Healthcare sourcing for dummies: How to find the best benefits deals

Health care buying is a mystery to the average business professional, with annual negotiations more reminiscent of the heydays of the De Beers diamond monopoly than the detailed analytical sourcing exercise that a massive expense representing 18% of GDP should warrant.

The typical annual renewal starts with HR professionals giving their insurance brokers a list of employees with basic demographics and the overall health care cost incurred over the last several years. The broker comes back with prices from a handful of insurers for administrative services, projected per employee costs of using their network, and risk products such as stop-loss for smaller employers. Unsurprisingly, most quotes are up vaguely outlined and cluster closely together. Everybody feels good and a deal is done, usually with the incumbent.

Insurers’ key selling point is to give access to their provider network at prices that companies presumably cannot obtain on their own. They also provide transaction processing and compliance services, make payments, interpret contracts, manage disputes, etc. It is fair to ask how well insurers source their network, but until now nobody really knew, as the industry put a tight lid on pricing data, even going to court to keep it secret.

This year the federal government ordered hospitals to begin publishing the actual prices negotiated with insurers. It is now abundantly clear that prices for identical services vary enormously not only by provider and location, but also by negotiator. Variances are huge and not always as expected, with large buyers not always paying the lowest price. Therefore, corporate benefits managers should investigate whether they can do better than their insurer in the subset of procedures that matter most to their covered population.

Leaving aside how this could have happened and what to do about it in the long term, we will go with Keynes’ observation that in the long run, we’re all dead, roll up our sleeves, and source health care like any other service.

We suggest the following strategic sourcing steps:

Buyer baseline. Establish a granular basis against which to compare bids and service performance, essentially the list of past and expected medical services by exact location and time preference, pharma, administrative services, and any risk products. Corporate buyers can easily obtain this data from their insurers.

Supplier universe. Understand suppliers’ capabilities by disaggregated value-add components and determine the most competitive players to include in a request for proposal (RFP) process. Even if the intention is to rebundle service components, it is critical that data collection takes place at the most granular level possible and includes all capable providers.

Pricing basis. Determine the best way to compare prices among suppliers, maximizing information for negotiation, and aligning incentives between the parties. We suggest creating a prioritized list of most frequently used services by location and time preference (i.e., emergency vs. elective) representing roughly 80% of the total expense and obtaining actual “per procedure” prices. The less frequently used items may be priced as discounts off provider’s list prices or Medicare rates.

Request for proposal. The purpose of the RFP is to obtain the data necessary to make an optimal economic decision for the long haul. While tedious, the costs of running an RFP process are quite low compared to the potential benefits, as interesting local capabilities and pricing variances are likely to be discovered.

Evaluation model. Sourcing health care is a network design problem: Providers deliver services to patients that are time and location dependent, while patients have service level requirements (immediate vs. elective care) and performance preferences (provider choice, co-pays, coverage limits, etc.). The goal is to create an employer-specific network of providers that is optimized for cost and employee satisfaction, rather than renting the generic national network of an insurance company.

HHS rules regarding pricing transparency and a dispersed post-COVID workforce have finally triggered the normalization of the health care services marketplace. It will take the better part of a decade to fully materialize, but leading employers of all sizes can take advantage of the shifting dynamics now. While it seems analytically complex, the rewards are very substantial, and the investment is well worth it.

Hans Dau is the CEO of the Mitchell Madison Group