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Utilizing Purchasing Resources To Control Spiraling Healthcare Costs


Todd R.C. Neely
Todd R.C. Neely, Vice President, Kingswood Associates, Chicago, IL 60652, 312/737-3550.
Marybeth Regan
Marybeth Regan, Product Manager, HealthCare COMPARE, Downers Grove, IL 60515, 708/241-7517.

79th Annual International Conference Proceedings - 1994 - Atlanta, GA

ABSTRACT. Every company is justifiably concerned about soaring healthcare costs. It is now possible for companies to spend 25% of their wage and benefit costs on employee healthcare, which is an increasingly volatile labor relations issue.

The recently unveiled proposal for national healthcare has generated diverse opinions on what consequences any enacted legislation would have on businesses. Few companies understand what aftermath these proposed changes may have on its financial position or on its employees.

Most companies do not involve their Purchasing department in the healthcare benefits procurement process, yet two areas could be positively affected by utilizing the department's existing skills and professionalism:

  • controlling healthcare costs under the present system, and
  • preparing for the changes that will accompany the phase-in of nationalized medicine.

THE FACTS. Each year, the United States spends more on healthcare than any other industrialized nation - almost one trillion dollars or roughly 15 percent of our gross national product (GNP). The healthcare percentage of the GNP is expected to reach 20% by the year 2000.

Health benefit costs continue to climb at a rate that exceeds the consumer price index. Between 1986 and 1991, the average cost for an employee health plan went from $1,849 to $3,546 per employee. (See Figure 1.) A recent survey of U.S. industry revealed that the average cost for employer-sponsored group medical plans has risen over 20% annually.

Many employers are no longer prepared to bear the total cost of healthcare benefits. More employers are shifting a larger percentage of the plan cost to employees in an effort to control and contain the company's healthcare expenditures. (See Figure 2.) Nine of ten employers said they would increase the employees' portion of premium costs, and two of five stated they would cut employees' medical benefits. Interestingly, 21% of the employers reported that increasing employees' premium contribution, rather than implementing managed care or self insurance strategies, delivered the most effective cost-containment strategy. Over the past several years, apparent "savings" were usually attributed to implementation of these alternative delivery systems. These savings in fact are illusory, the result of nothing more than benefit reductions, increased employee cost sharing, and a slowing of the general rate of inflation. In terms of real dollars (current dollars adjusted for inflation), escalation of healthcare costs has been steady and relentless.

CURRENT HEALTHCARE PACKAGES. Employee and dependent healthcare benefits provided by companies can be placed in the following categories:

Fee for service - Employees are provided with coverage for healthcare services by the doctors of their choice at the facilities of their choice. The employee however typically pays 20% of the covered charges and further must satisfy a deductible requirement.

Managed care - The Health Maintenance Organization (HMO) managed care model is the most well known. Healthcare services are delivered to employees by a specified network of providers at designated treatment sites. The usual charge to employees is a $5-$10 copayment at the time of service.

Combination - Companies provide employees with coverage that is a combination of the above types. The employee makes a token copayment if treatment is received from the designated network of providers but if the healthcare provider is outside the specified network, the employee must typically pay 20% of the covered charges.

None - For any number of reasons, some employees do not have health insurance coverage through work. These employees can apply for individual policies; qualify for dependent coverage on spouses' existing policies; or go without coverage.

The structure and amount of plan benefits included by the company determines the cost of coverage for the group of employees. Available coverages that must be examined are: deductible requirement and out-of-pocket maximums, and coverages such as hospitalization, emergency services, hospice, home care, eye exams, corrective lenses, dental services, prescription drugs, and mental health coverage.

PANACEA OR PANIC. The existing healthcare industry is very complex and confusing. The dissatisfaction with today's system has lead to a proposed realignment of healthcare access, benefits and financing.

On September 22, 1993, President Clinton presented to the nation his plan to reform our healthcare system. The specifics, as the legislation is debated in Congress, will be increasingly refined. The ultimate paradox is that the Federal Employees Health Benefit Plan which utilizes the much touted managed competition ideal - the original inspiration for the Clinton proposal - would be abolished.

The following issues will need to be addressed as Congress settles on the final reform health care legislation. Issues that will have an impact on your company's health care benefits plans:

Large companies need to know if the plan allows them to opt out of the specified alliances and self insure, the amount of any imposed payroll tax, and if worker's compensations costs will be included.

Small companies need to know if they are mandated to provide health coverage to all employees and, if so, what the minimum requirements are; the availability of subsidies for low wage workers, and affordability of the mandated coverage.

Insurance companies need to know if the plan sustains only large insurers, the mandated benefit package, and application of price controls to insurance premiums.

Other issues requiring decisions: coverage for retirees; taxing bracket for healthcare benefits, tort reform, and the plan to ensure quality medical services.

PURCHASING. Purchasing managers have traditionally not been involved in purchasing healthcare benefits even though they possess both the education and experience to satisfy the long-term and short-term health benefit objectives of the company.

The techniques purchasing managers typically utilize would fulfill similar company requirements if applied to healthcare benefit analysis and purchase. The Purchasing Department must have the following capabilities before the department could successfully become involved with the decisions to provide healthcare benefits. These techniques include:

  • Sourcing vendors - Identifying and qualifying appropriate providers as well as alternative sources.
  • Develop purchase specifications - determining the objectives, criteria, and the application of selection criteria consistently to all vendors.
  • Total-cost analysis - identify the direct and indirect costs of various options and calculate the actual total cost.
  • Vendor selection - Vendor selection focused on long-term contracts which establishes long-term win-win relationships with vendors. The negotiation with vendors, determining terms and conditions, hammering out agreements with a wide range of considerations including price, access and service.
  • Performance measurements - Key parameters in assessing performance include such factors as reliability, price history, quality, and outcomes measurement.
  • Purchasing research - As each new type of purchase requires research relating to material use, this purchase will also require factual data of not only the industry and its terms but also trends based on geography.
  • Performance evaluation review techniques - Determination of performance review and parameters to the specific purchase. If a multi-year contract is being considered, it must be continuously monitored by the users and compared to the contract performance expectations. Shortfalls in performance should be documented and brought to the attention of the plan (vendor) immediately. Annual review of the vendor is insufficient for performance assessment. Performance should be assessed on a semi-annual basis.
  • Win-win negotiations - proper assembling of facts, statistics and the knowledge of how to use them for this purchase for proper negotiation.
  • Establishment of a vendor rating program - A consistent method for rating vendors must be based on criteria which includes price increases, promptness in service and other items vital to the specific purchase.
  • Value analysis - Determine the ways to increase value for employees through the focus on areas of priority, combining both internal changes and vendor modification for a program with enhanced value for employees.
  • Fiscal management and cost control - Since the decision for health benefits is not a short-term or one-year decision, the cost needs to be evaluated over the long-term. All economic considerations of cost need to be evaluated.

Today's turbulent atmosphere surrounding all healthcare issues offers purchasing managers an opportunity to expand their areas of involvement. The forthcoming reform package effectively negates the "we've always done it this way" argument commonly used to exclude purchasing experts. Old methods must be analyzed, modified and continually refined to meet the new challenges caused by today's upheaval. Purchasing professionals can position themselves to provide their company with answers to new questions about healthcare access, benefits, financing, and reform implementation. At a minimum, optimum benefits could be secured for the company by having Purchasing's expertise in vendor identification and development; complex contract negotiations; and least-cost option analysis focused on assisting with company healthcare benefit acquisition.

* This article is missing charts. Call the NAPM Information Center for a hard copy of the article with charts.

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