managing the health benefits supply chain

8/8/2019 Managing the Health Benefits Supply Chain

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Managing the Health Benefits Supply Chain:A Solutions-Based Approach

A White Paper

Copyright VitalSpring Technologies, Inc., March 2003


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Table of Contents

Challenges to Efficiency in the Health Care Supply Chain ..................................... .... 3Impact on Corporate Profitability ................................................................................. 3Evolution of Employer Health Care Market Purchasing Dynamics .................... ........ 4

Defining the Health Benefits Supply Chain ................................................................ .. 5A Solutions-Based Approach ...................................................................................... . 6Value of Solutions to the Health Benefits Supply Chain ................................... .......... 9Balancing Employee and Shareholder Value ...................................................... ....... 10


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Challenges to Efficiency in the Health Care Supply Chain

Compared to other industries, the health care industry in the United States is fragmentedand disjointed at every level of the supply chainfrom patients, to physicians, to facilities,

to insurers, to payers. Little, if any, information exists across these levels to demonstratequality or service value from a purchasing perspective. As a result, employers have beenchallenged with complex purchasing decisions for health care services. Experts estimatethat 30% of all direct health care expenditures are the result of poor quality (e.g.overutilization, misdiagnosis, mistreatment, or overcoverage). i There is no other productor service offered in any industry that conveys this level of waste. As manufacturersstrive toward Six Sigma quality levels ii, they have achieved on average a production levelof 230 defects in parts per million. It is estimated that the defect rate for health careservices ranges between 6,000 and 300,000 parts per million .iii

Impact on Corporate Profitability

Unprecedented Business Risk Most companies are entering their fifth consecutive year of health benefits cost increases.According to national studies, health benefits costs have risen four-fold since 1980, and

premiums are expected to rise an average of 15% in coming years. CFOs now recognizethis as a mission critical issue and realize the impact health benefits costs have oncorporate financial performance. This impact, along with a struggling economy andnonexistent revenue growth, is likely to weaken the future prospects of even the best-managed large- and middle-market institutions. Thus, cost-saving measures are sought

beyond what has been tried in the past, in order to bolster bottom-line profitability andimprove earnings per share in the face of flattening revenue growth.

Employer Tactics to Mitigate Risk The impact of this health care crisis on employee relations and lost productivity isunprecedented. Employers struggle with managing increasing costs and sharing this

burden with employees. Until recently, most companies have resisted increasing theemployee burden. A study by the Employment Policy Foundation found that the

percentage of health insurance costs paid by employers has remained relatively constantsince the early 1990s, although costs have consistently risen iv. However, with all the well-known tactics of health care cost management exhausted, employers have begun to passhealth care costs on to employees, either in the form of coinsurances and co-payments or in consumer-directed strategies. Resistance to this recent trend is already growing. A

major union at General Electric staged its first labor action in 30 years over an increase of $17 to $32 per month to have employees share the cost increase of health benefits.

Most employers already have elaborate programs in place to monitor severely ill beneficiaries, and some offer new consumer-driven health plans that make beneficiariesaccountable for their health care spending. However, these tactics are, at best,implemented reactively as stopgap measures and are limited by the same lack of data and


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business intelligence required to target and manage these programs effectively. Theseapproaches do not address the larger cost-saving opportunities available using provensupply chain approaches. Successfully managing the health benefits supply chain will bea critical differentiator between those corporations that create shareholder value and thosethat erode shareholder value.

Evolution of Employer Health Care Market Purchasing Dynamics

Health Benefits as a Purchasing FunctionBecause information has not existed to make decisions based on value, volume

purchasers of health care services, such as employers, have made purchasing decisions based on limited data. This data may include price per unit expressed as cost per employee, provider name recognition, and geographic coverage. Payments are generallytied to transactions (e.g. services delivered, terms of coverage) and not outcomes, quality,or performance.

