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BCBS Study Shows Low Health Plan Administrative Costs

John Commins, for HealthLeaders Media, August 14, 2009

Private health plans' administrative costs averaged 9% of premiums across all policies sold and are well below "vastly overstated" estimates offered by proponents of a government-run public plan, according to a new study paid for by the Blue Cross Blue Shield Association.

A consumers' rights group disputes the findings.

The report, written by Sherlock Company, states that previous studies showing that private health plans' administrative costs are two to three times higher than actual costs are based on old estimates that don't reflect changes in industry practices, including advances in electronic processing.

"Prior reports rely on outdated, decades-old estimates from when claims were paper-based and today's electronic processes were in their infancy," says Douglas B. Sherlock, president of the Sherlock Company. "This report demonstrates that health plan administrative costs have been vastly overstated." The study reviewed 36 health plans–mostly Blues–participating in benchmarking studies in 2008.

Advocates for a public plan maintain that the higher administrative expenses for private plans are one reason why a public plan is needed. Health insurance industry officials say the Sherlock study undermines that claim.

"Some elements of healthcare reform can help reduce administrative costs, if done right. For example, state-based health insurance exchanges can make it easier for people to purchase health insurance and simplify administrative functions," says Scott P. Serota, president/CEO of the Blue Cross and Blue Shield Association.

The Sherlock report also claims that private plans perform the administrative functions that Medicare performs for $12.51 per member per month, compared to $13.19 per month for Medicare, and that private plans perform more administrative functions than traditional Medicare, including care coordination and wellness programs.

However, Cathy Schoen, senior vice president The Commonwealth Fund, says the Sherlock study is narrowly drawn. "It focused more on the Blues than the whole industry and it is focusing just on what it narrowly calls the administrative costs, not profit margins," Schoen says. "When you talk about the share of the premium that is not being paid out in benefits, it's both administrative and profits."

She says corporate reports from larger companies like Aetna and UnitedHealthcare show pretax profits in the 6% range in 2008, and administrative costs as a share of operating revenue running in the 15%-16% range. "UnitedHealth, out of all the revenue it took in, the amount it paid out was only 82%. So 18% was not paid out in medical benefits. In 2007, it was 19%," Schoen says.

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