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    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


    Rachael Zimlich, RN
    Rachael Zimlich is a freelance writer in Cleveland, Ohio. She writes regularly for Contemporary Pediatrics, Managed Healthcare ...


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