The 40% Overhead Myth - Part II
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The Massachusetts health plans submitted their 2007 filings at the end of last week, and amidst all the hub-bub were some interesting facts. If I read the numbers right, the large plans in MA (BC/BS of MA, Harvard Pilgrim, Tufts and Fallon) all paid out at least 87 cents on the dollar in medical expenses, and kept 13 cents, or less, for their own administrative overhead and profit. I’ll know more about the details once we have a chance to review the filings in more detail, but as far as I can tell, the plans continue to live within the framework established by the Massachusetts Association of Health Plans a month or so ago. FYI — the information on the MA plans can be found on the MAHP web site and information about BC/BS of MA’s administrative expenses can be found on their web site. Harvard Pilgrim’s specific administrative expense ratio went from about 12.5% in 2006 to 11.5% in 2007. We think it will go down again in 2008.
And by the way, the average premium increase for employers who chose Harvard Pilgrim in MA, NH and ME as their carrier in 2007 was about 7.2 percent, after buy-down. I’m sure people know this number is an AVERAGE — and therefore, varies from group to group, the overall average rate of increase is the lowest we’ve seen in several years. A good sign.
Thanks for the post, Charlie. As always, useful and interesting. Two followup questions:
1. Since administrative costs are staying pretty even as an overall part of health plan spending, that would seem to indicate they are rising at roughly the same rate as medical inflation which, as you know, is pretty darn high. I would think admin costs would actually be declining as an overall share during this decade of extra high medical inflation. Why not?
2. Average HPHC premium increases are 7.2% after buy down. Buy down, of course, is another term for higher deductibles, copays and other cost sharing. What is the average HPHC premium increase pre-buydown?
John McDonough, Health Care For All
John –
With respect to question #1, my answer would be, “not quite.” Premium doesn’t go up evenly every year - it’s a function of business and product mix.
For example, HPHC has about 23,000 Medicare Advantage members today. As recently as two years ago, we had over 35,000. Take the premium associated with 12,000 Medicare Advantage members out of the mix, and replace it with 12,000 fully insured or self-insured commercial members, and the plan’s overall premium (along with its medical expenses) drops by over 60% on those members.
In addition, we have members in MA, NH and ME - all of which have slightly different premium levels. As our MA membership has flattened out and our NH and ME business has grown, our premium per member overall has come down - primarily due to product mix (employers in MA buy richer product designs than employers in NH and ME).
Third, employers do buy down benefits each year to deal with the rise in premiums, which reduces the increase in premium per member as well. Last year, to answer your second question, benefit buy down was worth about 1.5 to 2 points on premium overall. That’s pretty typical of the last several years.
And as employers convert from fully insured to self insured business, we collect only fees for administrative services from them, which reduces our premium collection as well.
Net, net, net, medical expenses may be going up by 10-12 percent per year, but premium revenues collected by HPHC have been rising by much less - 6-8 percent, depending on the year, and the member and product mix we’ve got.
One final note, the state did change the rules about whether or not cost containment expenses (medical and case management services) were medical or administrative expenses in 2003. This added another $60 MM or so to our administrative expense line in 2004.