Fact Check on Administrative Costs

Fact Check on Administrative Costs

Posted onApril 11, 2013byAHIP Coverage

There is broad recognition that health care costs continue to rise at an unsustainable rate. But the data are very clear that soaring medical costs – not health plans’ administrative costs – are driving health care cost growth. According to historical government data going back to the 1960s, the portion of premiums allocated to health plans’ administrative costs has been consistent for decades and in 2011 was among the lowest in recent years, despite the fact that health plans have been incurring new compliance and regulatory costs related to the health care reform law.

National Health Expenditure data show that, on average, only 3.9% of the annual growth in health spending from 1989-2010 was attributable to private health insurance administrative costs.

Private health insurance administrative costs are also historically lower than Medicare administrative costs. A Heritage Foundation report found that from 2000-2005, Medicare’s administrative costs per beneficiary were consistently higher than those for private insurance, ranging from 5 to 48 percent higher, depending on the year.

And according to a BNA study, “Popular comparisons of Medicare and private group health plan ‘overhead’ costs wrongly compare only a part of administrative expenses related to the Medicare program to the whole of private sector administrative expenses for comparable large group health plans.” The report also says that Medicare’s costs for claims administration “are really about the same as claims administration costs in the private large group health plan market.” Moreover, some of Medicare’s general administration costs are expensed elsewhere in the federal budget, and others, like premium taxes, do not apply to the Medicare program.

Health plan administrative costs also encompass avariety of programs and services that improve the quality and safety of patient care, help patients navigate a complicated delivery system, and help control soaring medical costs. These include:

• Initiatives to prevent and deter fraud and abuse in the health care system;
• Developing partnerships with providers, such as Accountable Care Organizations, to reward quality, value, and better health outcomes;
• Credentialing health care providers to ensure that in-network doctors and hospitals provide safe, high-quality care;
• Providing patients with online and mobile access to their claims history and Personal Health Records;
• Sending notices to physicians and pharmacists about potential harmful drug interactions;
• Providing information to providers in real-time about what treatments work best; and
• Providing individuals and small businesses with access to agents and brokers to help find the coverage that is right for them.

As Ezra Klein noted on the Wonk Blog, “It’s also important to note that you don’t necessarily want administrative costs as low as they could possibly be. Some activities that are considered ‘administrative’ are useful. Disease management, for instance, which accounts for some of the difference between Medicare and Medicare Advantage. Mental health counselors who are available by phone. Good-faith investigations into waste, fraud and abuse. Care coordination. Nurses who use e-mail or telephones to remind patients to take their drugs. Administration is not always wasteful.”