Financial Wellness

Improving Health Plan Cost and MLR Attainment with eProcurement

Why eProcurement for Health Plans?

eProcurement: A uniform and centrally controlled paperless, web-based enterprise process that tightly integrates procurement, accounts payable and accounting. The Affordable Care Act (ACA) is now being implemented. Medical Loss Ratio (MLR) requirements, the requirements for Health Plans to spend 80 percent of premiums on care for individual and small group policies and 85 percent for mid to large groups, are fully in force.

Health insurance companies must closely track and control their medical costs, quality and member education spending to stay within the 80-85 percent window, leaving 15-20 percent of revenue available to pay for non-MLR administrative expenses. This is just the tip of the iceberg. In many states this same level of cost detail with auditable assignment of costs to products and channels of sale will also be required as justification for rate increase.

The answer to the question of how to provide this level of detailed accounting for every administrative spent item can be found within the procurement department. 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 while at the same time be an engine for real spend reduction.

This white paper will show how using eProcurement software and the right strategy can help health plans track, control and maintain visibility to MLR and significantly reduce administrative spending to maximize operating margin.

What Health Plan Organizations Face Today

Increased complexity in cost tracking. The new MLR mandate requires, beginning in 2011, health plans to spend at least 80-85 percent of premium dollars on medical care and health care quality improvement, rather than on administrative costs. If they don't, health plans will be required to provide a rebate to their customers starting in 2012.

This requires tracking and visibility into the dollars spent in these categories. MLRs vary from market segment to market segment, requiring even further tracking and categorization of spend. Add cost tracking by each State in which the Health Plan does business and the level of complexity increases.

According to a report issued by PriceWaterhouseCoopers in May, 2010, and reported as well 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 of 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 to large insurers. Adding to the problem of reducing spending to the required levels, most Health Plans are just not equipped to handle this level of detailed cost tracking and many will pay a high price.

The Answer: Control Spend with Procurement

How can Health Plans avoid the rebate crisis and begin the tedious and complicated task of detailed cost tracking? The answer is to implement a system that can significantly reduce administrative cost and improve spending value and control.

It must encompass all administrative spending, including specialized requirements such as marketing and temporary labor, and follow a single requisition, purchase and payment workflow. The answer is to control spend with a uniform Procure-to-Pay solution.

How It Works

A procure-to-pay (P2P) solution enables the integration of the purchasing department with the account payable department. With Procurement responsible for correct cost assignment at the requisition stage, the data accuracy that this integration provides allows precise cost assignment in accounting for posting to the General Ledger.

Procure-to-pay systems are designed to provide organizations with 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.

Most of the companies using these systems look for centralization of their procurement department, or to set up a shared services organization for the same purpose. In the case of a Health Plan, P2P can centralize the procurement functions and enable control by combining the management of all spending categories in a fully integrated system that provides precision in assignment of all spending to the cost center level.

The cost center accounting detail can then be carried from the item requisition approval process all the way through invoice vouchering, payment and general ledger posting- with reference at each processing step to the cost center, project, contract, or item budget. This ensures that all costs are being tracked, visible and assigned to the appropriate category, making information easily accessible for reports.

By centralizing Procurement authority and by fully using the paperless world of the internet (eProcurement), suppliers and vendors can also be efficiently managed to include new vendor registration and qualification, procurement requirement bidding, as well as invoice submission, reconciliation and automatic AP vouchering, so that money is accounted for at all times in a uniform, low-cost and paperless way.

eProcurement enables health plans to have all administrative spending correctly vouchered, fully visible, and monitored by plan, product, channel of sale, and spend category. All spend is totally controlled in a single workflow process regardless of type of expense. In addition, best in class streamlined practices for procurement sourcing and administrative execution are engaged. In many cases, low value spend can be automated and self-service for end users.

What are the Benefits?

Along with the benefits of cost tracking, visibility, report management and overall savings, additional benefits to using a good Procure-to-Pay solution include:

  • Greater internal efficiency by virtue of standardized, self-service tools for users.
  • Adherence to business rules that can be personalized for the individual Health Plan.
  • Ability to interface and trade data with common ERP and transaction systems.
  • Ability to link to other external systems such as vendor catalogs, and specialized vendor systems, travel management, or document management systems, among others.
  • Accurate cost assignment for MLR purposes.
  • Contract compliance and budget performance.
  • Accounts Payable eProcurement interface that provides accounting with precise and accurate cost center level, product and channel of sale data.
  • Internet paperless invoice submission and vendor discrepancy resolution.

Health Plan organizations are seeing a real need to change the way their business is being run. Changes must be made in order to stay in business and grow. Procure-to-Pay solutions have been proven to meet the need for spending management, cost assignment and cost reduction that most Health Plans are facing today due to the ACA MLR requirements.

Improvements to administrative cost and accounting control at health plans adopting this approach have been dramatic.  Spend category savings up to 20 percent and processing time improvements measured in weeks are typical.

About the Author

Dennis Toohey is Director of Health Care Solutions for Puridiom. His 20+ 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. Dennis is a BBA and MBA graduate of the University of Notre Dame.

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