As we are all aware, the Affordable Care Act contained specific regulations that govern payers’ Medical Loss Ratio or MLR. These rules set minimums for the amount of the premium dollar that plans must spend on benefits. If we think of a premium as having three components: Benefits, Administrative cost, and profit or surplus, by setting a minimum for the size of the benefit component, the ACA essentially set maximums for administrative expense and profit.

These restrictions created new pressure for plans to manage their administrative expense as this is the primary opportunity for increasing profit or surplus. In reality, changing a payer’s administrative cost structure can be a challenge: It takes a disciplined approach; it may actually require increased spending through investments in technology and other efficiency improvements; and it doesn’t happen overnight. 

Regardless of these challenges, organizations must find ways to manage their administrative expenses. To help organizations, we have identified five best practice approaches that organizations can use to support this work. 

1. Develop a defensible and accurate way to allocate administrative costs. Organizations must ensure that they are appropriately allocating administrative costs among lines of business.  Not all product lines are subject to MLR reporting requirements, and thus it is important to ensure that costs are appropriately allocated to the right products based on cost-generating activities.  Best practice organizations use a cost allocation model that uses quantifiable data to allocate costs and generate line of business financial reports. 
2. Employ an enterprise effort. Administrative cost management isn’t just finance’s problem—it requires an enterprise focus from managers and front-line staff throughout the organization.  Efficiency improvements can come from anywhere within the organization. Any administrative cost management project requires leadership and stakeholder engagement, organizational understanding and buy-in, and transparency.
3. Use benchmarking to set targets and understand what is possible. Benchmarking helps organizations understand how their own costs and performance stack up against the competition. Use of benchmarks can help identify opportunities for process or organizational renovation, estimate the potential savings from specific initiatives based on efficiency improvements, or even identify areas where additional investment is appropriate.
4. Track and trend improvements over time. At the beginning of any cost management project, leadership should establish targets (benchmarks can give targets credibility).  These targets should include both the overall goals (e.g., departmental administrative cost levels) as well as metrics related to drivers of cost reduction (e.g., efficiency, production, and quality). Over the course of the project, the organization should monitor changes and report progress so that participants can see progress being made. Best practice organizations use systems and tools such as dashboards, to report information throughout the organization.
5. Ensure incentives are aligned to achieve desired outcomes. Many organizations recognize that what gets rewarded is what gets done.  Incentive alignment strategies include: using benchmark data to set annual operating budgets; empowering cost center managers to negotiate trade-offs within benchmark budget targets; and tying budget performance into incentive compensation. 

Administrative cost pressure is a reality for all payers. These five best practice approaches can provide the foundation on which organizations can more effectively manage their administrative performance and achieve long-term goals for organizational success.

To learn more about administrative cost and MLR, click the following link to access our most recent webinar: Managing the Other Side of the Medical Loss Ratio.