Healthcare Town Hall

In the late 1990s, online travel agencies revolutionized the airline industry by publishing fares and allowing consumers to search for and purchase tickets. No longer would consumers have to rely on an agent to filter and present options; travelers could search across all vendors and use their own criteria to evaluate their options and purchase a ticket. The individual and small group health insurance markets are poised for the same sort of dramatic change, driven by the now familiar concept of the online marketplace, known in the health insurance industry as the exchange.

Although the operation of a health insurance exchange is quite different from that of an online travel agency, these distribution channels are similar in their impact on price transparency. Under the old travel agent model, consumers would first search for tickets based on convenience factors (e.g., travel dates and times, routes, etc.) and then use price to differentiate among a few options. Likewise, in the individual and small group health insurance markets, price is often presented after the purchaser has already narrowed the options to a few that meet non-price criteria. In both of these situations, price is applied as a deciding factor after the consumer has already narrowed the universe of choices to a subset of similarly appealing options; and the consumer lacks visibility to the prices of choices that were eliminated in that process. Online markets, on the other hand, allow consumers to see the prices of all or most options at the same time, making price a primary determining factor when making a purchase decision. This new presentation format, which allows consumers to choose one product over another based on a small dollar price difference, discourages significant price variation among competitors for similar products.

For most health insurance products, price is comprised of three primary components: benefit expense, administrative expense, and risk margin. Although benefit expense makes up the lion’s share of the premium or price, administrative cost differentials among health insurers can also materially contribute to premium differences. These differences will become more pronounced and may affect consumer purchasing decisions as the benefit expense component of premium is constrained by the medical loss ratio (MLR) requirements of the Patient Protection and Affordable Care Act (PPACA). These rules effectively create a benefit expense floor, requiring that health insurers in the individual and small group markets spend no less than 80% of premium on benefits (85% in the large group market), or pay a rebate to policyholders. It is likely that MLRs for individual and small group products will eventually settle around the 80% level or higher. In this new world, the importance of managing administrative cost will increase as price competition puts pressure on overall premiums and the MLR rules force administrative cost and risk margin into a fixed share of the premium dollar.

Benchmarking is one of the most effective tools available to help health insurers manage administrative expense. For insurers working to achieve MLR targets through administrative cost reduction, a benchmarking assessment can offer a function-by-function comparison of administrative expenses and staffing levels versus competitors and peers. Such an analysis can help organizations figure out where to target their cost reduction initiatives or determine what cost level is appropriate for a given department, cost center, or function.

For insurers that have already achieved the MLR targets, administrative benchmarks combined with a dashboard view can allow for monitoring of administrative expense variation throughout the year. Optimizing administrative cost is not something that can be achieved overnight; it takes time to plan and implement cost management initiatives, and months or years before the benefits accrue to the bottom line. Thus a dashboard coupled with benchmarks can provide management the tools they need to effectively manage their price competitiveness in this new distribution paradigm.

This article first appeared at Milliman MedInsight.

Administration, Cost, Reform administrative expense, Andrew Naugle, benchmarking, medical loss ratios, MedInsight, state exchanges

Milliman has studied and published health plan administrative cost benchmarks for over 15 years. Our research has included direct observations of over 100 health plans supplemented with the review of many more statutory reports. Of the many trends and changes that we have observed during this time, one general statistical observation has stood out: health plan administrative costs generally increase at a rate of about 67% of the rate of increase in medical cost inflation. This equates to an annual rate of increase of 6% for the period 2006-2011.

Conceptually, administrative costs, over a period of time, should be affected by:

• Increased efficiency through the use of electronic records and technology
• General salary and cost of goods inflation
• Regulation (positively or negatively)
• Increases or decreases in administrative workload, such as claims, customer services calls, etc.

None of the above appear to be all that closely related to medical inflation. Salary and general inflation should be the primary driver of healthcare administrative cost inflation. But with an annual salary and goods inflation level of around 2%, we must look to some other cause of the 6% annual increase. Certainly, as we consumers collectively continue to expect and demand more medical services and prescription drugs, we can end up creating more administrative burden. But shouldn’t any increase in administrative transactions have been more than negated by the proliferation of advanced technologies and electronic transactions?

This article first appeared at Milliman MedInsight.

Administration, Cost benchmarking, cost inflation, healthcare analytics, MedInsight

Administrative costs are often mentioned as a source of waste in healthcare financing.

We asked Andrew Naugle to tell us what is driving spending and where savings may be found.

Q: How much do health plans spend on administration and can they reduce that cost?

Andrew Naugle: If a health plan gets a dollar in the door, it spends about 85 cents of it on benefits, about 12 cents on administration, and it gets to keep about 3 cents as profit or surplus. Those numbers come from a study I did looking at the annual statements of about 900 health plans. Of course there is some variability, but the numbers hold pretty true.

Health plans spend a lot of their time and attention trying to manage benefit costs. That’s not an unreasonable area to focus on if 85% of the premium dollar goes to pay for benefits. However, reducing benefit costs can be a real challenge, as it requires changing member and provider behavior—a tall order.

On the other hand, while administrative expense represents a much smaller piece of the premium pie, health plans tend to be in control of their own administrative spending. Managing administrative cost, therefore, ought to be easier, as plans need only change their own behaviors rather than the behavior of third parties that don’t appreciate being told what to do.

Too bad it’s not that simple, because managing administrative expense can be very painful for organizations for a whole host of reasons. Ultimately, I have seen clients achieve significant improvement in their administrative expense positions. However, real bottom-line impact requires a comprehensive strategy, management buy-in and commitment, and major investments of time and energy.

Read more…

Administration, Efficiency admin, Andrew Naugle

Ed Boyle submitted a question via Facebook:

“With so much focus being placed on hospitals and clinics implementing electronic patient information systems, what – if anything – can state and/or federal government do to help support/alleviate the sometimes significant amount of time it takes physicians and clinicians to learn and become proficient at using a clinical information system – thus amounting to less time for patient care during that learning-curve period?”

For submitting this question, Ed Boyle is a finalist in our question contest. Congratulations, Ed.

Transcript

Q: What can the state and/or federal government do to help physicians learn the clinical information systems without detracting from patient care?

Mike Kreidler: The answer is “yes, there is.” We’re working on administrative simplification so that physicians and payers can process claims in a timely fashion in  a common format. The current system is antiquated. Even the rules that have been put forth for the various coding (by federal definition) have significant variations. There are format interpretation differences between one carrier or another. You’ve got to standardize that. Read more…

Administration, Adoption, Electronic Health Records, Government Adoption, john hammarlund, Mike Kreidler, State government