Health Plan Admin. Costs
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Over the past ten days, the Commonwealth of Massachusetts and the Mass. Hospital Association have both issued reports on health plan performance in Massachusetts. The state’s report - issued by the Massachusetts Division of Insurance - focuses on health plan administrative spending and health care claims costs from 2002 through 2007.
On administrative spending, the state’s report confirms what the plans have been saying for the past several years - that their (our?) administrative costs represent about about 11 cents of the health insurance premium dollar. The non-profits had lower administrative expense ratios than the for-profits, but only by a point or two. The study also compared the administrative expenses of MA-based health plans with plans in the Northeast and nationally, and found the MA plans to be a bit lower than the Northeast (12 cents) and national plan averages (12.5 cents).
Harvard Pilgrim’s own data over that period showed administrative expenses that were as low as 9.5% and as high as 13.5%. The difference for us was mostly tied to our level of IT spending. Our administrative expenses are tracking at around the 10.5-11% range in 2008 year to date.
This study also analyzed medical cost ratios to determine what percent of each dollar of premium goes to pay for health care costs at each health plan. There was more variation here than there was on administrative expenses. Harvard Pilgrim, for example, averaged 11 cents on the dollar for administration, 87 cents on the dollar for medical claims costs, and a 2 cent margin. Aetna averaged 13 cents for administration, 80 cents for medical claims costs, and a 7 cent margin. Pretty big difference.
Overall, MA health plans spent almost 87 cents of every premium dollar on medical claims costs - again, consistent with earlier reports published by the Mass. Association of Health Plans - while the Northeast and national plans spent 85 cents, on average, on medical claims costs.
As I’ve said before, the real money in health insurance costs is in HEALTH CARE COSTS, which represent about 87 cents of the dollar around here. Those costs are distributed pretty evenly between physician services, inpatient hospital services, outpatient hospital services and drugs. But the trend data on each of these varied, according to the DOI analysis. Inpatient utilization was flat, while rates (prices) for inpatient services rose by 10 percent per year. The cost of outpatient hospital services rose by 15 percent per year over the same period - a combination of higher utilization and higher prices. Physician service costs grew by 9 percent per year - primarily driven by rate increases and not utilization - which only went up by about one percent per year over the period studied.
Drug costs were up by 10 percent per year over the period studied, but unlike the other areas, which either stayed flat or ticked up a bit year over year, the annual increase in drug costs went down dramatically over the period. This appears to have been driven primarily by the substitution of generics for brand name drugs - as generic use climbed significantly over this period of time.
Net, net - this translated into a total medical cost trend of about 12 percent per year over this period of time. This is pretty consistent with our own experience, and most employers dealt with the increase by buying down benefits, increasing co-pays, and changing plan designs - which dropped the year over year increase to them down to something more like 8-10% per year.
The Mass. Hospital Association study was more anecdotal than the DOI study. It was not based on quantifiable information, but relied instead on the impressions of those hospital executives who responded to their survey questions. The questions were geared toward health plan performance across a number of administrative issues (claims processing, prior authorization, contracting approach, utilization review, medical management, claims payment denials, etc.), and hospital executives were asked to rank each plan as either excellent, fair, or fail(!) on each of these attributes.
While this approach makes it hard to draw too many conclusions from the results (one person’s “excellent” could be another person’s “fair” or “fail”), there were a couple of notable themes. First, the local non-profits did better on almost all of these attributes than the nationals did - and Harvard Pilgrim did quite well overall. Since the local plans represent the vast majority of the commercially insured population served by Mass. hospitals, this is a good thing - for them and for us. Second, most health plans - at least mine anyway - would support as “representative” the issues list the MHA chose to survey their members on.
MHA said their survey shows the MA health plans need to be more efficient and easier to work with. I beg to differ. I think their report - and the DOI report - say three things:
– MA health plans spend less premium on themselves than the nationals do;
– MA health plans spend more of their premium on health care services than the nationals do;
– MA health plans are easier to work with - based on MHA’s own data - than the nationals.
Can we do a better job of managing our affairs? Of course. Are we negative outliers? Don’t think so. And while some may use this report to say that the problem with health care costs rests with administrative complexity, the data simply doesn’t support that. You want to do something about the cost of health insurance, you have to do something about the cost of health care delivery. It’s as simple as that.
Bravo Charlie!
I always appreciate your ability to distill things down to their core message. And yes, the evidence would indicate you’re not doing a bad job…
Of course, what you make sound so simple is likely far from that…where does one begin to effectively slow the cost of health care delivery?
The unit cost side?
-Address the virtual monopoly pricing from certain providers?
-Slow the adoption of expensive new technologies?
-Fix the flaws with RBRVS and fee-for-service in general?
-Convenience clinics (cheaper site of service)?
Or the volume side?
-Reduce overall use through increases in population “health” (and the resulting reduction in diabetes, CAD, obesity-related conditions?)?
-Improved quality (get it right the first time)?
-Reduce variability?
Suddenly, it doesn’t feel so simple.
Charlie:
There’s a truism in the last lines of your blog: “You want to do something about the cost of health insurance, you have to do something about the cost of health care delivery. It’s as simple as that.”
Here’s another truism in reverse: “You want to do something about the cost of health care delivery, you have to do something about the cost of health care insurance. But it’s NOT as simple as that.”
