Both health insurance industry trade associations, America’s Health Insurance Plans (AHIP) and the Blue Cross Blue Shield Association, hired expert firms to conduct an analysis of specific issues that have come up in the health reform debate in Washington.

Both studies shed light on two controversial areas: health plan administrative costs and physician charges to out-of-network patients compared to the standard Medicare prevailing fee for the same procedure.

The findings are of interest in today’s health reimbursement climate.

Health Plan Administrative Costs Much Less Than Previous Estimates

Private health plans’ costs to administer benefits represented an average of only 9 percent of premiums across all policies sold, found a new review by the Sherlock Company.

"Prior reports rely on outdated, decades-old estimates from when claims were paper-based and today’s electronic processes were in their infancy," said Douglas B. Sherlock, company president.

The analysis "demonstrates that health plan administrative costs have been vastly overstated," Sherlock said. His report was released by the Blue Cross and Blue Shield Association.

Sherlock found that earlier estimates that private health plans’ administrative costs were two to three times higher than actual costs were based on estimates that were so old that they did not reflect changes in industry practices, including advances in electronic processing that speed payment to providers and reduce costs.

Private health plans perform the administrative functions that Medicare performs at a lower cost, according to a report prepared on the Sherlock analysis. Private plans are able to perform administrative functions for $12.51 per member per month compared to $13.19 per member per month for Medicare.

Another finding is that private health plans perform additional administrative functions compared to traditional Medicare, including care coordination and wellness programs, which result in better care and lower costs for patients and employers enrolled in private health plans, the report said.

Sherlock reviewed combined data from 36 Blue Cross and Blue Shield companies and non-Blue health plans participating in performance benchmarking studies in 2008.

The subject has come up in debates on health insurance reform with opponents of the creation of a new, government-run plan citing inflated estimates of health plan administrative expenses as one reason for the need for such a program.

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

The report is available online at: www.bcbs.com/issues/uninsured/Sherlock-Report-FINAL.pdf.

Addresses: America’s Health Insurance Plans, 601 Pennsylvania Ave. NW, South Building, Suite 500, Washington DC 20004; (202) 778-3200, www.ahip.org. Blue Cross Blue Shield Association, 225 North Michigan Ave., Chicago, IL 60601; www.bcbs.com. Sherlock Company, P.O. Box 413, Gwynedd, PA 19436; (215) 628-2289, www.sherlockco.com.

Administrative Expenses of Health Plans
	Sherlock Survey	Lewin (Commonwealth Fund) Estimate	Hay/Huggins (CRS) Estimated Underwriting Practices (1988)
Individual Market	16.4% of premiums	40.9% of claims/29% of premiums**	40% of claims*
Small Group Market (50 or fewer eligible employees)	11.1% of premiums	21.8%-35.8% of claims (varies with group size)/17.9%-26.4% of premiums**	25%-40% of claims

*The Hay/Huggins estimates do not separate out the individual market; however, their segmentation of the small group market starts with groups of 1-4 lives.
**Sherlock Company converted the estimates from percent of claims to percent of premiums.
Source: Blue Cross Blue Shield Association, Sherlock Company study.

Administrative Expenses of Private Health Plans Comparison of Administrative Expenses of Health Plan by Segment
	Individual	Small Group	Large Group	Overall
Original Lewin Estimate	40.9%	21.8%-35.8%	4.5%-15.3%	12.7%
Lewin Estimate expressed as percent of premium	29.0%	17.9%-26.4%	4.3%-13.3%	11.3%
Lewin Estimate expressed as a percent of premium with costs not typically considered administrative costs removed*	23.6%	13.6%-20.1%	3.8%-9.3%	9.7%
Sherlock Survey	16.4%	11.1%	7.0%	9.2%

*Removes risk/profit and interest credit expenses
Source: Blue Cross Blue Shield Association, Sherlock Company study.

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