James

How To Win The Lottery!

I suspect that the 30% figure refers to total administrative costs, i.e. insurer, provider, employer benefits admin, etc.

Very well said. I am confident, however, that I will read the statement numerous times from some that the number is 30% no matter what the facts show.

Thank you for your time on this matter.

Bill Randell

I don’t know where the 30% number comes from, but I’ve heard it used in two different contexts and in each instance I question the number. I’ve heard individuals claim that health plans’ overhead expenses (administrative costs and surplus levels) are roughly 30% of the premium dollar. In other instances I’ve heard that 30% of all health care spending goes towards administrative costs. I’ll start with the claim around health plan administrative costs.

According to the national health spending estimates from the Centers for Medicare and Medicaid Services (CMS), the administrative costs, taxes, profits, and other non-benefit expenses of private health plans have averaged about 12 percent of premiums over the last 40 years. This includes all types of health insurance purchased privately, ranging from employer-based coverage to individually purchased plans, Medigap, and long-term care insurance. That’s also consistent with what I stated earlier that among the five commercial MAHP member health plans, administrative costs and surplus levels accounted for 12.4% in 2007.

Some have argued that Medicare has lower administrative costs than private health plans. However, many of the elements that ought to be counted as part of Medicare’s administrative expenses – health and pension benefits for current and retired CMS workers, capital costs, IT expenses, customer service operations – are funded by other parts of the federal government. Further, Medicare contracts with health plans to process and pay claims, so it’s not counted as part of CMS’s administrative number, but is for private health plans.

With regard to the suggestion that 30% of all health care spending goes towards administrative costs, that seems a bit high when you consider everything that has taken place in recent years to reduce complexity in an effort to lower the amount spent on administrative processes. Health care is a heavily regulated industry and there are significant costs associated with complying with government regulations (state and federal) for all sectors of the health care industry. While there are certain regulatory and statutory requirements that are probably worth the cost, depending upon which segment of the industry you talk to, there are probably some requirements that ought to be reviewed to determine whether they still are relevant.

At the federal level, HIPAA established (among other things) requirements for transaction standards and code sets, resulting in uniformity for a variety of transactions that health plans, hospitals, and physicians utilize every day. This in turn has resulted in reductions in wait-times on various administrative functions, such as eligibility verification and claims submission and processing.

At the state level, in 2004 MAHP, along with the Massachusetts Hospital Association, Massachusetts Medical Society and Blue Cross Blue Shield MA worked together to streamline credentialing, the process health plans and hospitals use to verify that physicians’ admitting privileges and education are up-to-date. The four organizations agreed to a uniform credentialing application, so that physicians and their office staffs could utilize one form with the goal of reducing the amount of time they spend on credentialing. Credentialing is necessary to ensure quality care. While simplifying the credentialing process will help to reduce administrative expenses, there will still be some cost because someone has to verify the information.

Reducing administrative costs in health care is important, but if we want to talk about cost control and affordability, the focus needs to be on efforts to improve the cost and quality of health care, because the bulk of the health care dollar is spent on medical services.

With all due respect, as Marcia points out, health plans do not pay the $160 million assessment: consumers do, through the premiums that they pay directly to health plans, and through the reductions in wages that occur to offset employer contributions to premiums. Health plans are merely a conduit. I believe that Ms. Wcislo’s point is that health plans have significant, and growing, net worth that could be used for the benefit of everyone in the Commonwealth, instead of mainly to generate more and more investment income to make health plan reserves grow and grow. This growth might benefit the investment firms that earn fees and commissions, but it’s not producing much for anyone else.

The money that health plans spend on medical management programs might improve quality (although the research is far from clear on that point) but it’s usually not funded out of reserves. Instead, the standard practice is to recoup these expenses through the premiums that employers and consumers pay. In addition, there is a whole other layer of profit-making and wealth accumulation that results from these programs since they are often run by investor-owned profit-making disease management companies. (Anyone who is interested in learning more about the disease management industry can read this article by Dr. Thomas Bodenheimer http://bmj.bmjjournals.com/cgi/content/full/320/7234/563). Health plans in Massachusetts contract with many commercial medical, pharmacy and behavioral health management companies (including Beacon Health, ExpressScripts, Health Dialog, and Healthways).

