A Better Way for Employers to Procure Health Care - Harvard Business Review

Procurement of goods and services is at the heart of good business practice. U.S. companies manage their supply chains with diligence to ensure suppliers meet their standards for quality and affordability, but the vast majority don’t behave in this fashion when purchasing health care services. It is a costly mistake. However, the experiences of a handful of large employers — including Intel, Boeing, and the State of Washington — that are using their purchasing clout to improve the quality and affordability of health care that their employees and dependents receive shows that there is a superior alternative.

Conventional practice. Here’s how most employers deal with the health care services they offer their employees and their dependents. First, they often outsource design and management of health care services to brokers, consultants, and health plans that have little means or incentive to improve quality or affordability. In doing so, they lose control over care providers and expose themselves and their employees to the famously wasteful business practices embedded in contracts between providers and health plans. In short, employers disconnect from managing one of the most important and costly expenditures for their organizations.

Second, employers “in-source” accountability for health care services to Human Resources as a “benefit” rather than a service to be procured to maintain the health, well-being, satisfaction, and productivity of their workforce. With a misguided emphasis on “choice” of more providers and services, employers fail to shield their employees from a largely unvetted array of health care suppliers and practices. The result is predictable: immense and costly variation in access, quality, and safety. As long as employers distance themselves from the important work of purchasing health care, up to a third of their spend will convey no value.

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Third, employers respond to the resulting cost of health care in a misdirected way. Instead of demanding high value from providers and health plans, employers accept the price of inconsistent quality, then pass a proportion of these costs to employees through “total compensation” packages where rising health care expenditures displace take-home pay. Or employers may delegate the purchasing of health care to their employees through high deductible plans, health saving accounts, defined contributions, or health care exchanges, leaving them where they have no leverage with the health care industry.

On a larger scale, poor purchasing practices among employers are not only harmful to their organizations and their employees, they create and sustain a U.S. market for inconsistent care delivery by providers and dysfunctional payment by health plans. The resulting high per capita costs for U.S. business compared to global trading partners puts them at a serious disadvantage in the international market and is one contributor to the off-shoring of jobs.

A superior approach. A few leading employers such as Intel, Boeing, and the State of Washington have stopped excusing the health care industry from performance standards long expected of other suppliers. They are taking control of their health care supply chains. What they are doing, in simple terms, is what they do best: applying the tools of procurement to gain for their employees and their organizations the best possible health care services at a price affordable to all. Such an approach creates a market for quality in health care, can help lift the lid on salaries, and can even serve to keep U.S. jobs at home. Learnings from these early adopters can jump-start the efforts of others.

An illustrative case is the State of Washington’s Health Care Authority (HCA), the purchaser of health care services for state employees. The HCA is applying supply-chain tools to purchase high-quality surgical “bundles” defined by Washington’s multi-stakeholder collaborative that includes large employers, health plans, providers, and quality organizations. (A bundle is a defined package of care, offered at a single price, that covers the total cost of treating a patient for a condition like a knee replacement, from the moment of diagnosis through recovery (e.g., physical therapy.)

Here are some lessons from the collaborative on procuring high-quality, high-value health care:

Focus on targets of opportunity. A way to get started in applying supply-chain methods to health care is to identify a few targets of opportunity: discrete, non-urgent medical conditions of high frequency that have a high aggregate cost and a high variation in price and quality among provider groups. What quickly emerges from this analysis is high-cost elective surgery: total joint replacement, spine surgery, cardiac surgery, and bariatric surgery. These are good places to begin applying supply chain methodology.

Define the product specifications. This is where the general concept of bundled services can be applied. But all bundles are not alike. Unless appropriateness standards are included, it is likely that operations will be performed on patients who don’t need surgery: quality and outcomes might be exemplary in this scenario, but the operation may be unnecessary.

Further, unless safety standards are included in the bundle, high-risk patients can be taken to surgery without optimizing their health. Complications and readmissions may befall the patient and avoidable costs may accrue to the employer. When Virginia Mason applied appropriateness and safety standards to patients referred for lumbar fusion, it found that 58% would not qualify for this major operation. And unless “return to function” is part of the deal, operations can be a success from the perspective of the surgeon but not from the perspective of the patient.

Measure what’s important. Employers should require the same reporting standards from providers that they require of other suppliers. The health care industry has defined a huge array of quality indicators, many of which are important process measures that providers use to monitor safe practice. But these indicators often come across as unintelligible jargon to employers with little utility as guides to purchasing.

Employers should require their providers to report measures that mean something to them and their employees – for example, access, appropriateness, safety, patient care experience, avoidable readmissions, and return to function. And these reports should be sent from the provider to the employer every 12 weeks. (Customary performance indicators from health plans based on claims data have reporting cycles that take many months and fail to capture a number of metrics important to employers.)

Don’t pay for defective products. An obvious and costly example of a defective product is an avoidable hospital readmission following surgery. A list of nine avoidable complications, developed by Medicare for total joint replacement, has been accepted as a market standard by a number of purchasers. Employers should not pay for avoidable readmissions and should insist on a warranty against these unnecessary costs.

Cap the price. If you choose to purchase an explicit and comprehensive surgical bundle from a provider group, cap the price. With fixed price and a warranty against avoidable complications, accountability for appropriate, safe, efficient and effective care is transferred to the provider — where it belongs.

Use a request for proposals to find the best providers. If an employer has copied the model of a market-tested bundle, such as that developed in Washington State, it is not difficult to create an RFP and circulate it among provider groups. When the HCA did this for the joint replacement bundle, provider groups responded. The HCA vetted applications, arranged site visits to providers on their short list, and chose a medical group that met its needs — rather than the needs of an intermediary. A robust contract followed that included an explicit evidence-based product, market-relevant quality measures, a fixed price, and a warranty.

A health plan can manage such a contract, but in the Washington market, health plans have been slow to take this opportunity. Small, specialized, third-party administrators have moved rapidly to fill this void by creating separate contracts (“carve-outs”) for employers that allow them to purchase an innovative bundle directly from providers. The consequence is a trend toward employers contracting directly with providers in a more efficient and transparent market for quality.

Surgical bundles are but one example where innovative employers have introduced the tools of procurement and supply chain management to health care. In doing so they have begun to flex the muscle of their purchasing power to bring out the best in their health care suppliers.