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A Solutions-Based Approach
A White Paper
Compared to other industries, the health care industry in the United States is fragmented
and disjointed at every level of the supply chain–from patients, to physicians, to facilities,
to insurers, to payers. Little, if any, information exists across these levels to demonstrate
quality or service value from a purchasing perspective. As a result, employers have been
challenged with complex purchasing decisions for health care services. Experts estimate
that 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 product
or service offered in any industry that conveys this level of waste. As manufacturers
strive toward Six Sigma quality levelsii, they have achieved on average a production level
of 230 defects in parts per million. It is estimated that the defect rate for health care
services ranges between 6,000 and 300,000 parts per million.iii
Most employers already have elaborate programs in place to monitor severely ill
beneficiaries, and some offer new consumer-driven health plans that make beneficiaries
accountable 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
business intelligence required to target and manage these programs effectively. These
approaches do not address the larger cost-saving opportunities available using proven
supply chain approaches. Successfully managing the health benefits supply chain will be
a critical differentiator between those corporations that create shareholder value and those
that erode shareholder value.
Without measurements of quality or value within their health care supply chains,
employers are currently purchasing services that contain on average $1,350 of direct
expense per employee that add no valuev. Beneficiaries themselves assume additional
expenses, in the form of co-payments and coinsurances, for services that do not achieve
the desired outcomes.
To describe today’s health benefits delivery process as a supply chain is like describing
the 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 various
sizes, 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. There
is 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 a
contract, where sometimes the stock is too much, sometimes too little, and sometimes the
wrong type. Relatively simple questions about the costs of services delivered to
beneficiaries can be difficult and expensive to answer, even though millions of dollars in
expenses 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 and
requirements 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.
Common definitions of a supply chain begin where raw materials are procured and
assembled into a consumable form, and end where products are distributed and ultimately
consumed. Although it can be difficult to view health benefits in this context, we propose
that employers will be able to do so by asking the following questions:
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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?
Along this supply chain, as with any other, managers can maximize output and minimize
waste by:
Decreasing “held” inventory and “stock” overruns while still maintaining high
customer service levels, through the use of Supply Chain Analytics;
Optimizing the supplier base and developing supplier relationships to reduce
overall costs, using Supplier Performance Management;
Increasing intelligence among all nodes of the supply chain to create an
uninterrupted 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 each
level of the organization. A solutions-based approach addresses the needs of chief
financial officers, vice presidents of human resources, chief medical officers, benefits
managers, and health care analysts, as well as employees. A solutions-based approach
provides employers with accessible and relevant metrics, information, and tools to
improve decision-making regarding health benefits programs. The four components of
this approach are:
Supply Chain Analytics
Supplier Performance Management
Financial Performance Management
Beneficiary 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 all
generated from the same information source. Human resources executives can gain a
comprehensive view of health care cost drivers, financial and clinical indices of health,
productivity, and cost relative to their beneficiary population. Benefits managers and
health care specialists can create detailed analyses to test planned strategies against actual
data and fine-tune approaches before implementation. Chief medical officers can track
resource utilization against disease management programs or wellness initiatives. Health
and safety managers can use the data to create customized case management or return-to-
work programs in conjunction with respective health benefits programs. Furthermore, the
cost 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:
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, and
reinsurance;
Increasing supplier accountability toward cost and quality goals;
Driving employer purchasing power to create better negotiation leverage with
vendors.
Gains from Financial Performance Management for the enterprise include the following:
Developing forecasts of health care budgets using proven clinical and financial
methodologies based on actual integrated data, not estimates;
Tracking health care expenditures toward budgets and fund reserves on a
quarterly basis;
Monitoring the financial impact of health care cost-reduction initiatives;
Evaluating the costs, returns, and paybacks for investments in workforce health
and productivity, and making determinations against all corporate investments for
funding decisions;
Quantifying impacts to shareholder value from health care strategies and related
programs.
Gains from Beneficiary Relationship Management for the enterprise include the
following:
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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.
Where corporations now must manage processes as a supply chain, health benefits
managers must look beyond what has traditionally been a purchasing exercise, and
examine 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 inputs
toward 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 an
activity basis alone in the form of improvements in staffing allocations, administrative
payments to vendors, consulting fees related to analysis and reporting, and new
efficiencies from software and technologies.
Activity-Based Improvements
Input 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. Once
this information is readily available, an analytical framework must lead to actionable
information on process structure, desired output, and strategies that identify cost and
quality 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 and
approaches 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 Improvements
When 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 system
management, and employee health and productivity
Where employers can effectively manage their health benefits supply chain, they can
realize 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 as
well.
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 that
manage 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 to
renegotiate contracts, benefit from at-risk agreements, and set premiums more in line
with 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 be
identified to realign costs with budgets.
Employers can improve how health services are delivered by knowing what services are
given by which doctors and under what circumstances. With BRM, employers can
influence how and when those services are delivered, and influence beneficiaries toward
those doctors and services that demonstrate the best quality and the lowest cost.
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fluctuations. Other companies will assume that employee turnover undermines any health
improvement strategy. These companies will focus on tactical short-term approaches that
have 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 and
workforce. Certain corporations, however, will employ a supply chain approach to focus
on the inherent cost-saving opportunities available without compromising their employee
benefits offerings.
Using Supply Chain Analytics to integrate and analyze cost and utilization data
across the health care spectrum to identify cost or health outcome inefficiencies
from care and service providers;
Using Supplier Performance Management to leverage health and cost strategies
with 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 and
forward-thinking corporations that seek to reduce the inefficiencies in their health care
supply chain, improve the quality of health services delivered to their beneficiary
populations, and effectively manage costs and risks for occupational incidents. As in
other corporate venues where supply chain management has succeeded, these
corporations will be known as world class.
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i
Merry, 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 do
experience improved health outcomes, compared to those patients who do not have access to such information.