Reducing Health Plan Costs with eProcurement
Posted on Mon, Jan 16, 2012 @ 10:17 AM
Making the Case for eProcurement in Health Plan Organizations
The Health Care Reform Act (HCR) is now being implemented and Health Plans are feeling the strain. Medical Loss Ratio (MLR) requirements mandating that Health Plans spend at least 80% of premiums on care for individual and small group policies and 85% for midlarge groups are fully in force. Health insurance companies must closely track and control their medical, quality and member education spending to stay within the 80-85% window, leaving 15 – 20% of revenue available to pay for non-MLR administrative expenses and, hopefully, leave a profit.
MLR’s, however, can vary from market segment to market segment and state to state requiring additional levels of tracking, categorization and reporting of spend. In many states this same level of auditable assignment of costs to products and channels of sale will be required as justification for rate increases.
The Procurement Department, with the right processes and system, can be the point of control for correct administrative expense approval, category and cost center assignment and at the same time be an engine for real cost reduction.
Health Plans using eProcurement software and the right strategy can track, control and maintain visibility to MLR and significantly reduce administrative spend to maximize operating margin.
There is a High Penalty for Non-compliance
Health plans not meeting MLR mandates in 2011 are required to provide a rebate to customers in 2012. According to a report issued by PriceWaterhouseCoopers in May, 2010, and reported by NAIC, many insurers are not meeting the MLR requirement. It is estimated that rebates will total $2 billion to $4.9 billion from 2011 to 2013 with some analysts predicting an even higher number.
In December 2011 The GAO reported that, using 2010 data, 57% of insurances would not have met this requirement for individual plans, 30% for small group, and 37% for midlarge insurers. Many Health Plans are simply not equipped to handle this level of detailed cost tracking and cost control and these plans will pay a high price.
The Answer: eProcurement
How can Health Plans avoid the rebate crisis and meet the challenge of detailed cost tracking? Answer: a system that can simultaneously both lower administrative cost and precisely assign those costs to meet MLR needs. Such a system must encompass all administrative spending, including specialized categories such as marketing and temporary labor, and follow a single requisition, purchase and payment workflow. The answer is to control spend with a Procure-to-Pay solution.
Procure-to-Pay in the Health Plan Environment
A procure-to-pay (P2P) solution enables the integration of the purchasing department with the accounts payable and accounting departments. With Procurement responsible for correct cost assignment at the requisition stage, the data accuracy that this integration provides allows precise cost assignment for accounting and accurate GL postings.
Procure-to-pay systems are designed to provide organizations both control and visibility over the entire life-cycle of a transaction – from the way an item is ordered to the way that the final invoice is vouchered and processed – providing full insight into cash-flow and financial commitments. Each processing step provides visibility to the cost center, project, contract, budget and up to ten other user defined tracking categories.
In this way all costs are being tracked, visible and assigned to the appropriate category, making information easily accessible. By centralizing authority over the integrity of this process in Procurement, and supported by the right internet (cloud) based system, eProcurement interactions with suppliers can also be automated to include new vendor registration, requirement bidding, invoice submission, reconciliation and automatic AP vouchering. Money is accounted for at all times in a uniform, low-cost and paperless way. Low value or routine spend can be automated or made completely self-service for end users. Because system logic replaces manual labor, some health plans have used the eProcurement solution to outsource the entire A-P function to their bank, resulting in enormous improvements to efficiency, cost and time.
Benefits for the Health Plan Organization
• Labor saving tools.
• Standard interface to internal systems.
• Easy linkage to supplier systems.
• Accurate cost assignment for MLR and rate justification purposes.
• Contract and budget compliance.
• Paperless vendor management.
Conclusion
Health Plans must lower and more precisely account for their administrative spend. Procure-to-Pay solutions have been proven to meet this need producing cost reductions up to 20% and processing time improvements measured in weeks.
Read more about Controlling Health Plan Costs in a new white paper.
