Administrative Plan Costs for Managed Care Payers Jumped 5.7% in 2017

October 19, 2018 - Managed care payers experienced a 5.7 percent increase in administrative plan costs in 2017, for items such as staffing and customer service support, according to an analysis from the Sherlock Company.

Spikes in Medicaid enrollment generally drove administrative cost increases for managed care payers, the analysis found.

Health plan management costs for managed care payers continued to grow year-to-year as Medicaid enrollment grew by roughly 7 million members. The researchers found that national Medicaid enrollment increased from 6.6 percent of all insured beneficiaries in the United States during 2016 to 7.7 percent in 2017.

However, other market factors, including healthcare inflation, premium growth, and healthcare spending, also increased and influenced payer administrative costs, the team said.

In 2017, the cost of managing provider networks, beneficiary memberships, and other corporate services increased for the average managed care payer.

The Sherlock team found that provider and medical network management costs grew by 5.7 percent in 2017, compared to a 2.5 percent increase in 2016. These costs included payer expenses for negotiating provider contracts, administering wellness and chronic disease management programs, and conducting medical utilization reviews.  

Costs related to account and beneficiary membership administration increased by 5.9 percent for managed care payers in 2017. The analysts said that membership administrative costs increased for operations including beneficiary enrollment, billing, and customer service.

The largest cost increase in managed care administrative costs was for corporate services such as auditing, accounting, risk management, human resources, and legal and compliance functions. Corporate service costs grew by 12 percent for managed care payers in 2017, the team estimated.

In addition, sales and marketing costs for managed care payers significantly increased between 2016 and 2017.

In 2016, managed care payers spent 0.3 percent less on sales and marketing outreach than in 2015. However, managed care payers experienced a 5.6 percent increase in outreach, advertising, and underwriting costs in 2017.

Managed care payers might need to finance new solutions to improve health plan administration since their administrative costs are starting to reach similar rates as larger commercial payers.

The team found that managed care plans spent roughly 7.1 percent of their premium revenues on administrative expenses in 2017. Meanwhile, commercial payers spent 9.7 percent of premium revenues on health plan administration and Medicare plans spent 10.4 percent of premiums on the same categories.

However, managed care payers are more likely to spend significant funds on clinical care for Medicaid beneficiaries rather than on administrative optimization. Nationally, Medicaid beneficiaries face significant socioeconomic challenges and have higher healthcare needs than commercially-insured individuals.

“We don’t know the reason for the low percent of premium administration and the high per-member per-month administration costs displayed within Medicaid,” the analysts said. “One possibility is that the Medicaid-focused plans serve members requiring a higher degree of administrative support: their more intense care needs may be associated with greater medical management and claims costs.”

The findings represent just a few of the spending challenges associated with managed care organization and indicate that new polices, or payment models, may be needed to lower managed care spending.

The Congressional Budget Office (CBO) found that managed care spending accounted for 38 percent of all Medicaid spending in 2012, as a greater portion of states implemented managed care organizations (MCO) contracted payers to administer Medicaid.

CBO explained the idea that private payers can administer Medicaid programs in a cost-effective manner is encouraging to states that want to lower spending, but may sometimes fall short of cost-reduction goals.  

 “States might implement Medicaid managed care for a variety of reasons,” CBO explained. “Two of the most often cited are to increase the predictability of spending and to improve the coordination of care. Proponents of managed care suggest that competition between MCOs reduces spending and improves outcomes. To date, however, studies of managed care have not found consistent evidence to support those claims.”

State governments including Ohio and Rhode Island have taken steps to effective reform managed care programs into a pay-for-performance system that promotes cost-effectiveness.

In Ohio, state lawmakers adopted a payment model that allows managed care payers to pay discounted rates for prescription drugs like in-state pharmacy benefit managers. Separately, Rhode Island added value-based care provisions, such as bundled payments and quality adjustment provider reimbursement, to their Medicaid program.