How can health plans reduce cost and meet MLR targets?

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Written by Dennis Toohey, Director of Procurement Solutions, Puridiom The Health Care Reform Act (HCR) is now being implemented across the United State...

Written by Dennis Toohey, Director of Procurement Solutions, Puridiom

The Health Care Reform Act (HCR) is now being implemented across the United States and Medical Loss Ratio (MLR) requirements which mandate that health plans must spend at least 80 percent of premiums on care for individual and small group policies and 85 percent for mid-large groups are in full force. Health insurance companies must closely track and control their medical, quality and member education spending to stay within the 80-85 percent window, leaving 15-20 percent of revenue available to pay for non-MLR administrative expenses and, hopefully, leave a profit.

MLR’s, however, will vary from market segment to market segment and state to state requiring additional levels of tracking, categorisation and reporting of spend.

In many states this same level of auditable assignment of costs to products and channels of sale will be required as justification for rate increases.

The Procurement Department, with the right processes and system, can be the point of control for correct administrative expense approval, category and cost centre assignment and at the same time be an engine for real cost reduction.

Health plans using eProcurement software and the right strategy can track, control and maintain visibility to MLR and significantly reduce administrative spend to maximise operating margin.

High Penalty for Non-compliance

Health plans not meeting MLR mandates in 2011 are required to provide a rebate to customers in 2012.

According to a report issued by PriceWaterhouseCoopers in May 2010 and reported by the National Association of Insurance Commissioners (NAIC), many insurers are not meeting the MLR requirement. It is estimated that rebates will total somewhere between $2 billion and $4.9 billion from 2011 to 2013, with some analysts predicting even higher numbers.

In December 2011 the US Government Accountability Office (GAO) reported that, using 2010 data, 57 percent of insurances would not have met this requirement for individual plans, 30 percent for small group and 37 percent for mid-large insurers.

Many health plans are simply not equipped to handle this level of detailed cost tracking and cost control and these plans will pay a high price.

The Answer: eProcurement

So, how can health plans avoid the rebate crisis and meet the challenge of detailed cost tracking? The answer: Systems that can simultaneously both lower administrative costs and precisely assign those costs to meet MLR needs. Such a system must encompass all administrative spending, including specialised categories such as marketing and temporary labour and follow a single requisition, purchase and payment workflow. The key is to control spend with a procure-to-pay (P2P) solution.


A procure-to-pay solution enables the integration of the purchasing department with the accounts payable and accounting departments. With procurement responsible for correct cost assignment at the requisition stage, the data accuracy that this integration provides allows precise cost assignment for accounting and accurate general ledger postings.

Procure-to-pay systems are designed to provide organisations both control and visibility over the entire life-cycle of a transaction – from the way an item is ordered to the way that the final invoice is processed – providing full insight into cash-flow and financial commitments.

Each processing step provides visibility to the cost centre, project, contract, budget and up to ten other user defined tracking categories.

In this way all costs are being tracked, visible and assigned to the appropriate category, making information easily accessible. By centralising authority over the integrity of this process in procurement, and supported by the right internet (cloud) based system, eProcurement interactions with suppliers can also be automated to include new vendor registration, requirement bidding, invoice submission, reconciliation and automatic AP vouchering. Money is accounted for at all times in a uniform, low-cost and paperless way.

Low value or routine spend can be automated or made completely self-service for end users.

Because system logic replaces manual labour, some health plans have used the eProcurement solution to outsource the entire AP function to their bank, resulting in enormous improvements to efficiency, cost and time.

Health Plans must lower and more precisely account for their administrative spend.

Procure-to-pay solutions have been proven to meet this need producing cost reductions up to 20 percent and processing time improvements measured in weeks.

About Puridiom:

Puridiom is a leading procure-to-pay solution provider offering the most comprehensive eProcurement software on Cloud and Licensed platforms. Since 1983, Puridiom has helped clients streamline the purchasing process, providing visibility and management of procurement spend with easy-to-use software and best-in-class procurement strategies. For more information about eProcurement and Health Plans, download the white paper, Controlling Health Plan Costs with eProcurement by Puridiom.

Puridiom offers more than just eProcurement:

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