Category Archives: Administrative Expenses

MedInsight’s Top 5 Blogs in 2013

Administrative Expenses, APCD, Benchmarking, Healthcare Analytics, Risk Adjustment

Milliman MedInsight publishes this blog as a forum for meaningful discussion of day to day use of healthcare data to address issues and challenges encountered by healthcare organizations. Our consultants offer their expertise on innovative approaches and processes to leverage data to identify root causes of changes in cost and utilization trend, clinical and quality initiatives, and more.

The following list highlights MedInsight’s top 5 blogs in 2013 based on total page views:

5. David Mirkin’s blog “Innovation in Heath Plan Medical Management Metrics” explores the characteristics an idea medical management ROI tool or tools would have.

4. The concurrent and prospective models of risk adjustment both offer different advantages. Barb Ward breaks down each type in her blog “Risk Adjustment and Provider Profiling – My Patients are Sicker.”

3. Individual and small group health insurance markets went through a dramatic change in 2013 driven by the exchange. Andrew Naugle highlights why monitoring administrative expenses through benchmarking is essential in his blog “The Importance of Administrative Cost Benchmarking.”

2. In his blog “Employer Group Reporting: Just checking the box or true data analytics,” Brian Studebaker answers these important questions: what do employer groups really want from employer group reporting and what do employers really do with these reports?

1. Al Prysunka provides insight for APCDs on the utilization of an EDI format in his blog “Implementing the PACDR Guides for APCD’s – EDI vs. ASCII.”

Administrative Expenses: Five Best Practices

Administrative Expenses, Benchmarking

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.

Managing Administrative Expenses with Operational Benchmarking

Administrative Expenses, Benchmarking, Healthcare Analytics, Uncategorized

For all healthcare payors, managing administrative costs is increasingly important under the medical loss ratio requirements of the Affordable Care Act (ACA). Under the ACA, health insurers must utilize 80% of premiums on benefits in the individual and small group markets and 85% in the large group market. Payors need to efficiently and effectively manage these administrative costs in order to maximize the limited funds available for these operational activities.

For a healthcare payor organization, administrative expenses include those costs associated with operational activities such as claims adjudication, agent commissions, marketing, call centers, software licenses and more. Tracking and managing these administrative costs can be a challenge. And identification of areas where there is opportunity to optimize administrative spending can be an even greater challenge.

Benchmarking is an effective practice used by payor organizations to compare the cost and utilization in the delivery of medical benefits. Likewise, Operational Benchmarking of administrative activities enables healthcare organization to understand the performance of their internal and vendor provided administrative services. Types of administrative benchmarking measurement categories include:

  • Efficiency benchmarks – the level of resource required for the completion of a defined number of transactions or members
  • Quality benchmarks – both the level of consistency applied to similar transactions against recognized standards and the relative level of value of those services.

The purpose of establishing operational activities performance benchmarks is to define a vision for what is possible in “Best Practice” operations. Healthcare organizations utilize these benchmarks to identify strengths and weaknesses in their own operations, and to support operational improvement initiatives.

Administrative performance benchmarking allows a payor organization to:

  • Analyze the efficiency of the health plan operational areas including claims, medical management, customer service, and administration
  • Compare how the organization’s resource allocations compare to peers and competitors
  • Evaluate whether resources are allocated correctly and whether additional staffing is warranted
  • Measure administrative cost of the operations
  • Target areas for improving customer service

Milliman has developed Operational Benchmarks which include measures for all medical administrative functions. They establish the Worst, Median, and Best Practice levels of cost, efficiency, and quality for administrative functions such as processed claims per 1,000 members per processor, reversed and adjusted claims, and call center abandonment rates. Milliman’s Operational Benchmarks have been collected from more than 100 payor organizations representing the full spectrum of the healthcare industry, ranging from small single-line carriers to large national carriers supporting a full suite of commercial products, as well as government programs and self-funded employer groups.

As shown below, Milliman Operational Benchmarks can be used to compare a client’s administrative costs by functional area. The results can be used to target specific areas for optimization or additional investment. Note that the information shown in the table below is for illustration purposes only. Milliman develops customized benchmarks for each client based on the client’s unique mix of business, plan size, location of operations, and administrative intensity.

Administrative Benchmarking