We have to work on the clinical variation in the delivery of health care; hospitals understand that and are working together on that issue. But this blog entry is about insurance so let’s focus on that.
Here’s the point that I think was missed: Massachusetts health plans – all health plans for that matter – always focus on their administrative costs – which are, as you note, about 11% of the health insurance premium dollar. But let’s not forget that administrative costs of Massachusetts health plans (including all of the non profits) have gone up 48% from 2003-2007.
Here’s the point we were really trying to address in our survey: We want people to look beyond YOUR costs, Charlie, to the downstream administrative costs providers have to pay as a result of the oftentimes duplicative, poor processes from insurers.
If one health plan offers 40 different plan options – a not uncommon occurrence – a hospital has to keep track of each plan’s pre-treatment authorizations, coordination of benefits, plan notifications, claims submission and adjudication, and appeals process. Consumers have to keep track of how their plans work and, because they often don’t, providers end up walking with them through the insurers’ administrative thicket. A single hospital has to track literally hundreds of different products from the plans. That’s a big administrative burden.
Add to that cost the fact – confirmed by our survey results – that oftentimes an insurer’s staff is hard to reach, that often insurers don’t explain their claim denials well, that insurers don’t make the clinical guidelines used as a basis for denials easily available to providers – and on and on. With each flawed process, a hospital’s administrative staff spends more time on the phone or in front of the computer. As the clock ticks, health care costs rise.
Last year the U.S. Congressional Research Service estimated the administrative costs of private insurance and government programs at about $465 billion a year – and that does not include the administrative costs health care providers bear. Hospital spend about 65% of their health care dollar on wages and salary; most estimates of hospital spending for administrative requirements is about 25% of that dollar.
Here’s a great quote that we should all keep in mind:
“The administrative costs of the medical insurance system consume much more of the current health care dollar, about 7.5 percent, than in other countries. Bringing those administrative costs down to the level of 5 percent or so as in Germany and Switzerland, where private insurers play a significant role, would save an estimated $50 billion a year in the United States. It kind of dwarfs everything else you can do.” — Karen Davis, president of the Commonwealth Fund, as quoted in the New York Times, 7/17/2008
To reiterate: the point isn’t how well Massachusetts insurers compare to U.S. insurers. It’s how the entire insurer industry has helped create a costly administrative web. Hospitals certainly have a big role to play in keeping costs down. No one argues that. But it’s clear that everyone – including insurers – also have a role to play in the cost question. We’re beginning to address a few things – but let’s talk about the others…..
AM - I think you know the answers to most, if not all, of your questions would be some version of “yes.” While they’d be hard to do all at once, your list looks like a comprehensive approach to dealing with many of the fundamental problems we have with the current operating/financing model.
And as I’ve said before - I think public reporting is a big part of how we get from here to there. Can’t fix what you don’t measure, and you can’t generate focus and attention if you measure, but don’t report.
Just look all the noise and attention that’s been generated by Peter Pronovost’s checklist! In a few short years, he went from “out there” reformer to a MacArthur Foundation grant recipient. In a few more, his approach will be SOP in many places.
Lynn - Thanks for your response. I appreciate it. Suffice it to say there’s plenty to do in the administrative simplification space. No disagreement on that one. But doing everything that can be done there would yield small dollars next to the big bucks attached to health care costs generally.
For example, Karen Davis’ $50 billion in administrative savings represents less than 2% of total health care spending. Real money, to be sure, but only enough to fund three or four months’ worth of health care cost trend.
I’m not looking to be let off the hook on being as efficient as possible - and you and your members should continue to push us to be. But if we really want to make a dent on the cost of health insurance, it has to include - indeed, should probably focus on - doing something about the rising cost of health care. As Willie Sutton would say, that’s where the money is.
Lynn — Another thought. What if the health plans in MA and the hospitals in MA worked with one another - and with the Patrick Administration - to seek a demonstration waiver from CMS (aka, Medicare) to use something other than the traditional Fee For Service methodology to pay for some set of to-be-defined services? I’m convinced that you - we - and everyone else would be much better off if we could change the payment rules for some select set of services - and see if it did, in fact, improve quality and lower cost. What do you think?
Charlie: You have mentioned the Medicare waiver idea before and I think it is worth discussing. As you know, I have been speaking out about the flaws in the current payment system for awhile. You and I aren’t alone. Many of the hospital CEOs I represent also agree that payment reform is a discussion that needs to occur. Why? Hospitals are greatly frustrated with the current system that too often interferes with providing the best care. There are lots of examples of such barriers from delivery of primary care, to the transition to post-acute care, to the treatment of chronic disease. But reforming the system has to mean more than simply reducing payments to providers. It has to be about supporting a system that provides the right care, at the right time, in the right setting for all patients.
In my first meetings in D.C. with our Congressional delegation, I broached the idea of a Mass.-specific waiver just to test the waters, and there was certainly interest from most in looking at the option. Granted Federal waivers can take a lot of time and the clock won’t start running in D.C. until there is a consensus among Mass. stakeholders about what a waiver should look like. Just look at the difficulty in getting final agreement on the Medicaid waiver that supports our healthcare reform efforts. Thus it is incumbent on all of us to begin to have discussions about goals, desirable outcomes, and possible designs to get there.