Thursday, October 07, 2010

Where are the efficiencies?

The head of the Massachusetts Association of Health Plans often asserts that the underlying rise in medical costs is the main contributor to rising health insurance premiums in the state. As often noted here, such costs are important and cannot be ignored.

However, she seems to have overlooked a really interesting chart in a government report. Look here, on page A-10.

Golly, we see an average annual increase in the administrative costs of Massachusetts insurers of 9.3%. How can this be the case? In other financial services industries, unit costs of transactions have gone down, not up. What is it about health care that suggests the opposite should be the case?


Anonymous said...

Mass reform kicked in about the time rates dropped (2.5%/1.4%).

Seems like your point is valid pre-2007, but does your point hold in present day?

Reserve judgment, no?


Anonymous said...

Nope. Look an individual lines and see different patterns for each company. The overall question still deserves to be answered.

Anonymous said...

Yes, but we would need to see enrollment and changes in the individual plans to draw conclusions (risk pool changes, economies of scale--up, down, or lateral). That will have an impact on the admin costs.

The validity of the aggregate % can be questioned as well, I suppose, but then again, if that is the case, why draw any conclusions at all. Need more data.


Jay Lester said...

Very interesting observation Paul!

Is it possible that these overhead increases are not related to efficiency per se, but are rather driven by a logical response to demographic ane technological trends? For example, is the healthcare system preparing itself for an aging patient population? Or is more support required for ever-more complex technology?

I'd be very interested in looking at the next level of cost data to answer these questions.

Anonymous said...

If so, and maybe it is so, then you could and should also apply the same logic to actual medical expenses. My point is that it is just wrong for MAHP to offer broad complaints about hospital and doctor costs without explaining their own cost trends.

Jay Lester said...

Agreed! The MAHP should be sure they're not in a glass house before throwing stones.

You write a fantastic blog, keep up the good work.

Jean said...

It's not the unit cost of plans have had to spend more and more money to control utilization, negotiate discount, and deny claims! Otherwise, the medical trend line would have been even more out of control.

Lora Pellegrini said...


Reducing administrative expenses in health care is important and efforts are underway, but those costs are not what is driving health plan premiums. More to the point, talking about administrative costs distracts from focusing on the major cost driver, which is escalating medical expense. There is no separating health insurance premiums and medical costs as they are inextricably linked.

Nevertheless we looked at the numbers you reference: While the six-year period that you point to showed that administrative costs increased on average 9.3%, administrative costs increased on average 2.5% and 1.4% the last two years, demonstrating that health plans have taken steps to bring down transaction costs.

At a time when health plans have been focused on addressing their administrative costs, MAHP’s locally-based commercial health plans have seen an increasing portion of the premium dollar going to pay for medical care. Consider the last four years:

86% of the premium went towards medical costs
11% for admin
2% for surplus

87% of the premium went towards medical costs
11% for admin
1% for surplus

Nearly 89% of the premium went towards medical costs
Less than 10% for admin
1% for surplus

More than 91% of the premium went towards medical costs
Slightly more than 9% for admin
–.73% losses

Unlike health plans, which have experienced operating losses and have taken steps to reduce their administrative costs, many hospitals experienced an increase in total margin last year. According to the Division of Health Care Finance and Policy's recent Key Indicators Report, in 2009 the median operating margin for teaching hospitals was 5% and 1.5% for community hospitals. Those are numbers that many health plans (and Massachusetts employers) would envy.

Talking about administrative costs is a distraction from the real cost drivers. Health insurance premiums and medical costs are inextricably linked. All the objective data – report after report from various state entities – have pointed to the rising cost of medical services charged by hospitals and providers as the major contributing factor to increases in health insurance premiums. For example,

•In its 2006 publication, Massachusetts Health Expenditures Accelerating, the Division of Health Care Finance and Policy (DHCFP) noted that in 2004 hospital expenditures accounted for nearly 40 percent of Massachusetts health expenditures and 47 percent of the annual increase in total health expenditures.

•In 2008, the state’s Division of Insurance's report examining the factors driving increases in health insurance noted, the total cost for medical services increased by 55 percent per insured HMO member between 2002 and 2006, which was attributed to significant annual increases in the cost of physician, hospital and pharmacy services.

•The reports by the Attorney General and Division of Health Care Finance and Policy from this past spring highlighted that the major contributing factor to the increases in premiums has been the rising cost of medical services charged by providers.

•The AG’s report pointed to provider prices and the market clout of certain providers are responsible for almost all of the increases in health care costs over the last several years.

•The DHCFP report noted that Massachusetts health care costs are 15% higher than the national average. Getting those costs in line with the national average would go a long way towards making health care affordable.

Had providers’ costs – the prices charged by hospitals and other providers – mirrored the average annual rate of increase for health plans’ administrative costs, we’d be a long way towards dealing with the cost issue and providing employers, particularly small businesses, and consumers with some much needed relief.

Lora Pellegrini
President and CEO
Massachusetts Association of Health Plans

Anonymous said...

Clever, Lora, to return to health care costs as driver, a point I admitted in my first paragraph. But not so clever to fail to address my underlying point. Other financial services industries have learn how to reduce transaction costs. When will your industry?

By the way, on this point -- "the median operating margin for teaching hospitals was 5% and 1.5% for community hospitals. Those are numbers that many health plans (and Massachusetts employers) would envy" -- please recall that the number for teaching hospitals is skewed by two or three with such market power that they are paid rates well above the rest of us (St. Elizabeth, Tufts, BMC, and BIDMC).

