Disrupting disability: Continuing the conversation

In our last article, Disrupting disability: Time for a refresh, we made the case for a new perspective on disability models in Canada. While the combinations of short-term disability (STD) and long-term disability (LTD) benefits vary, the following are most typical:

Disability plans represent a significant and growing proportion of the total workplace benefit spend reaching 25% or more of the plan costs just for LTD premiums, let alone the short-term disability plan costs. While cost alone has not yet sparked a movement for change, the continued backdrop of a national mental health crisis, stretched healthcare services, escalating LTD premium rates, and recent changes to Employment Insurance (EI) sickness benefits, make the dialogue on new approaches for managing workplace disability an imperative.

While there are many articles and legal cases that challenge the ending date/age for LTD benefits, there is work to be done on when LTD starts and who goes onto it.

Amid the multiple workplace and mental health impacts stemming from a disability absence, cost is likely to become a key driver for change for many plan sponsors. The financial impact of a disability absence on a plan sponsor’s benefit program is much larger than just the costs of the income replacement benefit. Other elements of the broader program, such as the extended health and prescription drug benefits, may also incur significant costs. Plan sponsors continue to look for effective ways to holistically manage their overall benefit program in ways that support both plan members on, or exposed to, disability absences and the financial sustainability of the program. Adding more mental health support, healthcare navigation programs, and pharmacogenetic testing can support improved health outcomes and fewer, or shorter, disability leaves.

A double whammy: Mental health crisis and lagging healthcare access

According to recent data from Statistics Canada, among employed people, 7.5% had taken time off from their job or business because of stress or for mental health reasons in the 12 months before April 2023. This amounted to 2.4 days lost on average among all employed people over this period¹. Mental health claims are now the number one cause of disability on all insurers’ block of disability benefits. In fact, according to recent data from Manulife 36% of workers on long-term disability report mental health as a primary diagnosis². CAMH has estimated that the economic impact from mental health related disability is a staggering annual loss of $50 billion with $6.3 billion as a direct result of lost productivity³.

Mental health disability claims are among the most complex and often require early and ongoing intervention to support a successful return to work. In Canada, about half of those suffering from mental health issues wait about a month for access to ongoing counselling services and 1 in 10 wait up to 5 months⁴. The ongoing delays in access to appropriate diagnostics and treatment has lengthened the amount of time it takes to prepare a disability case file and has added to the complexity of pricing disability benefits.

Given that a typical workplace plan will have members with different types of disabilities of various durations and benefit amounts occurring at a range of ages, uncertainty and volatility in the pricing of LTD benefits can make the cost of these plans unmanageable for both plan sponsors and members.

A valid question and an opportunity

Available data from the Canadian Institute of Actuaries’ (CIA) study⁵ on when members are projected to recover from disability, combined with the mental health and healthcare system challenges identified earlier, raises a valid question: Why do most long-term disability benefits start at 17 or 26 weeks, forcing insurers to price for these claims during a period when expected recoveries remain so high and uncertain? The data suggests that we should lengthen the period that is considered short-term and delay the start of the period that is considered long-term until termination rates from disability reduce and stabilize and disabled employees are able to be closer to stabilized health.

The CIA study shows only 2% of insured LTD plans in Canada have an elimination (or qualifying) period of 12 months or longer. However, Eckler’s experience with these types of plans shows that they routinely benefit from the lowest (and most stable) premium rates. As we proposed in our first article, we believe there is an opportunity for a new approach. Potential opportunities include:

1. Extend the STD period to a minimum of 26 weeks (or 6 months) to better align with the EI sickness benefit changes.
2. Introduce a “medium-term disability (MTD)” period between STD and LTD with the MTD period running from the end of STD for an additional 18 to 24 months (or longer), followed then by LTD if needed.  This allows for more time for rehabilitation and return to work efforts before a member transition to what is truly a longer-term disability.

The benefit levels in this alternative model could be structured to ensure that a plan member on claim for a long duration receives the same (or very similar) total benefit amount as they would have under today’s common plan designs. This alternative structure could also allow plan sponsors to alter the traditional risk sharing (financing) arrangement with insurers. Self-insuring claims for the extended STD/MTD period, for example, could help plan sponsors realize savings on the LTD plan, by eliminating higher risk premiums while leading to more stable LTD premiums as well.

Introducing disability case management and rehabilitation support as early as possible in the STD/MTD process, as well as keeping plan members connected to their “work family”, would continue to be important to supporting a successful return to work with minimal possibility of disability relapse.

If not now, when?

Group administered disability plan design, both short- and long-term, has remained largely unchanged for the past several decades. While plan sponsors have spent considerable time adapting health and dental benefits to meet current – and emerging – member needs at the most effective cost point, the same has not been the case for disability plans.

Given that long-term disability benefits alone now account for 25%, or more, of a plan sponsor’s typical benefits plan costs, we believe now is the time to consider the possibilities for a modern approach to disability plan design that meets the challenges of current realities.