For large, self-insured employers, vendor management involves identifying and negotiating better arrangements with third-party vendors who administer benefits. A report from The Advisory Board Company shows that while vendor management is often overlooked by plan sponsors, the process can yield savings of between 5% and 10%.

For HR executives, "their experience is mainly in working with things that directly impact the employee," says John Workman, senior consultant of research and insights with The Advisory Board Company. "So plan design, setting the premiums - those have traditionally been more inside their control whereas the vendor management piece has typically been managed by an outside consultant."

An additional benefit to the process, Workman says, is that plan sponsors are likely to develop better working relationships with their third-party vendors, which will manifest itself in the form of better customer service.

Over the past 20 years or so, employers have tried everything from tweaking plan design and premiums to implementing case management and utilization management to save costs. Vendor management can be used as an additional tool in their cost-savings toolkit.

"Virtually every large employer has already looked to plan design and premiums and case management," says Workman. "They can do vendor management now because they've looked at the other areas pretty extensively."

In a report called "Next-Generation Health Benefits Management: Key Lessons in Unlocking Employee-Friendly Savings," Workman and his colleagues outline seven things employers should look at when thinking about vendor management. The lessons are categorized by three major vendor categories: stop-loss insurance, pharmacy benefit manager and third-party administrator and network.

And while it may seem like a daunting task, Workman encourages employers not to go it alone. "You should still use an external benefits consultant. There's too much back and forth with the vendors, too many contractual details, so you still want to be outsourcing some of that," he says. "Your job as an HR executive isn't to actually run the process, it's to better direct your consultant and give them more guidance on what, specifically, you're looking for."

The first step, he says, is to move away from the bundle. While many employers sign on to one contract with one vendor to provide all these services because it appears to be the cheapest way, Workman says that's often not the case.

"We found that when you carve those pieces out, you can almost always get a better deal if you shop for those services independently and go out to the open market and find the best individual product for you," he says.


Stop-loss insurance lessons

Stop-loss insurance is coverage purchased by self-insured employers to limit their exposure to catastrophic or unexpected losses. Workman says employers should make sure their coverage is safeguarded from hidden exclusions.

"You want to make sure your stop-loss insurance is free from any exclusions that would prevent you from being reimbursed for something you think you should be," he says. "Sometimes there are just exclusions you don't see until it becomes a problem. Make sure those exclusions aren't going to show up at an unexpected time."

He cautions that eliminating exclusions might actually add to premium costs but, on average, will still save money in the long run. "If you say you don't want A, B, or C, the insurance company might come back and say, 'Okay, but we're going to increase your premium by 5%,'" he says. "So long as that number seems in line with what you're hearing from other carriers, we recommend you take the slightly higher premium and get rid of the exclusions."

Lesson No. 2 for employers in the stop-loss insurance arena is to right-size their deductible levels to their expected claims. Workman says many large employers keep their deductibles too low when, in fact, their deductibles should be going up a little bit every year.

"If you have a low deductible, that means the insurance carrier is going to charge you more; that's the tradeoff," he says. "People don't adjust the deductible up very often and if you think about it from an inflation and rising cost of health care standpoint, you should be."


PBM lessons

The pharmacy benefit is likely one of the most well-used benefits. Plan sponsors can save money if they isolate sources of drug price discrepancy, says Colleen Mahoney, senior director of strategic planning at The Advisory Board Company.

Traditionally, employers compare the average wholesale price of a drug, factor in the discount they get from the PBM and go with the PBM that offers them the better discount. But PBMs have the opportunity to create what's known as a spread: A pharmacy charges the PBM one price but the PBM charges the plan a different price, and there's often no relationship between the two.

"Within the contract there are significant loopholes that can drive up their costs and prevent them from saving what they should," says Mahoney. "In general, we saw that most of our organizations were significantly overspending on their pharmacy benefits."

She encourages employers "to make certain you have in your contract that you always want to have the lowest of AWP minus the discount or usual and customary. And that usual and customary is the lowest cost."