Without measurements of quality or value within their health care supply chains,employers are currently purchasing services that contain on average $1,350 of directexpense per employee that add no value v. Beneficiaries themselves assume additionalexpenses, in the form of co-payments and coinsurances, for services that do not achievethe desired outcomes.

Health Benefits as a Programmatic FunctionOver the past several years, benefits managers have attempted to manage certain health

benefits in programmatic fashion. Where managers find challenge is in measuring the performance of such programs as disease management, disability, and workforce productivity. Little data exists to target these programs effectively, much less measuretheir performance. Moreover, as employees and their families ultimately consumeservices and drive expenditures, benefits managers have sought to engage them inconsumption and resource decisions. Without appropriate data and tools to generate theappropriate information and deliver it to the right person, management efforts arecompromised.

Health Benefits as a Supply ChainAs every major process within a corporation is now viewed and managed as a supplychain, corporate leadership realizes that the procurement and delivery of health andrelated benefits for the workforce must also be managed as such, with appropriateanalysis of inputs and purchases, continuous management of processes, and measurementof outcomes.

To describe todays health benefits delivery process as a supply chain is like describingthe inefficient manufacturing practices of the mid-1900s. For example, a manufacturer of engines from that era would not exactly know what production runs will be needed over the coming years. The manufacturer would have no choice but to stock gears of varioussizes, shapes, and materials to have on hand when needed. Holding costs are high,

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sometimes stock will run out or not be appropriate, and production runs will suffer. Thereis no manufacturer in the world still operating like this.

To parallel that scenario with modern day health benefits procurement, corporations purchase a multiyear, generalized supply of health care benefits because sufficient data is

not available to understand exactly what types of services will be needed, at what time,and how much. This overstock is then consumed by beneficiaries over the term of acontract, where sometimes the stock is too much, sometimes too little, and sometimes thewrong type. Relatively simple questions about the costs of services delivered to

beneficiaries can be difficult and expensive to answer, even though millions of dollars inexpenses may hinge on the answer to any one of those questions.

In order to revolutionize the way employers manage their health care supply chain,several capabilities must be achieved and applied, just as they have in every other area of supply chain management. These capabilities are:

1. Analyzing appropriate data that reflects the entirety of corporate inputs andrequirements for health and productivity within the workforce;2. Identifying performance issues and high priority problems when they occur and,

at times, before they occur;3. Measuring the performance of plans, providers, and programs in an ongoing and

systematic fashion;4. Relaying information to vendors and employees about performance, quality, and

value;5. Using this information to drive continuous quality improvement in program

direction, contracting, and workforce management.

Defining the Health Benefits Supply ChainCommon definitions of a supply chain begin where raw materials are procured andassembled into a consumable form, and end where products are distributed and ultimatelyconsumed. Although it can be difficult to view health benefits in this context, we proposethat employers will be able to do so by asking the following questions:

Sourcing for Health BenefitsWhat are the specific requirements for health care services within the beneficiary

population?What providers are required within the network to meet these service

requirements?What benefits should be offered within these requirements?What coverages are required and appropriate to manage access, cost, andaccountability?

Inventory of Health BenefitsWhat health care services should be purchased, at what cost, and with whatexpectations for quality?

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What is the variance between what services are sourced and how services are being consumed?What types of services are being delivered by providers?

Production of Health Benefits

Which providers are performing with the best cost and quality results?How is compliance to corporate performance thresholds assured?Are providers and plans meeting expectations of cost and quality?What are the funding projections for the quarter with projected year-end variance?What changes need to be made in coverage or benefits midstream to meet

budgets?

Distribution of Health BenefitsWhat trends exist that are impacting cost and quality for health care services?What opportunities exist to improve networks or services delivery?What services are being consumed and how, relative to the benefits offered?What supplemental programs are required to meet beneficiary needs?

