Managing Your Healthcare Supply Chain

As a business leader, you know that procurement of goods and services is at the heart of good business practice, and you likely manage your supply chain with diligence to ensure suppliers meet standards for quality and affordability. So why don’t most employers behave in this manner when purchasing healthcare services? Failure to do so can be a costly mistake.

If you’re like most, you’ve likely outsourced the design and management of healthcare services to brokers, consultants, and health insurers that have little incentive to improve quality or affordability. In doing so, employers lose control and are exposing themselves (and their employees) to the wasteful business practices embedded in health plan and provider contracts. Why are so many employers disconnected from managing one of the most important and costly expenditures for their organizations?

Further, most employers have “in-sourced” accountability for healthcare services to Human Resources, seeing it as a “benefit” rather than a service to be procured in an effort to maintain the health, well-being, and satisfaction of your workforce. The end result is predictable: immense and costly variations in access, quality, and safety.

Lastly, employers respond to the resulting cost of healthcare in a reactive (and misguided) way, by passing a portion of costs to employees or delegating the purchasing of healthcare services to them through high deductible plans or health saving accounts.

According to the National Business Group on Health (NBGH), which represents 420 large employers on health policy issues, employers project the total cost of providing medical and pharmacy benefits to rise by 5% for the fifth consecutive year in 2018, bringing the total cost to $14,156 per employee. If you have 100 employees, that means you’re managing a $1.4 million healthcare business whether you like it or not. If you have 1,000 employees, your healthcare business is valued at over $14,000,000! So, what are you doing to manage your multi-million dollar healthcare business?

“If you have 100 employees, that means you’re managing a $1.4 million healthcare business whether you like it or not.”

Successful employers are not holding down cost increases by raising employee costs, deductibles, copayments and coinsurance. Instead, they’re applying supply chain methods to healthcare purchasing.

Starting with a self-funded health plan, which gives employers the advantage of examining their data, the best performing companies are building plan designs that work best for their company, identifying targets of opportunity, and creating incentives for employees.

When you examine your data, what you’ll find is wide variations in charges by hospitals. Reimbursements by private insurers can be as much as 10 times higher than Medicare reimbursements for hospitals within the same geographic area. To address this, employers are designing health plans and creating incentives designed to encourage employees to use more cost-effective providers. Start, for example, with high-cost elective surgeries that have a wide variation in price and quality among providers: total joint replacement, spine surgery, cardiac surgery, and bariatric surgery to name a few.

The California Public Employees’ Retirement System (CalPERS), is a case in point. CalPERS was seeing a wide variation in prices for many procedures received by its members, depending on where they got their care. For example, it was paying anywhere from $12,000 to $75,000 for joint replacement surgery, despite being no clear difference in the quality of these services. To address the issue, CalPERS introduced a “reference point” of $30,000 – the maximum it would pay – and assembled a list of high-quality providers willing to accept it. Plan members who chose to go to more expensive providers had to pay the difference out of pocket. This is just one example, and by paying for the true value of healthcare services (where cost and quality intersect) the savings potential is huge.

You can put the brakes on rising healthcare costs, without compromising access to quality healthcare for your employees, with help from the right partner. Make sure that your organization is selecting a broker or consultant not for their skill in defending the status quo, but for their ability to lead performance improvement – giving you and your company the ability to compete and win.