Nine ways MCOs can cut administrative costs

While care management and benefits account for much of a health plan's costs, administrative expenses draw a lot of attention because they are the cost factor that health plans have the most control over-and have the greatest ability to reduce.

Administrative costs and other non-benefit expenses have averaged about 12% of health plan premiums for the last four decades, according to national health spending estimates from the Centers for Medicare & Medicaid Services (CMS). Although CMS doesn’t break down these expenses, America’s Health Insurance Plans (AHIP) says costs prior to the 1990s were mostly made up of claims-paying expenses, while disease and care management programs, member information services, nurse help lines, and hospital contract management make up the bulk of the costs today.

These estimates don’t include Medicare, which reports that administrative costs claim just 3% of its budget. However, a 2014 AHIP article notes that the private sector devotes more of its administrative costs to controlling overuse, and Medicare loses billions each year to fraud, accounting for as much as 11% of its budget-bringing the combined total percentage of fraud or overuse loss and administrative costs to the same level as private insurance.

The Institute of Medicine (IOM) estimates the cost of healthcare administration in the United States is $361 billion-more than twice the nation’s spending on heart disease, and triple the amount spent on cancer, according to a 2012 study published in the New England Journal of Medicine, "Reducing Administrative Costs and Improving the Health Care System." IOM also estimates that half of these expenditures are unnecessary.

Health plan experts say continual strategic change is key to controlling administrative costs, and those plans that don’t adopt this philosophy will fall behind. “As consumerization is sweeping across the health insurance marketplace, the ‘winners’ will be those plans that embrace the change, quicken the pace of their innovation, and compete on their efficiency, cost, and customer service, like an Amazon or a Netflix,” says Michael Taylor, managing director of Huron Healthcare. “Continuing the traditional, inefficient practices of the past will catch up to the plan and leave them woefully behind.”

There are many theories to reduce these administrative costs, including moving to a single-payer system, but a number of experts offer other tips that may be more realistic in the United States.

Next: #1. Change the big picture

1. Change the big picture

Adigozel Ozgur, a partner with The Boston Consulting Group, says having the right perspective is key to controlling administrative costs.“I believe the biggest issue is that there is a mindset to really drive a high-performing, low-cost operating business. I think the mindset should come from cost excellence,” he says. Health plans should stop focusing on individual improvements, and instead adopt a culture of change focused on optimizing efficiency. “They should improve services and quality, and cost will go down as a result,” says Ozgur. “But they should look at a system solution, not a point list.”

Creating a new mindset-one of continuous improvement-allows health plans to make changes they can stick with, rather than making piecemeal changes that require a big investment but are dropped after a few months or years.

“[Health plans] need to have discipline to live with the improvements they draw, and have the mindset of continuous improvement,” Ozgur says, adding that incremental savings are harder to sustain. Often, companies change operating models and make big changes, but changes need to be linked to strategy in order to be successful. "You can’t be best in everything-that’s a very expensive model," he says. "Your operations need to be strategic and you need to understand what your specialty is going to be and go after that. Then, you can really excel in those areas and maybe make those other areas parallel to the marketplace.”

Next: #2. Streamline contracts and products

2. Streamline contracts and products

Problems with original contracts and products designs are a major source of cost for health plans, says Ozgur. “Many payers have dozens of products and a variety of contracts for the providers, but this customization doesn’t necessarily create value for the customers,” he says. Non value-added complexity is a huge cost for health plans, and there is very little coordination and integration on the administrative side. In this situation, it becomes difficult for payers to lower costs, so they should instead focus on streamlining their offerings and contract templates.

NaugleFor example, Apple provides customers good, better, and best product options. This makes it easy for customers to make informed decisions about the products that are best for them, and it's easy for Apple to deliver on those different product offerings, Ozgur says. Similarly, by limiting the types of contracts offered, and focusing products to the ones a plan chooses to excel with, health plans can offer smart customization, he says. “The healthcare industry created too much complexity, and it’s harder for consumers to understand value.”

Andrew Naugle, MBA, a principal and healthcare management consultant for Milliman agrees that extreme complexity drives inefficiency. “Administrative simplification can definitely drive administrative cost improvements,” he says. “Plans might invest in standardizing their provider contracts, their benefit plans, and generally eliminating unnecessary complexity."

Next: #3. Automate tasks

3. Automate tasks 

Transactional activities, such as claims processing, offer opportunities to use automation to reduce administrative costs and reduce errors, says Naugle. For example, most health plans use "auto adjudication" to allow for automated processing of claims. Eliminating manual handling of routine or simple claims frees up skilled claim adjudicator resources to focus on more complex or complicated claims, he says. “Most plans have some form of automation; their efforts today are really focused on increasing usage of these capabilities.” 

One critical area is to significantly expedite automation of both claims processing and claims submission, adds Taylor. “A good first step is to standardize more plan designs so there are fewer benefit exceptions. This would go a long way to reducing costly manual interventions that are often needed to process a claim accurately.”

TaylorMost government-sponsored or individual plan designs have some degree of standardization, Taylor adds. An employer-sponsored plan is often highly customized and requires both significant investment to both program and administer. “Health plans, during implementation and working with benefit consultants, often have the opportunity to take a more aggressive tact to ensure more cross-plan standardization, which will result in a dual objective of being less costly to administer and provide better member satisfaction over the long run,” he says.

