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Five Common Myths

Is your organization making health-care purchasing decisions in the most effective manner?

Monday, May 2, 2005
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Purchasing health-care services can be one of the biggest and most costly decisions for employers. So it's surprising, then, that many organizations do not have a formal system in place for choosing health-care plans, providers and programs.

A recent survey by Hewitt Associates revealed that only one in three employers has a strategic process for health-care purchasing, one that uses sophisticated tools and analysis to ensure the most effective and efficient decision-making.

Over the next five years, it's projected that half of all organizations will shift their health-care purchasing decisions from HR to the procurement department. While the intent may be to take advantage of supply-chain management or other traditional purchasing solutions, the fact is that, initially, these procurement solutions have focused on the simplicity of administrative processes and administrative costs rather than the total cost, value and quality of care, the three most important factors when making decisions affecting employees' health.

Whether HR or the procurement department makes the health-care purchasing decisions in your organization, it's important to remember that choosing the right health-care benefits and delivery systems is a complex, two-level process involving numerous geographical locations and thousands of employees.

The two-level process recognizes that employers can stage more efficient options and encourage better decisions, but only employees can make the very personal choices of doctors, hospitals, drugs and health behaviors. Too often, organizations fall prey to simplistic purchasing myths that prevent them from taking the right steps to make the most efficient and effective decisions. Here are five of the most common and dangerous myths, remedied with solutions that progressive organizations are using today:

Myth 1: Large employers drive the best discounts.

For most employers, health-care benefit costs consist of two major components: health-plan administration fees and claim payments to hospitals, physicians and health-care providers. On average, the health-plan administrative fees represent 5 percent to 10 percent of total health-benefit costs. The other 90 percent or so is the actual payments to the health-care providers -- that is, the hospitals and physicians.

Large employers can negotiate the health plan's administrative-fee levels, but not the price they pay to health-care providers. The health plans' payments to specific providers are negotiated for all covered employers within the local market, and plans do not have the flexibility to change this rate for any given employer.

For a hospital system or physician in a particular community, the fact that an employer has 50,000 employees nationally means very little to them because in the majority of situations, the employer represents less than 1 percent of the patients in that location.

On the other hand, the three largest health plans in the average community often represent 60 percent to 80 percent of all patients. Health plans aggregate local employers to drive group-purchasing discounts, and have dramatically more purchasing power in a local market than a large employer does.

The solution? Work with the best aggregator in each region or community. Health plans are powerful purchasing aggregators within the community, so your organization must work with the one that can deliver the best discounts. Negotiated discounts can vary greatly by health plan and community, so health-care purchasers need to make greater use of tools to benchmark and analyze plans across locations. Some of these new and sophisticated tools allow employers to delve further into the rates and compare the variations between plans, resulting in cost reductions of as much as 10 percent.

For example, there is a substantial variation in the unit-cost discounts among health-care providers. Plan A in Los Angeles offers a 54 percent average discount with providers in that market, while Plan B offers a 50 percent average discount. In Hartford, Conn., the same plan offers a 30 percent average discount versus 37 percent for Plan B, demonstrating that different health plans' expenditures per dollar of covered services vary dramatically by geographic location. Therefore, the health plan's local size and leverage are more critical than employer size in driving volume discounts.

Myth 2: Specific health systems have the lowest regional costs. 

Many employers believe they can choose a single PPO health plan that's negotiated the best contracts based on a single-employer case study or data from one region.

In reality, health-care delivery systems and health plans have evolved differently in each community. As a result, research data shows significant variations in quality, satisfaction and cost efficiency among plans and delivery systems from one community to another and among plans within a single community.

Best-in-class strategies focus on the ability to measure cost efficiencies and value through access to comprehensive data in each community.

This analysis measures contracts for the actual mix of services used by the employer in each ZIP code under alternative plans and delivery systems. Overall, choosing the best-in-class aggregator and delivery systems in each market can drive a 5 percent to 15 percent reduction in total health costs for an organization.

