Managing the Health Benefits Supply Chain:

A Solutions-Based Approach

A White Paper

Copyright VitalSpring Technologies, Inc., March 2003

Table of Contents

Challenges to Efficiency in the Health Care Supply Chain.........................................3

Impact on Corporate Profitability .................................................................................3
Evolution of Employer Health Care Market Purchasing Dynamics............................4
Defining the Health Benefits Supply Chain..................................................................5
A Solutions-Based Approach .......................................................................................6
Value of Solutions to the Health Benefits Supply Chain.............................................9
Balancing Employee and Shareholder Value.............................................................10
Challenges to Efficiency in the Health Care Supply Chain

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

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 recognize
this as a mission critical issue and realize the impact health benefits costs have on
corporate financial performance. This impact, along with a struggling economy and
nonexistent 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 and
improve 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 is
unprecedented. Employers struggle with managing increasing costs and sharing this
burden with employees. Until recently, most companies have resisted increasing the
employee burden. A study by the Employment Policy Foundation found that the
percentage of health insurance costs paid by employers has remained relatively constant
since the early 1990s, although costs have consistently riseniv. However, with all the well-
known tactics of health care cost management exhausted, employers have begun to pass
health 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 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.

Evolution of Employer Health Care Market Purchasing Dynamics

Health Benefits as a Purchasing Function
Because 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 generally
tied 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 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.

Health Benefits as a Programmatic Function

Over 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 measure
their performance. Moreover, as employees and their families ultimately consume
services and drive expenditures, benefits managers have sought to engage them in
consumption and resource decisions. Without appropriate data and tools to generate the
appropriate information and deliver it to the right person, management efforts are
compromised.

Health Benefits as a Supply Chain

As every major process within a corporation is now viewed and managed as a supply
chain, corporate leadership realizes that the procurement and delivery of health and
related benefits for the workforce must also be managed as such, with appropriate
analysis of inputs and purchases, continuous management of processes, and measurement
of 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.

Defining the Health Benefits Supply Chain

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:

“Sourcing” for Health Benefits

 What 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, and
accountability?

“Inventory” of Health Benefits

 What health care services should be purchased, at what cost, and with what
expectations 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 Benefits

 What 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 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:

 Establishing administrative workflow efficiencies associated with generating

detailed, comprehensive, and timely reports;
 Validating health care strategies that make the best use of time and resource
commitments, 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 case
management, disease management, and consumer-driven options, applied toward
groups most likely to impact future costs.

Supplier Performance Management (SPM)

Supplier Performance Management views the entire health care supply chain from an
employer’s 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 allow
employers to set performance targets for suppliers. Employers can then monitor these
metrics 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 to
increase the accountability of all the suppliers in the health care supply chain and, if
necessary, gain negotiating leverage. Just as major automotive manufacturers set
standards 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, and
reinsurance;
 Increasing supplier accountability toward cost and quality goals;
 Driving employer purchasing power to create better negotiation leverage with
vendors.

Financial Performance Management (FPM)

Most employers have limited means of quantifying or qualifying health care performance
measures into financial metrics that can be tracked throughout the year, much less on a
quarterly basis. Financial Performance Management translates metrics from SCA and
SPM into operational and financial performance measures that CFOs need within the
budgeting process. CFOs can thereby manage health care funds and make appropriate
midterm changes in line with their organizations’ financial strategies. CFOs can also
track 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 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.

Beneficiary Relationship Management (BRM)

Beneficiary Relationship Management enables employers to engage beneficiaries in the
health care decision-making process through a combination of targeted permission-based
messaging, employee feedback, and health surveys, all integrated within management
reporting. The BRM solution creates an effective Web-based health portal for both
beneficiaries and employers. Beneficiaries can benefit from targeted health information
and have the opportunity to give meaningful feedback to the employer. An automated
health communication channel with beneficiaries can influence behavior toward benefit
offerings 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 care
costs.

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.

Value of Solutions to the Health Benefits Supply Chain

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.

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. Successful
implementations of solutions-based approaches have demonstrated efficiencies to reduce
total health and productivity expenditures between 3% and 10% for the corporation.

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.

To further reduce costs, employers require a better understanding of occupational versus

non-occupational disability costs and health-related versus non-health-related
productivity issues. In relating health program performance to workers’ compensation
and disability, employers will achieve savings in reduced absenteeism, increased
productivity, and better coordination between first-dollar and insured programs. Studies
have shown these costs, when poorly managed, increase direct health and productivity
expenditures by one third.

Balancing Employee and Shareholder Value

Through the managed-care years and into this consumer-driven period, companies have
tried many tactical approaches to managing health benefits and workforce productivity.
In the future, corporations will divide along what strategies they employ. Some will
assume that health care costs are not controllable or are inherently cyclical. These
companies 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 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.

These corporations will be marked by:

 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.