We all know there is strength in numbers, but when it comes to purchasing health services, how do numbers translate into buying power? More specifically, health care buying power? Can any organization become part of a purchasing consortium, or are effective health coalitions limited to major employers that can bring thousands of plan members as a bargaining chip to the benefits table?

The answer: Almost any organization of any size can reduce at least part of its health care spend through coalition membership. The more members one brings to the party, the greater the potential savings. But no organization, regardless of size, can benefit from coalition membership without having the will to change its benefits strategy. And regardless of how many plan members a coalition commands, it still must be able to effectively negotiate with parties that have historically balked at price transparency.

Banding together

As pressure has increased on health care organizations and prescription drug vendors to be more transparent about their actual cost structures, more employers are collaborating to find ways to pierce the lack of transparency that has been characteristic of these providers. Cracking the cost code on medical procedures represents the Holy Grail for coalitions, since medical represents 75 to 80 percent of plan spending. While early coalition builders have found this to be frustrating, their persistence will pay off–if they are serious about reducing spending and stick together. But reducing medical costs will be hard work and the savings may be less than anticipated.

“Coalitions in general are a great idea. The one thing that could move the needle [on health care spending] is market share. That is what hospitals and others really look at,” says David Henka, CEO, ActiveRADAR, a company that specializes in providing clients with reference-based pharmaceutical pricing information.

But, he says, coalitions have only “so much weight and authority in any given market. They only represent a fraction of the services any provider has the capacity for.”

Negotiating effectively with providers must include the threat to take business elsewhere, says Health Rosetta founder Dave Chase.

“Put simply, hospitals won't be transparent until health care purchasers are willing to walk away and pursue alternatives,” he says. “Other than true emergencies, which is a small part of health care spending, there are always other options available, whether it's from independent medical practices and surgery centers, the hospital an hour or two away or domestic and international medical tourism.”

The least difficult types of purchasing coalitions to create are:

Coalitions among organizations in the same geographic area, particularly those whose entire employee population resides in that area. Government entities are ideal candidates.
Coalitions to purchase prescription drugs. Large employers are ideal candidates.
Organizations that promise to deliver group discounts (OMNIA in Tennessee is one). Any company can become a member of these group purchasing organizations.

Tacking pharma spend

Prescription drug purchasing coalitions can be built across geographic borders and represent a relatively easier plan savings opportunity, compared to the job of negotiating medical cost reductions.

“The advantage of focusing on prescription drugs is these benefits are like peanut butter–the contracts are the same everywhere in the US,” Henka says. “If you have a large population where you can control entirety of costs you don't have to get medical group by medical group to negotiate favored nation status. The meat of the argument is on the medical side. But it's heavy lifting: one system and one clinic at a time. The prescription drug may only be 20 percent of your spend but it's one-stop shopping.”

Group purchasing organizations, designed to reduce drug costs to members, have been in existence for years. These services don't target specific types of organizations; the common denominator among clients is the desire to reduce health care spending.

OMNIA includes in its menu of services for human resource professionals a prescription drug purchasing model. OMNIA partners with two prescription drug services–Southern Scripts and Employers Health–to offer “a best-in-class program with a variety of customizable pharmacy benefits management solutions.” OMNIA promises “transparent and aggressive pricing models” as well as complete support services to help HR reduce drug spending.

Large employers are also exploring collaborative alliances to reduce prescription drug spending. Last fall, the Health Transformation Alliance, composed of 40 major employers of the IBM scale, signed on to use an online prescription drug platform from Rx Savings. The platform promises to save employers and their plan members money on a range of drugs by supplying members with information on both actual medication cost and its efficacy.

Other large employer organizations like the National Business Group on Health are reporting increased coalition formation among its members that are targeting drug spending. The group's latest member survey found that nearly one in five members is part of a pharmacy coalition or cooperative.

New groups emerging

The reduction of actual medical insurance claim costs has been the focus of emerging employer coalitions. These coalitions bring together members that have much more in common that simply seeking to reduce health care spending. They may be enterprise scale commercial employers, regionally based smaller employers, or government entities that are co-located. They are using similar tools: the identification of health care provider centers of excellence (COEs); reference-based pricing; and decentralized treatment facilities. They are taking on hospital systems over pricing, and making gains.

Insurance advisor Holmes Murphy has considerable experience facilitating nontraditional collaborations designed to address employer health care spending. The company began to explore ways to reduce costs for its Dallas-Fort Worth area clients in 2015.

“DFW area health care costs are higher than the average in the U.S.,” says Den Bishop, president at Holmes Murphy. “One of the reasons for the gap is the difference between what Medicare pays for hospital services and what employers pay. It is very wide in this marketplace.”

The firm focused on its government-entity clients, primarily because all their plan members were in the DFW area.”They buy all their services in one place, which gives them market share advantage. The other piece is that it is taxpayer money. There is true transparency as to what they will pay for goods and services.”

Holmes Murphy used the increasingly available hospital data to educate representatives of various government entities about the price differentials in the market.

“We showed them by hospital what is being billed and what medicare is being paid,” Bishop says. “The real pricing. What we did not know was how much they were paying.”

Would each representative be willing to share that information? They would. That was when the coalition was truly birthed. “We were able to show in this market the taxpayer money was purchasing after discount about 250 percent of Medicare. There were variances between insurance companies. But by time you rolled it up by network didn't make a great difference.”

Because it was the largest player in the coalition, the city of Dallas was chosen to negotiate the first contract in 2016. Other members would then be able to access the same terms. While there were bumps along the way, including an inability to achieve pricing tied to Medicare costs, the members have already realized considerable savings.

“The dialog between cities and hospitals has really opened up since we sat down across the table with the hospitals and explained these are taxpayer dollars,” says Holmes Murphy's Morgan Young, vice president, client services for public entities. “It used to be everything was filtered through the [insurance] carrier. By having those conversations with the hospitals, we showed them we had done our homework. The hospitals know exactly what they are doing and will continue to do it until there's a strong push from the marketplace to change. We want to provide that push.”

Brian Dickerson, director of human resources for the City of Fort Worth, says considerable negotiations were required to achieve the new contract. But the savings–especially for a taxpayer supported entity–were worth it.

However, he cautions that private employers may have a more difficult time. “It will be much easier to accomplish this in a municipality than a corporation. It's very difficult for a company to set up something that is regionally based.”

Health Rosetta's Chase disagrees that private employers cannot enjoy the benefits of such coalitions.

“For-profit businesses are free of issues that political entities sometimes face, since the health care industry are large lobbyists and employers. However, [private employers] must apply the same ongoing rigor to the business coalition they would any strategic area of their business as opposed to a sidelight. They must realize that every day, a large swath of the health care industry is scheming to redistribute as much money from employers as possible as they've been an easy mark for a long time. It's critical that they look at all dimensions of transparency to seek out what some are calling a 'Fair Trade' for health care.”

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Employer health coalitions chipping away at plan costs

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