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.
While it may be possible to go lower, certain administrative expenses help pay for themselves:
For example, some medical management programs can help to avoid unnecessary use. Administrative spending on these programs can be considered an investment, which can result in lower expenditures for healthcare services and therefore a lower total cost. Elimination of such “good” administrative expenses must be carefully considered to ensure that any administrative expense savings are not offset by increases in benefit costs.
Again, the full book is available for download here.
UPDATE: The essay is published as a standalone item here.