Tag Archives: administrative expenses

Indian health insurers can benefit from benchmarking administrative costs

Health insurance is the fastest growing segment in India’s nonlife insurance sector. Health insurance costs are also increasing quickly. According to Milliman’s Lalit Baveja, insurers in the market should consider the benefits of administrative savings as a larger part of a cost containment strategy.

Administrative costs, customer acquisition costs and benefit payment (in the form of claims payouts) are the three key expense areas for insurers. Going forward, the importance of managing administrative expenses will increase as competition continues to put pressure on overall premiums. In line with other markets, the Indian regulator also restricts the percentage of premium income that can be used as management expenses to promote efficiency and the availability of funds for benefit payments after a defined inception period. Insurers themselves have a vested interest in keeping these costs manageable. Topline focus must be complemented with cost containment in both benefits and administrative costs to achieve desired profitability and sustainability. While claims cost containment requires effective provider contracting and optimal utilisation management (and is reliant on multiple providers and other intermediaries), acquisition costs are dictated by market forces. Administrative efficiency within internal operations is one area where an insurance company can effectuate changes more directly. Tracking and managing these administrative costs can be a challenge, and identification of areas where there is opportunity to optimise administrative spending can be an even greater challenge.

Lalit discusses how benchmarking is an effective tool that can help health insurers manage their administrative efficiencies and expenses. To learn more, read his article “Administrative benchmarks for health insurance in India.”

Milliman releases new analysis of Medicaid managed care administrative costs

Milliman today announced new research into the administrative costs associated with Medicaid managed care plans. These plans have become increasingly popular, which is due to the Medicaid expansion provisions of the Patient Protection and Affordable Care Act (ACA) and the continued growth of the managed care delivery system within Medicaid. This information is especially valuable now, with the release of the proposed 2016 Centers for Medicare and Medicaid Services (CMS) capitation rate-setting guidance and the CMS proposed rule for Medicaid managed care. These CMS regulations require greater documentation of Medicaid managed care administrative costs, and may be useful as plans look to establish benchmarks.

We are excited about the addition of the administrative cost report to the annual financial analysis of Medicaid risk-based managed care reporting. This is an area of intense focus for the industry as we look to meet increased expectations of transparency in capitation rate-setting and face regulatory reporting of medical loss ratios.

Among other findings, the analysis demonstrates that Medicaid managed care administrative costs are primarily driven by expenditures for human capital and non-income-based taxes and fees.

The administrative cost report complements Milliman’s annual analysis of Medicaid managed care financial results, which is now in its seventh year. The administrative cost report will be updated annually.

To see the administrative cost report, click here. To view the annual financial analysis, click here.

Managing administrative expenses with operational benchmarking

Zoelzer-NancyFor all healthcare payors, managing administrative costs is increasingly important under the medical loss ratio requirements of the Patient Protection and Affordable Care Act (ACA). Under the ACA, health insurers must utilize 80% of premiums on benefits in the individual and small group markets and 85% in the large group market. Payors need to efficiently and effectively manage these administrative costs in order to maximize the limited funds available for these operational activities.

For a healthcare payor organization, administrative expenses include those costs associated with operational activities such as claims adjudication, agent commissions, marketing, call centers, software licenses, and more. Tracking and managing these administrative costs can be a challenge, and identification of areas where there is opportunity to optimize administrative spending can be an even greater challenge.

Benchmarking is an effective practice used by payor organizations to compare the cost and utilization in the delivery of medical benefits. Likewise, operational benchmarking of administrative activities enables healthcare organizations to understand the performance of their internal and vendor-provided administrative services. Types of administrative benchmarking measurement categories include:

• Efficiency benchmarks: The level of resource required for the completion of a defined number of transactions or members.
• Quality benchmarks: Both the level of consistency applied to similar transactions against recognized standards and the relative level of value of those services.

The purpose of establishing operational activities performance benchmarks is to define a vision for what is possible in “best practice” operations. Healthcare organizations utilize these benchmarks to identify strengths and weaknesses in their own operations and to support operational improvement initiatives.

Administrative performance benchmarking allows a payor organization to:

• Analyze the efficiency of the health plan operational areas including claims, medical management, customer service, and administration
• Compare how the organization’s resource allocations compare to peers and competitors
• Evaluate whether resources are allocated correctly and whether additional staffing is warranted
• Measure administrative cost of the operations
• Target areas for improving customer service

Milliman has developed operational benchmarks that include measures for all medical administrative functions. They establish the worst, median, and best practice levels of cost, efficiency, and quality for administrative functions such as processed claims per 1,000 members per processor, reversed and adjusted claims, and call center abandonment rates. Milliman’s operational benchmarks have been collected from more than 100 payor organizations representing the full spectrum of the healthcare industry, ranging from small single-line carriers to large national carriers supporting a full suite of commercial products, as well as government programs and self-funded employer groups.

As shown below, Milliman operational benchmarks can be used to compare a client’s administrative costs by functional area. The results can be used to target specific areas for optimization or additional investment. Note that the information shown in the table below is for illustration purposes only. Milliman develops customized benchmarks for each client based on the client’s unique mix of business, plan size, location of operations, and administrative intensity.

Administrative Benchmarking-MedInsight

This article first appeared at Milliman MedInsight.

The importance of administrative cost benchmarking

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.

Implications of health insurance exchange implementation

The health benefits purchasing dynamic that has existed for decades in the United States, involving providers, payors, employers, and members, is likely to change dramatically with the emergence of health insurance exchanges, mandated by the Patient Protection and Affordable Care Act (PPACA). As a result, the American healthcare system will see a significant expansion of the power of individuals (rather than employers) to make health plan purchase decisions, in both state and federal exchanges. This approach promises to have a far-reaching impact on the way coverage is marketed and administered, as well as an effect on healthcare analytics as administrative challenges are confronted.

The exchange concept, which figures prominently into PPACA, was originally envisioned decades earlier. Thus, while final determination of the landscape and details are still changing, events currently unfolding are the result of long-established ideas.

Health insurance exchanges are designed to allow individuals within participating employer groups to select coverage from among participating payors, with coordinated billing and administration provided to the employer by the exchange. Even though these individuals will still be employees, the exchange concept will enable them to select the product of their choice. In theory, this process promises to provide increased choice to individuals and families, in a uniform competitive environment, while distributing risk between participating payors among a larger membership base.

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