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BCBS Study Shows Low Health Plan Administrative Costs
Private health plans' administrative costs averaged 9% of premiums across all policies sold and are well below "vastly overstated" estimates offered by proponents of a government-run public plan, according to a new study paid for by the Blue Cross Blue Shield Association.
A consumers' rights group disputes the findings.
The report, written by Sherlock Company, states that previous studies showing that private health plans' administrative costs are two to three times higher than actual costs are based on old estimates that don't reflect changes in industry practices, including advances in electronic processing.
"Prior reports rely on outdated, decades-old estimates from when claims were paper-based and today's electronic processes were in their infancy," says Douglas B. Sherlock, president of the Sherlock Company. "This report demonstrates that health plan administrative costs have been vastly overstated." The study reviewed 36 health plans–mostly Blues–participating in benchmarking studies in 2008.
Advocates for a public plan maintain that the higher administrative expenses for private plans are one reason why a public plan is needed. Health insurance industry officials say the Sherlock study undermines that claim.
"Some elements of healthcare reform can help reduce administrative costs, if done right. For example, state-based health insurance exchanges can make it easier for people to purchase health insurance and simplify administrative functions," says Scott P. Serota, president/CEO of the Blue Cross and Blue Shield Association.
The Sherlock report also claims that private plans perform the administrative functions that Medicare performs for $12.51 per member per month, compared to $13.19 per month for Medicare, and that private plans perform more administrative functions than traditional Medicare, including care coordination and wellness programs.
However, Cathy Schoen, senior vice president The Commonwealth Fund, says the Sherlock study is narrowly drawn. "It focused more on the Blues than the whole industry and it is focusing just on what it narrowly calls the administrative costs, not profit margins," Schoen says. "When you talk about the share of the premium that is not being paid out in benefits, it's both administrative and profits."
She says corporate reports from larger companies like Aetna and UnitedHealthcare show pretax profits in the 6% range in 2008, and administrative costs as a share of operating revenue running in the 15%-16% range. "UnitedHealth, out of all the revenue it took in, the amount it paid out was only 82%. So 18% was not paid out in medical benefits. In 2007, it was 19%," Schoen says.
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Douglas B. Sherlock (8/14/2009 at 4:02 PM)
Our response to Ms. Schoen's specific points follow: Schoen: "It focused more on the Blues than the whole industry and it is focusing just on what it narrowly calls the administrative costs, not profit margins," Schoen says. "When you talk about the share of the premium that is not being paid out in benefits, it's both administrative and profits." Sherlock: a. Of the 36 plans in this study that were the chief source of information used in the analysis, 23 were Blue and 13 were from Independent / Provider -Sponsored plans. b. We use industry and regulator (NAIC) definitions of administrative expenses. The definitions we employed are not arbitrary. c. Capital costs, such as profit and interest, are not administration. If you are comparing organizations, it is helpful to be consistent between them. If capital costs for private health plans are included in the comparison then the capital costs of Medicare need to be included as well. Schoen: ?She says corporate reports from larger companies like Aetna and UnitedHealthcare show pretax profits in the 6% range in 2008.? Sherlock: Much of their business comes from business lines other than health insurance, so it is inaccurate to consider combined, consolidated margins of these organizations as exclusively health insurance. In particular, these firms operate affiliates that serve as BPOs to employers that insure their own employees. These relationships are also called ASO arrangements. Margins on the revenues of these businesses are not comparable to health insurance without adjustment. We have made the appropriate adjustment for comparability. Schoen: ?She says the Blues also don't count the average 5% commission that businesses usually pay the agents who write the insurance contract as administrative costs.? Sherlock: We think that broker commissions are administrative costs and we have included them in this analysis, along with all other marketing costs. Less than one half of members served in the companies included in our study are sold through brokers. Schoen: ?Schoen says public and private health plans in the United States average about $600 per person a year for insurance administrative costs.? Sherlock: While we only have most of the Blue Cross Blue Shield Plans and many of the leading Independent / Provider - Sponsored health plans in our study, it is highly unlikely that costs for the industry as a whole are as high as Ms. Schoen says for members under 65 years of age. Her comment implies administrative costs of $50 PMPM. Blues have administrative expenses of approximately $26 PMPM. Independent / Provider - Sponsored plans, with a heavier mix of Medicare members, have PMPM administrative costs of $30. Since Blues and Independent / Provider - Sponsored plans compete with other plans (such as publicly-traded firms) it is improbable that those other firms would be successful under the competitive disadvantage that she implies.
Kara Wilhelm (8/14/2009 at 10:14 AM)
This is too funny. BCBSA themselves has also published a report (here: http://www.bcbs.com/blueresources/healthcare-trends-report/pdfs/2009-healthcare-trends-in-america.pdf ) slightly contradicting this new study. Page 21 shows admin costs for public insurance at 3% and page 33 shows admin costs for private insurance at 13%.