Health care needs less risk management and more supply chain management

Self-insured employers are fundamentally in the business of “buying health care”. A 1,000-employee company is going to spend $15 million on health care annually; most of that spending is on the same things each year, like MRIs, joint replacements, and drug infusions. When businesses are regularly spending such a significant amount of money, they have departments and tools dedicated to evaluating purchases. The people in these departments make sure that all the purchased units are competitively priced, efficiently delivered, paid correctly, and of high quality. Health care should not be an exception to this practice. 

Employer-sponsored health care is the only industry where purchasers spend billions per day yet do not judge their performance by how good their purchases were. Instead, a framework from insurance is used to evaluate purchasing. This framework focuses on aggregate metrics built to estimate future costs, rather than more actionable measures on the effectiveness of expenditures. Plan sponsors and their consultants focus on “risk management” when they should instead be focusing on “supply chain management”. 

Supply chain management has the tool set the industry needs to create a better and more efficient healthcare system. 

The risk management framework

The primary role of insurance is to smooth out payments over time. This role is especially important for unexpected payments. Insurers must set premiums high enough to pay out all claims over the year and generate profit; thus, their analysis tools largely focus on accurately predicting future population health care cost. 

To estimate future costs of health care, insurers built “risk management” models. These models include the following factors: population health, member cost-sharing, and aggregate rate-increases and “discounts” paid to providers year-over-year. In reports, these factors are often listed under disease categories (“musculoskeletal”, “cardiovascular”, etc.), categories of aggregate spend (“inpatient”, “outpatient”, “emergency”, “etc.”), or tracking of patient risk (“members with a chronic condition”). All reporting and management strategies revolve around these models, from disease management programs to high deductible plans. However, these models were built for insurance to help make cost projections, not for managing the very frequent and very high cost of purchasing health care. It is time for these tools to evolve.

When all analysis in health care revolves around these models, we become stuck trying to address “risk factors”, rather than manage the underlying purchases. Health care is not an aggregation of “musculoskeletal spend” and deductible payments. It is an aggregation of decisions in consuming health care. These consumption decisions are the goods and services that a health plan buys, from MRIs to hospital stays. The value of these products — their price, efficiency, and quality — is not included in any popular risk management framework used by employers and their consultants. 

Value today is only addressed indirectly through comparing carrier discounts, aggregate costs, or abstract population health measures. The individual value of health care decisions, or “units of purchase”, should not be taken as a given; health plans can control the value of those decisions through network, incentives, navigation, and utilization management — clear levers at a health plan’s disposal. The measure of how well those units are purchased is captured by the metrics that define value: price, efficiency, payment integrity, and quality. These are the metrics we need to track in order to make management decisions. 

Why supply chain management is better 

Supply chain management is a framework for buying inputs for a business. It considers concepts of outsourcing, insourcing, procurement, supplier evaluation, and more. General Motors (GM) considers every automobile part they buy as part of their supply chain.  Self-insured employers need to consider MRIs and colonoscopies — the health care services that all businesses buy — as part of their supply chain.  

If GM were to measure their purchasing performance by similar metrics to health care, it might look like the table below (with comparison to actual health care metrics):

In this scenario, GM would never have a complete inventory of the parts they bought or information on the cost and quality of any individual part. GM could predict future costs with this information, but their purchasing department could not manage them.

By employer’s taking a supply chain perspective, we can judge how well we are doing in a way that can be managed. For health care purchasing, we can ask questions like: Are the individual services being purchased at a fair price? Which suppliers are performing best? How do we want to change the distribution of services? Are we purchasing the right services? We know that services are going to occur in a plan year — the question is, how are we buying them and can we do better?

For example, through this framework, some metrics of performance could be the extent to which screening colonoscopies are occurring as expected, distributed to efficient locations at fair prices, and have good outcomes. Efficient screening colonoscopy purchasing would occur more frequently at ambulatory surgery centers, which are priced below $2,500 on average, occur with members who meet the clinical criteria, and have fewer post-procedure complications. 

Once we understand both the volume allocation and value of care, we can begin to figure out the strategies necessary to make health care services valuable. We can judge a navigation program, utilization management policy, incentive program, or network by the impact on the price and efficiency of healthcare. 

We can aggregate all unit purchases and judge a provider’s or network’s performance. As an example, a company spends 30% of their health care budget at Hospital A. Hospital A sells equivalent “units” for twice as much as Hospital B, with no better outcomes. We now know the most meaningful way to reduce costs is to purchase fewer or less expensive units from the more expensive provider; we can then determine how that can be possible.

This framework shifts our focus away from our population and refocuses our efforts on our suppliers (the providers, carriers, etc.). An employer can only have a limited impact on the health “risk” of a population, and as it stands, the evidence of savings from wellness programs and disease-based point solutions is limited. Alternatively, the evidence of savings from paying less for the same or better health care through a tiered, high performance, or narrow network is significant. 

A supply chain management framework aligns better with the decisions plan sponsors can make. A health plan can pay less for health care by purchasing services more efficiently. There are new products like high performance networks from the major carriers and new innovative companies that work to navigate members to more efficient and high-quality locations. There are also a variety of options, from direct contracting to onsite clinics and virtual care, that help put the health care supply chain under the control of the plan sponsor. What we lack is the framework, knowledge, and data to 1) push for this change, 2) verify the claims of those trying to engage with it, 3) collaboratively refine and join these efforts, and 4) ensure it is an appealing experience for members. This area is where consulting partners, the right data, and the right incentives can come together to make a positive impact on health care. The practice of benefits needs to add supply chain management thinking to its toolkit.

Risk management will not and should not disappear from health care, but the risk management framework alone does not lead to an effective, efficient marketplace. To make sure health plans provide value for our businesses and members, it is time to start approaching healthcare with supply chain management principles.

David Gaines is the CEO and founder of Careignition, Inc.