While investments in improving administrative and transaction-oriented processes in other industries generally lead to lower administrative costs (e.g., banking), that doesn’t seem to have been the case in insurance. In an earlier blog entry by Nancy Turnbull on administrative cost trends, she noted that per member per month administrative costs for health plans had increased dramatically in the last few years. Anyone who works in a provider setting can certainly tell you that it doesn’t feel like administrative processes, or the cost of complying with them, are getting much easier.

Finally, it’s worth noting that the high quality ratings and high member satisfaction of health plans in Massachusetts probably have as much, if not more, to do with the high quality of medical providers in the state, and with the fact that health insurance coverage here is more comprehensive than in most other parts of the country. Much harder to be happy about your health care, or to comply with guidelines about getting preventive services, if you have a high deductible health plan….

So, I’m still wondering, with Ms. Wcislo, why health plans need $3 billion in reserves?

Peter

Very impressed.

How do you answer people who suggest that 30% of every healthcare dollar is wasted on administration and bureaucracy?

Thanks

Bill Randell

And what was it we taxpayers were told about our state legislature looking into that and other compensation packages of the CEO’s and other executives at the state’s supposed “not-for-profit / public charity” tax-exempt insurance companies?

Focusing on health plan profit margins is misplaced. As the recent MassINC report, Point of Reckoning, noted, there is enormous risk in relying on capital gains and the stock market to fund programs, particularly at a time when there is increasing concern about the economy.

To get a better sense as to how the state’s not-for-profit health plans are performing, a more accurate reflection would be to look at their operating margins to see how much revenue they take in and how much they pay out in medical expenses and administrative costs. In 2006, the collective operating margin of the five local commercial MAHP member plans (Fallon Community Health Plans, Harvard Pilgrim Health Care, Health New England, Neighborhood Health Plan, and Tufts Health Plan) was 2.18%. In 2007 it was 1.19%, which is pretty close to break-even.

While you are correct that these plans do not need to impress Wall Street or shareholders, you are incorrect to assert that they do not need to make significant capital investments. In addition to meeting state solvency requirements, reserves are necessary to help fund improvements in health plan IT systems and other infrastructure investments that ultimately benefit consumers. For example, improvements in areas such as enrollment, billing and claims payment that improve the administration of health care can require extensive system and process changes and significant financial resources are needed to fund those improvements. Reserves are a way of helping to finance those upgrades.

Disease management efforts offer another example. Innovative programs introduced by health plans to help patients with chronic and acute conditions, such as congestive heart failure, diabetes and asthma, are now common practice. The investments Massachusetts health plans have made in these programs is one of the reasons why those plans consistently rate as the country’s best in clinical quality and member satisfaction measures. However, these programs require health plans to invest significant resources into the system to make these programs work.

Health plans already contribute $160 million every year to health reform through assessments. Instead of focusing on how much more any entity should contribute, we should be focusing on what is making coverage unaffordable – rising health care costs – and the steps necessary to getting a handle on those costs.

“A more foreboding scenario has played out in New Jersey which reported collecting $23 million less in cigarette tax revenue than before the state’s latest cigarette tax increase. Also, Arizona, Maine and South Dakota have reported budget shortfalls after raising the cigarette tax.”

In New Jersey they actually collected less then before the increase. The other four states collected less then their projected increases.

States are not getting increased revenue with the additional taxes. I just read the other day that five states who increased their tax on cigs recently have actually received much less then expected. New Jersey, Tennessee and I forgot the other three states. In fact it was one of the reasons why the Governor of Florida just recently vetoed a bill to increase the tax of cigs.

I will try to find more detailed information and post later.

Lastly the DOR is not cracking down on internet cig dealers to collect the taxes. They are getting the names of people who have ordered cigarettes from the internet dealers along with their orders and are mailing them a bill in the mail.

Bill