Beyond Cost: How a Vendor Portfolio Management Mindset Can Maximize Value
Authored by Jeff Schacht
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:
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:
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:
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Supplemental and Specialty Benefits:
Risk Adjustment:
Customer Service:
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Director at AArete
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