This is an AArete Healthcare Payer solution

Diligent unit-cost negotiations with vendors can generate savings of 5-10% in a given relationship, but health plans are leaving value on the table by taking this zero-sum approach. A vendor portfolio management strategy – and placing as much emphasis on the quality of services as on properly structuring partner compensation – can lead to far greater relationship value.

The entire healthcare ecosystem is under enormous pressure to reduce costs. Margins are being squeezed by a variety of factors (higher salaries/wages/benefits expenses, rising prices for goods and materials, increased compliance costs associated with increasing regulations). To protect margins, companies often fall back on playing hardball with vendors to obtain the lowest possible price for goods and services.

At AArete, we believe a vendor portfolio management methodology is the best way to manage an organization’s value chain. A fixation on obtaining the lowest price possible could have unintended consequences, such as a vendor cutting back on voluntarily offering recommendations or advice on how to improve operating efficiencies.

Benefits of a vendor portfolio management approach

By treating their vendors as true partners, health plans can forge stronger, more productive relationships that may result in far-reaching benefits throughout their organization. It is a win-win strategy because it builds trust and keeps communication lines open, both of which are vital to sustaining long-term partnerships with vendors. In addition to reducing costs, this approach also has other important advantages, such as:

• Continuous improvement in operations
• Uninterrupted services by proven partners
• Opportunities for innovation

The primary barrier to structuring successful partnerships is the highly specific nature of healthcare operations. Health plan leaders are frequently asking themselves a wide range of questions when searching for ways to reduce supply chain costs: Are my information technology vendors innovating to deliver services more effectively at a reduced cost the way they should? Are my medical management partners providing quality care to improve patient health outcomes? How do I know if I am getting the best out of my risk adjustment vendors?

Health plans can maximize value by focusing on service categories that, in most cases, are the areas with the highest expenses: medical management; pharmacy and pharmacy benefits managers (PBM); supplemental and specialty benefits; information technology; risk adjustment; customer service; and payment integrity. When re-evaluating their vendor portfolios, plan leaders should:

• Have an “art of the possible” mindset to determine what realistically can be achieved.
• Understand the potential and practical operating models with each vendor and the division of internal and external responsibilities.
• Take a category approach to reviewing services.
• Focus on individual vendors to maximize strong partnerships and shift away from what is not working.

Evaluating vendor costs and performance is a significant undertaking that requires considerable time and resources. Without years of experience across different organizations, it can be difficult to have a view of the various vendors and models to understand the best practices that lead to high-performing partnerships.

From our work with health plans across the country, here are the seven most impactful areas where payers can reduce costs and enhance the value of their vendor partners:

AArete, as a leading consulting firm for health plans, has extensive business, clinical, and technical expertise across the full spectrum of payer operations. With decades of experience supporting more than 120 health plans, AArete can rapidly provide critical best practices that enable successful vendor partnerships within the most complex payer functions. To give you a recent example, we worked with a health plan that, through vendor contracting efforts and right-sizing vendor relationships with formal performance targets, realized $36 million in recurring annual savings. That is the power of vendor portfolio management.

Is your health plan seeking actionable, practical strategies to enhance the value of your vendor portfolio? Our team of Healthcare Payer experts is ready to help.

Meet The Author

Jeff Schacht

Managing Director