So, for example, if Walmart pays $4 for a drug, you want to be billed at the $4 rate, not at the average wholesale price minus the discount that's been set, she explains.

Mahoney acknowledges it's not easy for plan sponsors to get into the nitty gritty of PBM contracts and close all those loopholes. The Advisory Board Company created its own fully transparent contract and "we went to numerous PBMs and found many of them don't want that strategic business model," she says. "We did find one - Envision - willing to deliver that so that's what we do. The members I work with who have that transparent contract pay one flat administrative fee and all rebates and additional discounts are all passed through to them."

The other critical piece is that "we audit Envision on an annual basis to make sure members are getting the discounts and rebates that are guaranteed in the contract," Mahoney says. "So we have full access to their data and I think that was probably another barrier to other PBMs coming on board."

Another lesson that can generate some savings is for employers to migrate to a per-claim payment system. "You write into the contract 'I'm going to pay you one set fee and it's a per script fee,'" says Mahoney. "It's transparent, there are no loopholes in the contract and you [the PBM] will guarantee me that this is your only source of income."


TPA and network lessons

Network discounts often are quoted in a way that makes it difficult for employers to compare between two different offerings. So when shopping for a vendor, it's important to create apples-to-apples network comparisons. Another option is to have potential networks go through a re-pricing exercise where "they take your claims data from the past couple of years and run it through their own system and tell you exactly how much it would have cost had you been part of the United network, for example, instead of the Aetna network you were on," says Workman.

The large networks will do that for free if you ask, although Workman cautions smaller, regional networks might not have the technological capability to do this.

Plan sponsors may also want to ensure they have guaranteed transparent claims audit rights. Workman notes a typical TPA will have an error rate of between 1% and 2%. But even that could translate into $200,000 or $300,000 the plan sponsor shouldn't have paid.

"It's your money; you're entitled to get it back," Workman says. "But you have to have the ability to look at your data and find those errors and go to the TPA and tell them you've found those errors and would like to be reimbursed."

The problem, he says, is that it's not always easy to get at the data. So, "it comes back to getting in front of the issue - making sure you have certain things written in to the agreement with them, that they will provide you with this kind of data with this regularity and we'll have this long to review it and challenge it."

An emerging area for employers to consider is incorporating performance-based financial penalties into their TPA contracts.

"In HR in general, we're very familiar with misaligned incentives - people aren't being incented to do the things you want them to and that's definitely the case in the vendor contract," notes Workman. "We pay them a flat rate and they do a service for us, as opposed to putting a little bit of skin in the game."

He cites the example of Altru Health System, a 3,500-employee health system located in Grand Forks, North Dakota. In its TPA agreement, 10% of the overall contract value is placed at risk based on a subjective assessment of United's service and performance. Specifically, the overall payment is dependent on where Altru's HR department places United on a scale of zero to 10.

Another example is the TPA putting some money at risk based on the employer's performance in terms of cost. Specifically, how does the health plan grow? While some growth is expected simply because the cost of health care goes up every year, "hopefully the employer would be able to keep that growth down to a reasonable number, 4% or 5% as opposed to the 10% or 12% you sometimes see," explains Workman. So, for example, if the employer's plan grew by 4% or less, the TPA would increase its contract accordingly. If the plan increased by 8% or more, then the TPA would actually reduce its own costs the following year.

"The idea is that the TPA definitely has some part to play in managing employee utilization," says Workman. "Better to align those incentives so you can be working together rather than both of you working in silos."


Vendor management lessons at a glance

I. Stop-loss Insurance

1. Safeguard coverage from hidden exclusions.

2. Right-size deductible levels to expected claims.

II. Pharmacy Benefit Manager

3. Isolate sources of drug price discrepancy.

4. Migrate to a per-claim payment system.

III. Third-Party Administrator and Network

5. Create apples-to-apples network comparisons.

6. Guarantee transparent claims audit rights.

7. Incorporate performance-based financial penalties.

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