Along this supply chain, as with any other, managers can maximize output and minimizewaste by:

Decreasing held inventory and stock overruns while still maintaining highcustomer service levels, through the use of Supply Chain Analytics ;Optimizing the supplier base and developing supplier relationships to reduceoverall costs, using Supplier Performance Management ;Increasing intelligence among all nodes of the supply chain to create anuninterrupted flow of information to be used for business planning, with

Financial Performance Management ;Having the right service in the right place with the right quality at the right cost,with Beneficiary Relationship Management .

A Solutions-Based Approach

Spiraling health care costs can be managed when addressed with the right solution at eachlevel of the organization. A solutions-based approach addresses the needs of chief financial officers, vice presidents of human resources, chief medical officers, benefitsmanagers, and health care analysts, as well as employees. A solutions-based approach

provides employers with accessible and relevant metrics, information, and tools toimprove decision-making regarding health benefits programs. The four components of this approach are:

Supply Chain AnalyticsSupplier Performance ManagementFinancial Performance ManagementBeneficiary Relationship Management

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Supply Chain Analytics (SCA)Supply Chain Analytics offer an integrated view of health care costs across medical,

pharmacy, short-term and long-term disability, workers compensation, enrollment, user surveys, and other custom data feeds. This solution can be leveraged across the enterprise

from the vice president to analysts, from human resources to finance each with access

to a specific set of metrics relating to their respective roles in the corporation, but allgenerated from the same information source. Human resources executives can gain acomprehensive view of health care cost drivers, financial and clinical indices of health,

productivity, and cost relative to their beneficiary population. Benefits managers andhealth care specialists can create detailed analyses to test planned strategies against actualdata and fine-tune approaches before implementation. Chief medical officers can track resource utilization against disease management programs or wellness initiatives. Healthand safety managers can use the data to create customized case management or return-to-work programs in conjunction with respective health benefits programs. Furthermore, thecost of generating these reports is negligible when they emanate from an integrated

business intelligence platform and are removed from manual processing.

Gains from Supply Chain Analytics for the enterprise include the following:

Establishing administrative workflow efficiencies associated with generatingdetailed, comprehensive, and timely reports;Validating health care strategies that make the best use of time and resourcecommitments, based on company-wide integrated data;Attaining enterprise perspectives on the distribution of health care costs and their impact on productivity;Tracking corporate health and productivity based on indices adjusted for case-mix, geographic disparities, and other factors;

Identifying and implementing targeted cost-reduction strategies, such as casemanagement, disease management, and consumer-driven options, applied towardgroups most likely to impact future costs.

Supplier Performance Management (SPM)Supplier Performance Management views the entire health care supply chain from anemployers perspective. The supply chain includes payers, third-party administrators,consultants, re-insurers, actuaries, pharmacy benefits managers, case managers, provider networks, specialty networks, carve-outs, and others. SPM uses metrics that allowemployers to set performance targets for suppliers. Employers can then monitor thesemetrics over time to ensure supplier compliance with corporate health and cost strategies,

and know when thresholds of cost and quality are crossed. Employers thereby are able toincrease the accountability of all the suppliers in the health care supply chain and, if necessary, gain negotiating leverage. Just as major automotive manufacturers setstandards for quality and imparted those standards to their parts suppliers, employers will

be able to do the same with suppliers of health care services.

Gains from Supplier Performance Management for the enterprise include the following:

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Evaluating performance from programs and suppliers toward corporate goals, and providing early detection of quality and cost defects;Evaluating strategies around plan design, provider network optimization, andreinsurance;Increasing supplier accountability toward cost and quality goals;

Driving employer purchasing power to create better negotiation leverage withvendors.

Financial Performance Management (FPM)Most employers have limited means of quantifying or qualifying health care performancemeasures into financial metrics that can be tracked throughout the year, much less on aquarterly basis. Financial Performance Management translates metrics from SCA andSPM into operational and financial performance measures that CFOs need within the

budgeting process. CFOs can thereby manage health care funds and make appropriatemidterm changes in line with their organizations financial strategies. CFOs can alsotrack the financial impact of vendor performance and corporate strategies, in order to

budget on a real-time and ongoing basis. This means no year-end surprises in the form of health care fund overruns.