On the claims input side, health plans have been working feverishly with hospitals and high-volume physician practice areas to increase the percentage of electronic submissions, which are automated and require less, if any, manual intervention, adds Taylor. “These best practices now need to be extended to the multitude of smaller physician practices and specialists," he says. "As the provider community is becoming more specialized, these smaller practices are driving significant volume, but have largely been left out of auto submission initiatives. There’s significant opportunity to improve in this area."

Next: #4. Invest in self-service capabilities

4. Invest in self-service capabilities

Health plans invest significant resources in handling telephone inquiries from members and providers. For example, a provider may call the plan to verify member eligibility two or three times or more for a single appointment, says Naugle. “Each of these calls may cost a health plan $2 or $3 and is a hassle for the provider. Self-service capabilities such as those enabled by online portals or automated telephone systems can significantly reduce health plans’ costs of handling these inquiries,” he says, adding that a self-service transaction might cost the health plan a quarter or less. For a number of transactions, like eligibility verification and claim submission, the industry has adopted standardized electronic transactions that can go beyond self-service to enable automation that eliminates or greatly reduces the labor component of these transactions, generating even more savings for all parties," says Naugle.

On the membership side, giving members more power to find answers on their own also adds value, says Taylor. “Limiting in-bound call volume by enabling members to self-answer Tier 2 and 3 questions via the plan’s website would lower costs,” Taylor suggests. “Plans have done a good job of providing answers to basic Tier 1 questions, but there’s more opportunity regarding complex inquiries such as providing progress to a member’s annual deductible or out-of-pocket maximum.  Lowering in-bound unexpected call volume equals less cost."

Next: #5. Consider outsourcing

5. Consider outsourcing  

Outsourcing non-core administrative activities can help manage administrative expense, Naugle says. Many plans outsource pre-processing of paper claims, for example.

“This isn’t a core plan activity, and its one where there are major scale economies so outsourcing to a vendor that specializes in this can be very efficient.  Also, a number of our clients (especially very large plans) are using offshore resources for administrative activities, enabling them to access lower cost labor,” he says.

Next: #6. Eliminate unnecessary activities

6. Eliminate unnecessary activities  

Another good way to eliminate administrative waste is by eliminating unnecessary activities or workload. “Many health plans have utilization management (UM) programs that require providers to obtain prior-authorization for certain types of services,” Naugle says. “In UM, the plan reviews the proposed services for medical necessity, benefit coverage, etc. The scope of services requiring authorization varies widely among plans and products.”

While UM can be an effective strategy for managing benefits and clinical quality, plans should be strategic in how they implement it, he says. “Many best practice plans have eliminated UM requirements for services where the activity (i.e., reviewing the requests) costs more than the service itself, or where there is a very low denial rate. Plans are sometimes hesitant to change legacy processes out of fear of the unknown impact or because of system limitations, but there are ways to do this while mitigating risk.” 

Next: #7. Target care management programs

7. Target care management programs

Over the last decade or so, health plans have made substantial investments in hiring clinically trained personnel, especially registered nurses and physicians, says Naugle.

“It is very important that plans make judicious use of these expensive resources. To do that, plans are starting to invest in analytics to improve their ability to target care management programs toward members most likely to benefit from participation." 

For example, historically, a plan might enroll every member with a specific disease in a disease management program, now plans are using risk stratification to target their disease management programs to those members who can actually benefit from program participation. This approach, which is also applied to case management and other care management programs, allows plans to be more effective with fewer clinical resources, says Naugle.

Next: #8. Eliminate paper

8. Eliminate paper

Health plans that operate most efficiently have eliminated paper provider directories and moved to electronic document delivery for correspondence and other paperwork, such as explanations of benefits. They are also promoting electronic funds transfers to pay providers, eliminating the costs of paper and postage, says Naugle.

PeresieTaylor agrees that paper can be consuming for health plans and suggests taking greater advantage of growing adoption of mobile devices. “Why is the default to process and mail ID cards, rather than subscribers having an electronic version stored on the health plan’s smartphone app?” he asks.

In spite of the widespread adoption of electronic payments across many industries, many payers still provide paper-based payments to providers, says Michael Peresie, senior vice president of strategic marketing for Change Healthcare. “Continued use of paper payments creates inefficiencies because they require printing, handling, and postage costs," he says. "The good news is that advancements in electronic payment administration capabilities and increased adoption by providers is making the conversion to electronic payments easier than ever before."

Next: #9. Promote electronic transactions

9. Promote electronic transactions 

An additional opportunity to improve administrative efficiency is through promoting the use of electronic attachments and transaction standards for claim, prior authorization, and referral authorization transactions, says Peresie. “Over 110 million estimated transactions annually utilize fax, paper, or telephonic-based processes today,” he says. “Payers can lead the reduction of paper-based attachments by encouraging provider adoption of online portals, the ASC X12 275 electronic document attachment standard, and other electronic formats."

Rachael Zimlich is a writer in Columbia Station, Ohio.