Posts Tagged ‘Andrew Naugle’

The importance of administrative cost benchmarking

February 11th, 2013

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 , , , , ,

Electronic funds transfers

February 21st, 2012

Managed Healthcare Executive looks at the move toward standardized electronic funds transfers. Here is an excerpt:

Savings of $4.5 billion over 10 years is the projection by the federal government relative to a new rule to standardize electronic funds transfers. HIPAA-covered entities have until January 1, 2014, to comply.

Payers will need to develop infrastructure and processes to support electronic remittances, but much of the work to implement this rule will fall on providers, says Andrew L. Naugle, a principal at consulting firm Milliman. The biggest piece of the puzzle is what the provider does with the electronic remittance advice.

“Although most health insurance companies already have the capability to send an electronic remittance advice, the typical healthcare provider is not set up to accept this electronic transaction or automatically post the payment to the corresponding receivable,” says Naugle.

Electronic Health Records , ,

Indiana posts exchange papers

June 28th, 2011

50 states…50 Health IT solutions?

May 17th, 2011

Managed Healthcare Executive poses this question with regard to the establishment of state exchanges: Will each state build their new statewide health IT infrastructure from scratch? Fortunately not.

The idea that states will be able to share some core exchange components is driving $241 million in HHS “early innovator” grants awarded in February to Kansas, Maryland, New York, Oklahoma, Oregon, Wisconsin, and a multi-state consortium led by the University of Massachusetts Medical School.

In Kansas, the grant will fund a solution that lives “on the cloud,” which other states can use. New York will build from its Medicaid management information system (MMIS), which already processes payments for about one of every three healthcare dollars paid in the state.

“What’s interesting is that there are no two states that are thinking about it the same way,” [Brian] Russon [of Microsoft] says. “But from a core exchange component, we’ll see heavy similarity in the consumer portals and the ability for the exchange engine to plug into what we’re hoping to see: very data hub-centric approaches, especially as states look at connecting into federal systems.”

Andrew Naugle, a principal with the consulting firm Milliman, notes the challenges associated with the many different MMISs in use.

“Hopefully, the federal government will come up with a standardized way to access its systems,” Naugle says, “but on the state side, there could be many different ways to interface with the various state Medicaid systems. So there will be a lot of customization even if a state pursues a commercial product off the shelf.”

Whether states build their exchange technology from existing systems or start with a commercial exchange solution, linkages to other state and federal data systems, which currently are silos of information, need to be built. The biggest challenge right now is the infrastructure, says Naugle.

Exchanges , ,

New book: The Healthcare Imperative

April 5th, 2011

The Institute of Medicine, as part of its “Learning Health System Series,” has published a book called “The Healthcare Imperative: Lowering costs and improving outcomes.” The book is available for free download here. The book includes an essay called “Excess Health Insurance Administrative Expense,” by Milliman principal Andrew Naugle. The essay includes both an estimate of total administrative cost in the system:

We estimated 2008 total administrative expense for fully insured commercial products using benchmarks developed from administrative expense data collected from more than 100 payers. According to these proprietary benchmarks, median payer administrative expense for fully insured commercial products, expressed as a percentage of fully insured commercial premiums, was 11.3 percent. Note that this definition of administrative expense is inclusive of external broker commissions, but excludes premium taxes.

Using the combination of the total fully insured premiums in the commercial market and the median administrative expense level (using the median to approximate the mean) we calculated an estimate of $42.4 billion ($375 billion × 11.3 percent) to represent total payer administrative expense for fully insured commercial products.

If that is the starting point, what is the potential for more efficient administration? Here’s a key excerpt:

In terms of administrative expense, we defined the best-practice level, based on our experience, to be approximately 7.6 percent of fully insured commercial premiums. Although it is possible for organizations to operate effectively at lower administrative expense ratios, we find it is more common for organizations with administrative costs below this level to exhibit characteristics of poor performance (e.g., high claims turnaround times, long customer service call hold times, inadequate or ineffective medical management programs) that are due to insufficient staffing.

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Cost ,

ICD-10: Urgency setting in?

January 22nd, 2010

Even with the direction of reform now in question, change continues throughout healthcare. One evolution that should be well underway is the mandated, industry-wide conversion to ICD-10. Here is a summary from GovTech:

They say it’s a bigger deal than the Y2K bug.

Not so much in terms of mass hysteria, but in scope: In 2013, the U.S. will upgrade to the latest version of the International Classification of Diseases (ICD) system — the standard diagnostic taxonomy by the World Health Organization — a move which represents “the largest health-care systems modernization effort in history,” said Bartlett Cleland, senior director of policy at TechAmerica, a technology industry association.

As hospitals switch to the latest disease diagnosis and procedure codes, industry observers say, the technical and economic impact to the U.S. government and health-care community could eclipse the much-hyped system upgrades at the turn of the century.

“It’s going to affect anybody who touches the health-care system,” Cleland said. “If not done correctly, this change has the potential to be even more painful than anything in the health-care debate that’s going on.”

ICD-10 is starting to get more press and attract a greater sense of urgency. This blog article has appeared several places. Why the increased attention? First, because 2013 no longer seems so far away; and second, because many in healthcare are not yet prepared for the conversion. The industry’s preparation was recently highlighted in this survey.

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Electronic Health Records , ,

ICD-10: Industry perceptions and readiness

January 14th, 2010

A new study looks at how health organizations are responding to the ICD-10 deadline of Oct. 1, 2013. In many cases, they don’t seem to be responding at all—70% indicated their organization has done  “little or nothing” to implement the new standard.

You can read the study here.

Electronic Health Records, Quality of Care , , ,

Optimizing administrative expenses

June 11th, 2009

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.

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Administration, Efficiency ,