Investing in scalable healthcare technology reduces administrative costs

Just as a patient who invests time and effort into wellness can prevent a costly healthcare emergency, payers and providers who invest in technology now can stop hemorrhaging administrative costs in the future. 

That’s the promise behind software platforms that seek to integrate claims processing, care management and enrollment data into an enterprise-wide system that could form the foundation for sharing data across the entire care continuum 

“There’s a lot of investment in infrastructure needed to get systems in place,” says Jennifer Ford, an adjunct professor at Kaplan University who teaches courses in healthcare administration. “‘Let’s grow the business as fast as we can,’ was the focus of many healthcare organizations, but they didn’t have a system in place to measure and reduce administrative costs. They haven’t needed one.”

Attention via regulation

On the provider side, a reduction in Medicare reimbursements as part of the Affordable Care Act (ACA) combined with insurers seeking tighter controls on costs is driving the need to realize administrative savings. For payers, the ACA’s medical-loss ratio (MLR) is just one factor lowering administrative costs. 

The law requires plans covering small groups and individuals to spend 80% of their premiums on healthcare, rather than administrative costs. The percentage rises to 85% for large group plans. Last year, more than $332 million in rebates were paid out by health insurers who failed to meet the minimum MLR, according the U.S. Department of Health and Human Services (HHS). That’s a marked improvement compared to the $504 million in rebates issued in 2012 and the $1.1 billion in 2011 reported by HHS.

The portion of premium dollars directed toward administrative costs and profit dropped in all markets since the introduction of the MLR rule, according to HHS. However, the largest decline, which was in the individual market, was just 3.6% between 2011 and 2013. Administrative spending in group markets increased slightly from 2012 to 2013, but showed a net drop from 2011 to 2013. 

“There have been other laws that have been driving factors to not only reduce administrative costs, but to implement technologies,” says Kimberly Perkins, PhD, a master professor for Kaplan’s Master of Health Care Administration degree program and CEO of Adaptive Consulting Group in International Falls, Minnesota. She cites the Health Information Technology for Economic and Clinical Health Act (HITECH) as another example of regulations driving cost reductions through incentives for the use of electronic health records.

With all the focus on reducing costs, there is a paradox when it comes to meeting regulatory requirements. 

“Administrative costs are still climbing because investments have to be made,” says Ford. 

Like all laws, parts of the ACA force healthcare executives to find ways to comply, Perkins points out. Doing so requires resources, she says, and typically resources mean more people, which cause administrative labor costs to rise.

External marketing to internal communications

In addition to labor expenses, sales and marketing traditionally have been the largest sources of administrative costs for health plans. Ford and Perkins say that is shifting as healthcare payers invest in the technologies needed to lay the groundwork for lower administrative costs. 

For example, an online portal that allows members to find answers to their questions can reduce call center staff. But that’s just the beginning. To be even more useful, a portal might include customized healthcare tips based on each member’s healthcare history, allow members to measure their disease management activities against national averages or schedule appointments with providers. 

Making it easy for members to manage their health could pay dividends in terms of wellness adoption, but before that can happen, multiple administrative systems need to communicate with one another. 

“The first thing people need to do to build a technology infrastructure is to understand their business,” Ford says. “They need to understand their claims and their financial impact. They need systems that can communicate. After that, they may be able to build systems to understand disease management to see where costs are going, for example. But, the first step is infrastructure.”

Unlike manufacturing, which has been balancing cost optimization with quality control for decades, the healthcare industry has been driven by payment models that didn’t require real-time information, says Prakash Kadamba, senior director of Healthcare Product Management at Infor, a company that develops suites of business management software.

“Providers are looking to track metrics across a continuum of care for a patient, from the moment a member enters a healthcare facility through the procedure to rehab,” he says. “The core stumbling block is the fact that integrating healthcare systems is challenging. What will save the day is seamless integration at a low cost. Billing, supply chain, scheduling … they’ve all been driven individually from their own areas. They don’t communicate with each other in a streamlined manner.”

A daunting initial investment

Streamlining operational, clinical and financial data is the key to controlling costs in the future, but it requires a holistic view. Investing in piecemeal solutions that address one area without integrating with other systems is a recipe for disaster. Some early adopters of electronic medical record platforms, for example, are realizing that the systems they adopted aren’t scalable and don’t integrate with other systems.

“I think people are gun shy,” Ford says. “In systems where we have to hold onto dollars, people are cautious. They’re afraid to make a wrong decision; afraid they’re going to lose more of their technology investment. Do they find a workaround to their current technology or start over from scratch?”

A workaround means finding ways to make one piece of software communicate with others. These patches then require maintenance as new silos of information need to be integrated. The more time invested in connecting disparate systems with proprietary patches, the more difficult it becomes to start over.

“As new technology comes into the marketplace, even if healthcare organizations want to move, they might be deeply embedded into older systems,” Kadamba says. “The return on investment when transitioning to an integrated system is not immediate.”

That’s the problem inherent in the opportunity presented by an integrated healthcare data management platform. While the longterm benefits to resource optimization make it a tempting opportunity, the initial investment may be more of an obstacle for some organizations.

“The crazy thing is, we now have these amazing technologies that can reduce administrative costs by integrating other technologies,” Perkins says. “I believe that some of these new initiatives in software development are going to pave the way for how healthcare organizations structure their business.”

As regulatory pressures, customer demands and competition mount, now is the time for healthcare organizations to invest in a scalable technology infrastructure, Ford says. 

“If they don’t find a way, they’re going to get further behind the eight ball,” she says. “People need to understand that the initial cost will eventually reduce administrative costs. It has to be done.”  

Jamie J. Gooch is a Cleveland-based freelance writer.