Gains from Financial Performance Management for the enterprise include the following:

Developing forecasts of health care budgets using proven clinical and financialmethodologies based on actual integrated data, not estimates;Tracking health care expenditures toward budgets and fund reserves on aquarterly basis;Monitoring the financial impact of health care cost-reduction initiatives;Evaluating the costs, returns, and paybacks for investments in workforce healthand productivity, and making determinations against all corporate investments for funding decisions;Quantifying impacts to shareholder value from health care strategies and related

programs.

Beneficiary Relationship Management (BRM)Beneficiary Relationship Management enables employers to engage beneficiaries in thehealth care decision-making process through a combination of targeted permission-basedmessaging, employee feedback, and health surveys, all integrated within managementreporting. The BRM solution creates an effective Web-based health portal for both

beneficiaries and employers. Beneficiaries can benefit from targeted health informationand have the opportunity to give meaningful feedback to the employer. An automatedhealth communication channel with beneficiaries can influence behavior toward benefitofferings and relevant health strategies. vi Ultimately, the ability to influence employee

behavior in key health-related areas can have a measurable impact on overall health carecosts.

Gains from Beneficiary Relationship Management for the enterprise include thefollowing:

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Engaging beneficiaries in the health care decision-making process;Ensuring workforce satisfaction with benefits and programs;Influencing beneficiary behavior to optimize costs through consumerism of relevant health information;

Reinforcing corporate strategies that emphasize desired utilization patterns with benefits programs.

Value of Solutions to the Health Benefits Supply Chain

Where corporations now must manage processes as a supply chain, health benefitsmanagers must look beyond what has traditionally been a purchasing exercise, andexamine their supply chain on an activity basis and with respect to programmatic outputs.All expenditures for staff, services, consulting, and support must be managed as inputstoward an outcome that is categorized by a process and understood within that

relationship.

Solutions-based approaches can return between two and seven times the investment on anactivity basis alone in the form of improvements in staffing allocations, administrative

payments to vendors, consulting fees related to analysis and reporting, and newefficiencies from software and technologies.

Outcome requirements pertain to programmatic improvements in cost, service, quality,and satisfaction. Ultimately, employers will understand the relational impact on financial

performance and the future requirements of their health care supply chain. Successfulimplementations of solutions-based approaches have demonstrated efficiencies to reduce

total health and productivity expenditures between 3% and 10% for the corporation.

Activity-Based ImprovementsInput requirements initially include the measurement and assignment of inputs and

procurements across the supply chain, such as staff time, technologies, consulting payments, vendor fees, and the administrative components to benefits purchases. Oncethis information is readily available, an analytical framework must lead to actionableinformation on process structure, desired output, and strategies that identify cost andquality criteria to uphold corporate financial and performance goals.

Process requirements will pertain to timely, effective, and efficient access to management

information on an ongoing and continuous basis. Multiple analytical formats andapproaches drive the analysis and measurement of performance. More importantly, data

processes and methodologies must be designed to meet the specific requirements of employer health and workforce productivity.

Programmatic ImprovementsWhen considering the outputs of the supply chain, employee health, and the utilization of services, employers will realize programmatic improvements in vendor management,

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plan management, premium rate management, utilization of services, delivery systemmanagement, and employee health and productivity

Where employers can effectively manage their health benefits supply chain, they canrealize savings that may not be apparent within existing vendor contracts. Efficiencies

exist in the form of discounts that meet unrealized opportunities within utilization patterns. Balancing utilization between first-dollar programs (e.g. occupational clinics,workers compensation) and insured health benefits can generate significant savings aswell.

