E-procurement 101 for health plans
By Dennis Toohey, January 30, 2012
Reduce costs and meet medical loss ratio requirements using a centrally controlled, Web-based process that integrates procurement, accounts payable and accounting.
The Health Care Reform Act (HCR) is now being implemented. Medical loss ratio (MLR) requirements mandating that health plans spend at least 80 percent of premiums on care for individual and small group policies and 85 percent for mid/large 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 to 85 percent window, leaving 15 to 20 percent of revenue available to pay for non-MLR administrative expenses — and, hopefully, leave a profit.
MLRs, however, will 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 e-procurement software and the right strategy can track, control and maintain visibility to MLR and significantly reduce administrative spend to maximize operating margin.
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 percent of insurances would not have met this requirement for individual plans, 30 percent for small group and 37 percent for mid/large 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: E-procurement
How can health plans avoid the rebate crisis and meet the challenge of detailed cost tracking? Answer: a system that can simultaneously 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.
A procure-to-pay (P2P) solution enables the integration of the purchasing department with the accounts payable (AP) and accounting departments. With the procurement department responsible for correct cost assignment at the requisition stage, the data accuracy that this integration provides allows precise cost assignment for accounting and accurate general ledger (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 10 other user-defined tracking categories.
In this way, all costs are being tracked, completely visible and assigned to the appropriate category, which makes information easily accessible. By centralizing authority over the integrity of this process in the procurement department and having the system supported by the right Internet- (cloud-) based system, e-procurement 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 e-procurement solution to outsource the entire AP function to their bank, resulting in enormous improvements to efficiency, cost and time.
E-procurement system benefits
• 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; and
• Paperless vendor management.
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 percent and processing-time improvements measured in weeks.
Puridiom, for over 28 years an e-procurement technology and services provider, was named by Aberdeen in September 2011 as having the broadest overall P2P functionality, offering both cloud and licensed platforms for healthcare organizations of all sizes.
About the author
Dennis Toohey is director of healthcare solutions for Puridiom. His 20-plus years of experience include procurement management and systems, strategic sourcing and supply-chain management for companies such as Blue Shield of California and North American Philips. Toohey is a BBA and MBA graduate of the University of Notre Dame.
For more information on Puridiom solutions: http://www.puridiom.com.
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