Time to Re-Think the Way Employers Purchase Healthcare

Astronaut Alan Shepard, the first American to ride a rocket into space, was once asked what he thinks about while he’s sitting in the capsule waiting for the launch. While the questioner no doubt was looking for a profound, perhaps even metaphysical answer, Shepard’s response was much more practical: “The fact that every part of this ship was built by the lowest bidder.”


That is the way business typically operates. When organizations are considering a major purchase they generally have policies and processes in place that fully leverage their purchasing power to obtain the best combination of quality and price. In other words, despite Alan Shepard’s tongue-in-cheek concerns they have standards established to ensure they get the best of both.


Once they have made a decision, the selected provider goes onto the preferred vendor list. If the employee expects to be reimbursed for an expenditure in that area, they are required to use that preferred vendor.


Strange then that the one exception seems to be the single aspect that touches more employees than any other: healthcare. When self-insured employers select a provider network, all the processes that go into investigating quality in conjunction with price seem to go out the window. Instead, the focus more often than not is on access and convenience.


In other words, the assumption is that as long as the provider is within the payer’s network the quality and cost of care will be the same. Unfortunately, that is simply not true.


The reality is that both quality and cost can vary greatly between providers in a given geographic market. Even when the care itself should be fairly standardized.


Knee replacement surgery is a great example. At this point, the procedure and materials required for a knee replacement are pretty well known. So much so that knee replacement surgery is often one of the first procedures to be included in an Accountable Care Organization (ACO), and was targeted by the Centers for Medicare and Medicaid Services (CMS) for a major initiative on cost and quality in 2015.


It has a defined beginning, middle and end, right down to expectations of how long recovery should take and how much physical therapy will be required. As a result, you would think there should be very little variance in the cost of knee replacement surgery from one provider to another.


You would be wrong, however, as this chart demonstrates. For example, there can be a more than $40,000 difference in cost for knee replacement surgery in Dallas, depending on which provider a patient sees. In most of the other cities the cost difference is more in the $20,000 - $30,000 range.


That’s a lot of money to pay for the convenience of not having to drive quite as far to obtain the surgery. Put another way, if the patient takes a taxi to the surgery, that’s a $20,000 cab ride. Try submitting that one on an expense report.


The real kicker, however, is that higher cost does not necessarily equal higher quality the way it often does with other purchases. For example, most of us expect a Tesla to out-perform a Prius on the highway, or a $7,000 Rolex Submariner to out-perform a $20 Timex in the ocean.


Research, however, shows that market forces – not quality – is the actual drive of prices in healthcare. Prices at hospitals with a lot of market power are higher regardless of the quality of care they provide.


These are the reasons employers need to start re-thinking the way they purchase healthcare, and applying the same rules, processes and demands they use when making other purchases.


Step one is establishing the standards for quality of care. Employers need to research each provider they’re considering when building their network and insist that they meet a minimum standard. This investigation should get down to the individual provider level, as quality can vary greatly within a hospital or even within a practice. In some cases, a provider may be approved for certain procedures and not others in order for reimbursement to take place. If they don’t want to perform this research themselves they can partner with an organization that already has the data and analytics to do so.


Step two is understanding the cost of care and matching the providers who can deliver the desired quality at pricing that is reasonable within the market, and that fits the demographics of its employee base. For example, primary care providers with a high co-pay are unlikely to be seen by a workforce with predominantly lower wages, thus negating the value of the plan. Especially when it comes to preventive care such as annual physical exams and cancer screenings.


With those two pieces of data in-hand, the employer can then build a provider network that makes for its employees. It may not be as large as a typical broad-panel preferred provider network, but it will serve the needs of both employer and employees better.


Building a sensible health plan isn’t rocket science. Or brain surgery for that matter. If employers will take the same approach they use with other major purchases rather thinking healthcare has different rules, they will be able to reduce their overall costs – and keep employees healthier and happier.


For more information on why access to providers is a poor way to build a provider network, drop us a note at heyimagine@imaginehealth.com