Within benefits planning, it has been difficult, if not impossible, to set appropriate cost-sharing and coverage incentives and appropriately match the benefits structures to

population requirements. Within SCA, the metrics exist to do so, delivering plans thatmanage quality care and utilization costs for both employer and employee.

Premium rate management provides employers with the ability to detect appropriate or

unnecessarily high premiums within their insured populations. When employers face premium rate increases for upcoming renewal periods, SCA and SPM will enable them torenegotiate contracts, benefit from at-risk agreements, and set premiums more in linewith claims experience.

Even within carefully designed plans, utilization of services may exceed projections.Isolated overages for provider groups can result from inappropriate referrals or ineffective gatekeepers. With SPM, action with providers and referral patterns can beidentified to realign costs with budgets.

Employers can improve how health services are delivered by knowing what services aregiven by which doctors and under what circumstances. With BRM, employers caninfluence how and when those services are delivered, and influence beneficiaries towardthose doctors and services that demonstrate the best quality and the lowest cost.

To further reduce costs, employers require a better understanding of occupational versusnon-occupational disability costs and health-related versus non-health-related

productivity issues. In relating health program performance to workers compensationand disability, employers will achieve savings in reduced absenteeism, increased

productivity, and better coordination between first-dollar and insured programs. Studieshave shown these costs, when poorly managed, increase direct health and productivityexpenditures by one third.

Balancing Employee and Shareholder Value

Through the managed-care years and into this consumer-driven period, companies havetried many tactical approaches to managing health benefits and workforce productivity.In the future, corporations will divide along what strategies they employ. Some willassume that health care costs are not controllable or are inherently cyclical. Thesecompanies will maintain their current practices, and be at risk for health care cost

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fluctuations. Other companies will assume that employee turnover undermines any healthimprovement strategy. These companies will focus on tactical short-term approaches thathave demonstrated limited success. Other companies will ask employees to share the

burden of defect-laden health care costs, and manage these relations with their unions andworkforce. Certain corporations, however, will employ a supply chain approach to focus

on the inherent cost-saving opportunities available without compromising their employee benefits offerings.

These corporations will be marked by:

Using Supply Chain Analytics to integrate and analyze cost and utilization dataacross the health care spectrum to identify cost or health outcome inefficienciesfrom care and service providers;Using Supplier Performance Management to leverage health and cost strategieswith vendors;Reducing the time and cost associated with proper Financial Performance

Management and business planning exercises to manage a supply chain;Engaging in Beneficiary Relationship Management toward a common goal and perspective on utilization and satisfaction.

There are many significant cost-saving opportunities available today for innovative andforward-thinking corporations that seek to reduce the inefficiencies in their health caresupply chain, improve the quality of health services delivered to their beneficiary

populations, and effectively manage costs and risks for occupational incidents. As inother corporate venues where supply chain management has succeeded, thesecorporations will be known as world class.

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iMerry, MD and Brown, JP. 2002 From a Culture of Safety to a Culture of Excellence, Journal of Innovative Management. 7(2): 29-46.

ii Six Sigma is a universally accepted measure of manufacturing and service quality. Six Sigma is a disciplined, data-driven approach and methodology for eliminating defects. To achieve Six Sigma, a process must not produce more than 3.4 defects per million parts or service events.iii

Kohn, LT, Corrigan, JM, and Donaldson, MS. 1999 To Err is Human: Building a Safer Health Care System. Institute of Medicine, published by the National Academy of Sciences. Becher, EC and Chasin, MR. 2001. Improving the Quality of Health Care: Who Will Lead? Health Affairs 20(5): 164-179.iv The EPF found levels holding constant around 77%, http://www.epf.org/research/newsletters/2003/et20030113.pdf.v $1,350 estimated based on 30% of the $4,500 average health benefits cost per employee.vi

Institute of Medicine Report Crossing the Quality Chasm. 2000. Article reports that patients who have access to pertinent health information doexperience improved health outcomes, compared to those patients who do not have access to such information.

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