Smart Manufacturers Are Changing Their Healthcare Purchasing Philosophy

When it comes to improving the performance of your manufacturing firm’s health plan, it’s not what you buy, but rather how you buy it. Are you managing your healthcare supply chain with the same efficiency and effectiveness that you use to run your business supply chain?

Manufacturing CFOs like yourself look at healthcare as a selling, general and administrative expense. It’s a cost of doing business where a return on the investment is not expected. You certainly don’t expect it to increase your margin. But when you manage healthcare purchasing as an operating expense, you’re focused on the lowest acquisition cost.

Unlimited Credit Card

Typically, the way manufacturers manage healthcare purchasing involves choosing the least bad option from a variety of carriers who are all presenting at least a 10 percent (often higher) premium increase over the previous plan year.

Even worse — although through no fault of their own — employees make healthcare purchasing decisions based on whether or not a provider is in-network. By training employees to operate this way, you are, essentially, providing them with an unlimited corporate credit card to go out and buy healthcare.

Here’s why. If you had a group of employees traveling on a business trip and you told them they would only need to pay a $100 contribution toward the hotel room, what’s to stop them from choosing a Ritz Carlton over a Days Inn? Both provide a decent night’s sleep, but one will cost you, the employer, a significant amount more. You can forget about increasing your margin with a T&E report like that.

This is what manufacturing firms are doing now with their fully insured benefit plans. If a provider is inside your insurance carrier’s network, you’re giving the employee a free pass to choose any facility they’d like — regardless of cost and quality metrics. The employee doesn't know how much they’re costing the plan on the backend, they’re just following the rules by staying in-network and paying their responsibility.

Change Your Approach

To put an end to this practice and increase your margin once and for all, you have to change your approach to healthcare purchasing.

How is it done? Say your employee is looking for an in-patient facility where they will need to undergo a complex operation. Rather than letting the employee make the wrong decision and drive costs up by $75,000 or more, you can spend an extra $2,000 and save $73,000 by waiving their deductible, if they opt to have their procedure done at a center of excellence — one that has higher quality metrics at significantly lower costs.

Here is real Medicare data from Pittsburgh as an example:

• one hospital bills $20,800 for a joint replacement procedure.
• Another bills $103,000 for the same procedure.

Even within the same health system, meaning hospitals that are owned by the same parent company, it’s common for charges to vary by tens of thousands of dollars like this. There are a variety of reasons behind it, such as when the company is building a new facility at one location and needs to offset costs. Regardless, none of it is standardized.

There’s more:

• At the $20,800 cost facility in Pittsburgh, Medicare reimburses $11,495 for this procedure.
• At the $103,000 facility, Medicare only reimburses $7,300 for this procedure.

Even a network discount of 50% would have to be multiplied by nearly seven times what Medicare reimburses to make up for the cost differences for the same procedure charged at the most expensive hospital versus the least costly one.

Oh, and the $20,800 facility has a significantly higher Medicare quality rating than the $103,000 facility.

Wouldn't you want your employees going to the highest quality, lowest cost facility? It would reduce your cost while improving employee outcomes. Oh yeah, and dramatically increase your margin. You can do it by making it free to plan participants.

The service is still being rendered, the employee still gets the care, but you changed how you went about the process. Talk about a win-win. Get rid of the SG&A mentality and look at healthcare purchasing like a capital expense — one that can deliver a defined return on investment.