton Investment Management Limited. News and other information about Mellon is available at www.mellon.com.