Also, everyone knows that MA hospitals in general earn an insufficient margin to generate capital for renewal and replacement of plant and equipment. If you think a 1.5% margin is sufficient to do so, you don't understand the underlying finances of hospitals.

You can continue to cast blame only on others, but your insistence on denying any responsibility by your sector undermines the credibility of your arguments.

Tara Murray, Blue Cross Blue Shield of Massachusetts said...

We agree that every institution in health care – health plans, hospitals, physicians’ practices, and others, can and should become more efficient in order to conserve limited health care resources. At Blue Cross, we are working very aggressively to lower our administrative spending, which accounts for approximately 10 percent of each premium dollar. For example:
o Over the last four years, our administrative spending on a per member, per month basis has risen a total of 2%. That’s about one half of one percent per year.
o In the past year alone, we have reduced our administrative spending by approximately 8% In 2010, we anticipate that our total administrative spending will be reduced to 2006 levels.

We’ll continue to explore ways we can be more efficient and are confident others in the health care community will do the same. It is a responsibility we all share to make health care more affordable for the community we serve.

Anonymous said...

Paul - It's pretty easy to see who is driving the escalating healthcare costs by the captial expenditures they make... Mass General, Brigham & Women's and Children's continue to add new buildings, new floors and state of the art technology and equipment. They are spending hundreds of millions of dollars each to expand their facilities. It is impossible to keep up with them and they continue to grow their PCP networks feeding more and more care into these highest cost facilities. You can point all you want to these other minor areas but until the Partners and Children's PCP contracting entities are broken up you will not see any slowdown in the cost increases. They can command anything they want from the health plans and then use these contracts to attract other PCPs and their membership panels. The Attorney General should disband these contracting entities that largely exist for the sole purpose of getting more money from the insurance companies. Until that happens I seriously doubt you will see any real change in local healthcare costs.

Anonymous said...

The AG did find that the large disparity in reimbursement rates was, in fact, responsible for a portion of rising health care costs in the state. As I recall, she cited points similar to those you have made. The insurers have said they don't have the market power to turn down those rate requests. Perhaps the transparency of rates that will result from recent state legislation will be helpful over time.

e-Patient Dave said...

I'm late to the party on this one, but the more I learn about this industry (especially in this state) the more I'm getting sick of big players playing "I know something you don't know, and I'm not telling."

This is no small issue. People suffer due to inability to access care, and I find it unacceptable that anyone should be in the business of saving life and limb, and not be willing to declare that the public well-being is most important and they're willing to be open about everything in the interest of better health.

Anonymous said...

Paul - The insurers may think they can't turn down those rate requests but history tells a different story. Let's look at Tufts Health Plan in the early to mid 1990s. Tufts was a very fast growing health plan with hundreds of thousands of covered lives. Tufts would number their provider IPAs (a physician group joining with their hospital) as they came into their network and by the time Mass General joined they were IPA 52 and Brigham & Women's came in even later at IPA 64... the Children's PPOC came in so late they are IPA K2! My point is that Tufts was able to grow to cover hundreds of thousands of lives WITHOUT the likes of Mass General, B&Ws and Children's in their provider network. I would say many employers and their employees would jump at a limited network plan if the cost savings were significantly lower. Tufts added these high cost IPAs to grow even further but that decision was the primary driver of the healthcare cost explosion which ignited during the Partners standoff with Tufts and Tufts blinked first and the rest is history with Partners and Children's driving up costs. Frankly, Tufts was a better health plan before they added these late arriving, high cost IPAs which eventually cost them their ability to control costs. (As a side note Beth Israel was Tufts IPA 38 so you were late to the managed care party but not as late as Partners)

Anonymous said...

Paul - great blog entry. I have always found it interesting that insurer admin. costs have hovered at 10% of an ever increasing premium dollar. Seems like it should cost about the same to process a $100 claim as it does an $80 claim.

It seems that MAHP is saying we can only attack one part of the cost problem - the 90% - at a time. While insurer admin. costs are "only" 10% of the problem, that 10% is about $1B that does little if anything to benefit patients.

Barry Carol said...

The Massachusetts AG did an excellent job of exposing the huge price variance among providers, especially hospitals, while quality variance is often low and sometimes non-existent. Regulators should pave the way, via legislation if necessary, for the establishment of tiered networks that would expose members to meaningfully higher co-insurance if they want to use the highest cost providers. Moreover, complete price transparency would help referring doctors to easily identify which good quality providers are the most cost-effective. Price transparency would also make it much easier for patients to see and understand the wide price differences without any significant difference in quality. As it stands now, powerful hospital groups often refuse to sign contracts with insurers that allow them to be placed in other than the most preferred tier while confidentiality agreements between providers and insurers preclude disclosure of actual contract reimbursement rates. Fixing these issues could go a long way toward mitigating the growth in healthcare costs.

As for insurer administrative costs, underwriting costs will shrink considerably after 2014 while broker commissions may be unbundled and paid directly by small and medium size employer groups based on value added while the exchanges, coupled with increased market transparency, could eliminate the broker role in the individual insurance market.

Anonymous said...

Very valid point but I'm not sure that this is the "lowest hanging fruit" in Health Care Costs. Provider costs represent a larger share of the pie and therefore a 1% decrease in their costs goes a lot further than a 1% decrease in the overhead cost for insurance companies. That said, I think it's still worth pursuing operational efficiencies on the part of the entire industry.
Finally, in the spirit of transparency, could you let us know what BIDMC's overhead/admin costs are? If you've posted already or it's easy to get off your 990, could you point the way? Also, I know that org's who receive funding from the National Institute of Health must negotiate an F&A or "overhead" rate with the govt. Would you mind sharing with your audience what the BIDMC F&A rate is?