Benefit costs outpace inflation but employers hold the line

Each month at BPM, we offer a slate of articles and content pieces that go deep on a particular topic. This month, we're focusing on consultants and the role they play in shaping benefits, pensions and investment outcomes. 

Canadian plan sponsors are caught in a bind, more so than ever before.

Benefit costs are climbing at two to three times the rate of general inflation, economic uncertainty is squeezing budgets from every direction, and yet employers are overwhelmingly refusing to pass those costs on to their employees, notes Daniel Drolet, senior partner, health and benefits at Normandin Beaudry.

“It's true globally and it's true locally in Canada. Cost has been the number one priority for organizations. When you talk about benefits, managing the cost, controlling the cost, bending the curve, call it whatever you'd like. Finances are putting pressure everywhere in the organization and AI is challenging the model too. So there's a lot of noise and uncertainty and the money is not there.”

He points to the firm's global benefits attitudes survey, which draws from more than 200 Canadian participants, as evidence, noting that only nine per cent of respondents cited they would increase the employee share of costs, with only 2 per cent who would reduce benefits.

That restraint is notable given how tight budgets have become. The post-pandemic era of open-ended investment in employee programs has cooled — spending now needs to be justified. Yet employers are still asking how to do more with less rather than simply doing less.

Drolet, who has spent 35 years in the benefits industry, highlighted the clear break from how organizations handled similar financial stress during the 2008–2009 downturn, when the instinct was to slash plans outright.

"Companies were looking to see how they could reduce the cost? So, they said, ‘Let's cut the benefits. Let's cut the plan.’ That was more brutal as a reaction," he said. "Today plan sponsors are trying to do the maximum before they impact their employees."

Cost pressure is multi-directional

Drolet breaks down the cost pressures. While an aging workforce is part of the equation, he argues the cost pressure is not coming from just one direction, particularly as younger employees are more health-conscious and more assertive about what they expect from a benefits plan.  

According to Drolet, they ask pointed questions during recruitment - not just whether drug coverage exists, but how much is covered, how often they can access dental care, and whether specific medications are included. That level of engagement, he suggests, is exactly what plan sponsors want: employees who understand and value their coverage. But it also drives utilization higher across the board.

Meanwhile, mental health claims continue to climb, as medications for neurodivergent disorders like ADHD are also seeing increased uptake among young and older adults alike.

While none of these individual categories are necessarily breaking the bank on their own, Drolet noted, the cumulative effect is significant because he suggests it’s multiple layers of modest increases stacking on top of one another, each one adding to a cost trend that has outpaced inflation and salary growth for years.

What’s driving costs in claims?

When it comes to ranking the cost drivers, Drolet puts drugs firmly at the top, with disability close behind. The two are connected. While effective drug treatment for mental health can prevent a disability claim, once someone is on disability for a mental health condition, medication becomes essential to recovery. The goal for employers is always to keep people healthy, active, and productive, but the cost of doing so keeps rising.

Within the drug category, the traditional drugs are trending downward in cost and utilization while a 12 per cent increase is being driven by specialty medications. These are expensive, often new-to-market treatments with expanding indications.

GLP-1 medications for diabetes and weight management have been the most dramatic example of how fast the landscape can shift as Drolet acknowledged how diabetes wasn’t even a top 10 therapeutic class for reimbursement three years ago, whereas now it leads.

He underscored plan sponsors are willing to cover these treatments, but they want to understand whether the investment is paying off elsewhere, like in fewer disability claims, lower hospitalization or better productivity.

"Most of them are willing to invest the money, but they're questioning more about the impact of what they do cover in their plans," he said.

Employers consider shifting costs

Drolet predicts that the share of employers looking to reduce benefits or transfer costs to employees will climb over the next year, as the pace of cost increases becomes unsustainable for those already under financial strain.

That notably raises the question of what happens to employees' financial wellness if costs do shift. Drolet frames benefits as a percentage of payroll — typically around 5 to 6 per cent, with employers covering roughly two-thirds.

According to Drolet, when salaries rise under inflationary pressure, benefit costs tied to those salaries rise too, particularly on the disability side and then compound quickly. Some employers he works with are already weighing a difficult trade-off: putting more cash in employees' pockets rather than expanding coverage, recognizing that day-to-day expenses like groceries and back-to-school costs are hitting harder than an underused benefit plan.

"Accessibility of the benefit plan becomes something really important to have in mind when you make those changes," he said.

Drolet sees spousal plan coordination and flexible design as ways to ease that pressure but also cautions against treating flexibility as a cure-all, noting it demands education and communication that most organizations still underdeliver on.

He sees potential in AI-driven tools that could eventually guide employees through their personal coverage options one by one, like matching claims history, spousal plans, and actual usage to recommend the right configuration.

"We're not there yet, but we might get there. And I would love that because ultimately this is what we want to do. Support employees one by one," he said.

Why sound utilization matters

According to Drolet, the most effective cost management lever is counterintuitive: encouraging sound utilization rather than discouraging it. Investing in prevention and early intervention looks like an added expense on paper, but it can head off far costlier claims down the road.

He believes the key is matching utilization data to the services being offered. For example, if mental health-related disability claims are high but usage of paramedical services and employee and family assistance programs is low, that gap points to an opportunity, he noted.

Before removing an underused service, Drolet recommends plan sponsors should ask whether the problem is the service itself or whether employees simply don't know it exists. Better communication might unlock value that's already being paid for.

He also pushes plan sponsors to audit the full suite of programs and tools they offer for overlap and redundancy. Many organizations have layered on mental health coverage, internet-based cognitive behavioural therapy, virtual care, EFAP, and wellness platforms without stepping back to assess whether employees are actually using all of them.

Where uptake is negligible, those fees can be cut and redirected toward coverage that delivers measurable outcomes. He likens it to the growing stack of streaming subscriptions most people pay for but rarely use. At some point, he believes it's worth asking whether every one of them earns its cost.

The goal, as Drolet sees it, is to eventually reach a point where organizations can look at their employee population and forecast plan utilization based on what treatments and therapies are on the horizon. That kind of forward-looking analysis would allow plan sponsors to act proactively. Not just to contain costs, but to cover the right drugs for the right populations before expensive claims materialize, he said.

“Prevention or covering some drugs in the employee population would be amazing as a decision to avoid future costs, but we're not there yet,” said Drolet.