An ongoing study by Hewitt of more than 14 million participants from 350 major employers shows that financial efficiency (a measure of a health plan's effectiveness in controlling health-care costs after adjusting for differences in demographics, plan design and location) can vary dramatically from plan to plan within a given market. There are four categories of optimal plan selection criteria: financial efficiency, geographic access, employee satisfaction and plan performance. These measures can be benchmarked against a company's current strategy and culture to ensure the best fit for its employees.

Myth 3: Companies do better by self-insuring.

Some organizations believe they can optimize cost efficiency and financial risk by self-insuring all their health plans. As the size of the risk pool increases, the law of large numbers creates more predictable costs for large employers, making self-funding more practical. Other key differences between self-funding and fully insuring a health plan include health-plan risk and retention charges, additional mandated coverages and differences in contracted provider payments.

Under a fully insured arrangement, the health plan will add a risk element to its premium in order to avoid losing money. In addition, some health plans may be willing to reduce these risk margins in order to get or retain a specific customer.

Meanwhile, a self-insured employer takes on all of the risk of the higher number of claims from year to year. Some may purchase stop-loss reinsurance to protect against truly catastrophic situations, but this is unusual for employers with more than 10,000 employees.

Working with more than 350 employers, Hewitt used actuarial models to predict each location's total cost of health care in a self-insured arrangement and compared that to the total insured rate that was quoted for the same group. The results clearly demonstrate that a hybrid mix of insured and self-funded plans offers greater purchasing efficiency than either a fully insured or self-insured arrangement. By using sophisticated health-modeling tools, organizations can be up to eight times as accurate in determining their risk exposures.

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Myth 4: Rebates drive cost-efficient drug selection.

Many organizations still believe that maximizing rebates will guide employees to more cost-efficient drug selection and will lower overall prescription drug costs.

However, not all rebates for brand-name drugs are passed through to clients by their prescription-benefits manager. Even if they were, these rebates would not make up for the increased costs generated through higher utilization of expensive brand-name drugs.

A new solution to lowering overall prescription drug expenses is a condition-centric, cost-management approach based on a thorough breakdown of an employer's data. The results often reveal a tremendous variation in population health needs and alternative pharmaceutical therapies.

Claims data can show the degree of utilization of the lowest-cost drugs and how the outcomes are equal to or better than more expensive prescriptions. While the typical employer can reduce costs by 1 percent to 5 percent by maximizing rebates, savings of up to 40 percent are possible through optimal clinical substitution.

Programs that actively switch from one brand to another have failed to generate significant savings. However, switching from brand-name products to generic equivalents for any given condition can produce significant savings.

Appropriate clinical cost evaluations can determine areas where this can be most effective. Each 1 percent increase in generic utilization saves nearly $1.3 billion nationwide, far more than what rebates alone can generate in savings.

Myth 5: Abusive negotiating skills work with insured HMOs.

It has become a widely held belief that strong negotiating skills are all it takes to produce the desired cost results with insured HMOs.

While strong negotiating skills are critical to every purchase decision, most HR professionals would agree that first-hand knowledge of market pricing, including the amounts other health-care buyers are paying and what other competitive plans charge, is an essential component of an effective purchasing strategy. Table pounding is not only ineffective, it's harmful to the critical working relationship between employers and health plans.

Organizations must have the actuarial and underwriting skills to support fact-based negotiation. They must also have data on comparative risk profiles and what plans are charging to other clients and in the market.

Employers need to know the history of the best and worst deals health plans have cut, clinically indexed adverse selection analysis for their populations, and the variance or credit granted for design adjustment and more. In the absence of this data, all health plans believe they suffer from adverse selection and have the employer's worst risks -- akin to a reverse version of author Garrison Keillor's fictional town of Lake Wobegon, where "all the men are good looking and all the children are above average."

In order to deliver the greatest quality and value, decisions must

be supported by defining comparative value across employers, health plans and locations after adjusting for age, dependents, health risk, benefit design and area cost variations.

The company with the best knowledge of the market alternatives, health risks and points of leverage will maximize savings.

Jack Bruner is health management practice leader for Hewitt Associates, a consulting and outsourcing firm in Lincolnshire, Ill. 

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