Coalition purchasing: pathway to real benefit performance. (Benefits).

Decades of supply-side mergers and acquisitions by benefit vendors have gradually eroded employers' bargaining power. Increased regulation and growing product complexity have likewise placed a considerable burden on already strained HR resources, saddled by budget cutbacks and staff downsizing. The combined effect can seriously compromise the ability of benefit managers to deal effectively with large suppliers.

There are signs, however that employers are trying to fight back. In an effort to re-establish and broaden negotiating clout, buyers are organizing product demand into efficient local and national buying cooperatives -- and they're starting to have an impact. Long considered the province of smaller firms, purchasing coalitions are becoming a standard procurement tool of mid-to-large companies, in all major public and private industrial sectors.

Purchasing coalitions can consist of private businesses, public entities and even groups of Taft-Hartley funds banding together to buy employee benefits and support systems. Since the mid-1980s, experimentation with various forms of group governance, operational structures and day-to-day management has produced a wide variety of workable models. Regardless of the product or nature of the sponsor's HR culture, purchasing coalitions exist today to suit almost any company's needs.

Leverage buying power 

Aggregating demand to achieve market leverage is not new. What is new is the manner in which employers from all sectors have begun to embrace purchasing coalitions to control benefit price and performance. Historically, companies relied on vendors to provide best pricing and to operate efficiently. Group buying was widely ignored, especially by many large and mid-sized employers confident in their ability to achieve good value at the bargaining table. Recent trends in health care spending, however have triggered renewed interest in coalitions amid reports that even the largest employers can produce gains they can not win on their own.

Suppliers, too, view the growing coalition market as a means of increasing profitable market share. They see coalitions as a prime means of reducing outlays for marketing and sales support, to simplify negotiations and to help contain claim costs, administrative fees and communication expense. Savings produced through operating efficiencies and the pricing discounts they can represent create significant incentives for companies considering group purchasing.

Cost-containment strategies that overlook waste and inefficiency buried in the purchasing model itself miss significant upfront opportunity. Cost-shifting strategies centered upon benefit redesign, tightening eligibility and adjusting contribution levels focus only on part of the problem. (In fact, if left unchecked, these approaches can seriously undermine employee motivation and eventually challenge the employer's ability to attract and retain qualified talent.) Group purchasing changes the basic manner in which an employer enters and interacts with the market. When transferred to the employee in the form of reduced premiums and broader coverage, these gains can lessen the need for other counterproductive expense controls.

The New Agenda

An attractive aspect of modern-day coalitions is the intermediary role they play as advocates for both the buyer and consumer of benefit products. While pricing control is their primary short-term focus, they can also enhance benefit performance and employee satisfaction, key drivers of employee morale and productivity.

Group purchasing means moving beyond connecting vendors to buyers on the basis of discounts alone. By pooling resources, progressive coalitions seek ways to bring improvement to issue-prone benefit systems through claim audit, data integration, financial reporting, ROT analysis, information systems, technology and consumer advocacy. As coalition members band together in data networks, communication channels emerge, facilitating the exchange of best practices, market intelligence and benchmarking strategies, which, in turn, can drive continuous advancement for the entire group.

Coalitions are also leading the way in areas of vendor accountability -- employing financial guarantees and penalties to ensure contractual commitment to strong performance. Adopting a "measuring to manage" approach, today's coalitions track claimant satisfaction and health outcomes, producing value to participating companies through a system of supplier rewards and incentives.

In its purest form, collective purchasing can be achieved without the risk, expense or legal restructuring typically associated with most other co-buying strategies (such as strategic alliances, joint ventures or partnerships.) Coalition members gain initially by spreading start-up costs among many participants. Further savings flow from the fact that regardless of the number of employer participants, each phase (needs analysis, product design, request for proposal preparation, proposal review and negotiation) is performed one time for all members.

Large Fortune 500 firms, once concerned about the loss of independence attendant with traditional cooperatives, are quite responsive to coalition models that promote flexibility and choice. Business plans and by-laws that allow direct vendor contracting (at group-bargained-for rates) and provide plan design and implementation flexibility have strong appeal to the large corporate market. Experience rating options and other financing alternatives can also play a big role in attracting members interested in preserving autonomy.

Influence Change

On issues reflecting trends in regional and national markets, coalitions can represent a credible broad-based perspective for policymakers. Coalitions can also use their collective influence to drive change when the market-based health and welfare (H&W) system is unresponsive to employer needs. Ensuring that new products will emerge in time to support rapidly changing demographics will no doubt lead to direct involvement in benefit product development and refinement.

Familiarity with rating structures, for instance (related to skill in securing discounts), provides excellent positioning to target the enormous waste and inefficiency buried within a $1.3 trillion annual domestic expenditure for employee benefits. Likewise, the aging of American workers -- likely to require revolutionary changes in H&W benefit systems -- should provide further opportunity for coalitions.

Other major issues on the radar screen include serious under-funding in long-term care and the need for wealth management services in anticipation of massive drawdowns of 401(k) reserves by retirees at the end of this decade. National purchasing coalitions can present a unified front and a stronger voice in articulating consumer positions on issues of national health and employee financial security.

