Health plan administrative costs: The 67% rule

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.