The Center for Medicare and Medicaid Spending recently reported a 7 percent increase in overall spending for domestic health care in 2000. (Figures for 2001 are expected to be higher still.) National health expenditures are expected to grow at a mean annual rate of 7.3 percent for the balance of the decade.

The largest increases were in the areas of drugs, hospital care and nursing home services. What's interesting is that increased spending for prescription drugs -- many of which were developed over the past decade and touted as alternatives to expensive surgeries and lengthy hospital stays -- have done little to stem the rise in medical services claim costs.

Increased concern over the relationship of cost behavior between health care generally and prescription drugs will eventually lead to greater examination of alternative buying models. Because of their growing market influence, coalitions are uniquely positioned to accelerate the development of "smart" benefit systems that coordinate and control total spending.

Supported by emerging technology and integrated patient history, these plans can be expected to make greater use of disease management and wellness programs to control overall expense, joining physician, pharmacist and other key providers in unified, goal-oriented teams.

Against the backdrop of recent benefit cutbacks, industry studies show increasing sponsor interest in supplementing benefit portfolios with voluntary or "employee-pay-all" benefits. When made available through the worksite, popular retail products such as auto and home insurance, prepaid legal services or college savings plans can be offered with discounts, unique options and on-line application, features otherwise unavailable.

Predictions

The simplicity of the notion that otherwise separate and distinct companies will benefit by becoming "purchasing partners" often hides the tremendous economic power at stake. It may also explain why companies themselves frequently overlook opportunities to apply collective buying approaches within their own organizations.

As companies become more adept at saving through coalitions, they'll also begin to recognize the value of adapting these same skill sets internally. Enlightened organizations will encourage risk and benefit managers to work together to share negotiating insight and to aggregate the full gamut of corporate insurance needs, whether related to risk, financial or HR division operations. Domestic and foreign subsidiaries joined by common ownership will also begin to explore the market power inherent in collective buying methodologies.

Bundling demand for first- and third-party risk protection, workers compensation, disability, employee health and welfare products and self-insured programs will take the evolutionary process to its next logical level. Corporations making this a routine practice will enhance the value of their involvement to the national coalition movement, accelerate its growth in the marketplace and, by doing so, further their own competitive business strategies.

RELATED ARTICLE: Health Discount Card Provider Offers Alternative

As health care costs continue to soar, companies everywhere wrestle with different providers and models in a struggle to rein in expenses. Self-insurance has been popular, as have various permutations of dental and vision plans, in addition to full health insurance. It's a confusing and fluid -- some might say almost chaotic -- marketplace.

Now, a small New Jersey company is trying to fill what it sees as a void -- discounted health care for part-time workers or employers too small to afford health insurance. Pinnacle Choice, based in Fairfield, N.J., claims to offer access to more than 650,000 physicians, 5,800 hospitals, and more than 20,000 dentists and 21,500 eye professionals through a card program that covers up to 10 members of a household.

A key concept: There are no "co-pays," and users of the card pay the difference between the actual bill and the discounts negotiated by Pinnacle Choice. Discounts have been running around 40 percent, though some services can be cut as much as 90 percent, says CEO Michael Evans Caradimitropoulo.

While the company has salespeople trying to sell small employers, entry to the large corporate market tends to come from the CFO or the chief operating officer looking at cost containment and recruitment and retention of part-time workers, Caradimitropoulo says. "This program definitely fits in a large corporate atmosphere," he adds. "A lot of those companies do have part-time workforces, and those people don't qualify for a regular plan."

The card costs individuals $250 a year, and can be set up through a onetime payment or through payroll deductions of as little as $5 a week. Specialty, supplemental healthcare cards are available for even less. Pinnacle Choice says the cards require no paperwork, claims forms or long waiting periods, and can be shared by members of the cardholder's household.

An alliance with a Canadian pharmaceuticals distributor, Affordable Rx, allows workers to get regular prescription medications at up to 75 percent off, Caradimitropoulo says. Pinnacle Choice also provides access to nontraditional providers often not covered by many health plans, such as plastic surgeons, chiropractors and holistic medicine practitioners.

Pinnacle, which launched earlier this year, had signed up only about 3,000 cardholders by the beginning of November, and Caradimitropoulo says it has a "slow-growth business model" that eschews telemarketing companies. Signing up a huge company with a big part-time workforce -- like a Wal-Mart or Sears, Roebuck & Co. -- is one of Caradimitropoulo's major goals, though he says a budding relationship with the Restaurant Depot, which represents 45 smaller restaurant employers, is a model that will help push the card as well.

Caradimitropoulo concedes that the entire discounted health benefits area has been tainted by some shady operators, and that he and his management team are committed to "doing it right." "The largest problem is inconsistency in the product, which is often sold without the right kind of information, to the point where it's frustrating," he says. "We want to make sure we have the right message to the end user."

Jeffrey Marshall

Louis N. Anastasio is VP, Coalition Purchasing Group, at Aon Consulting Inc. He can be reached at 732.271.2447 or at [e-mail].