Managing Administrative Expense
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July 2014
New Healthcare Models Are Driving 
Increased Administrative Expense
Scot McConkey, Executive Vice President, Healthcare 


Over the past 20 years, health plans have made significant progress in reducing administrative expenses, but new healthcare models are requiring health plans to implement new capabilities, which is driving costs back up.


The health insurance industry has never been stagnant, but the changes going on today are perhaps more profound than ever. The industry must demonstrate that it can improve healthcare efficacy; that is, that it can control medical costs while it improves health outcomes. If it doesn't, we will likely see more government intervention. It isn't just the Affordable Care Act (ACA) that is driving the industry to improve efficacy-employer groups are also implementing innovative models. According to a 2013 Towers Watson employer survey on purchasing value in healthcare, nearly two-thirds of surveyed employer groups provide financial incentives for members to participate in health management programs; and 16% of those respondents, an increase of 6% over 2012, indicate that incentives are being tied to improvements in health status.  Another 31% of respondents indicate they are considering tying outcomes to incentives in 2014.


Managed Care Organizations (MCOs) are taking several approaches to improve efficacy; but it is generally accepted that to truly impact efficacy, members must take an active role in managing their care, and providers must be rewarded for outcomes (not simply volume). MCOs must change how they work with members and providers:

  1. Engaging members as customers. MCOs must support members at both the point of purchase and at the point of service.  At the point of purchase, MCOs must help members understand what is available to them and assist them in determining which products and services best suit their needs.  In addition, members should be guided at the point where they are accessing healthcare services to understand how their decisions are likely to impact their costs and outcomes. MCOs are implementing new product designs that require members to take a more active role in the healthcare process; between 2005 and 2011, enrollment in high-deductible health plans increased from roughly 1 million members to 15.5 million. With changes in product design, such as high-deductible plans, and the changes driven by the ACA, members are looking for more transparency regarding the cost of their healthcare. A 2013 survey by Transunion found that 55% of patients paid more attention to healthcare bills over the last year.  Additionally, 75% of surveyed members indicated that costs are important in their decisions to enroll in or to stay enrolled with a health plan.  Cost transparency is becoming more important to members and MCOs must help provide that transparency.
  2. Engaging providers as partners. To help control the costs of healthcare, providers must be engaged in some form of a value-based arrangement. Value-based arrangements range in scope from full risk delegation through risk sharing to cost and quality incentives, and their use is growing rapidly. According to The Advisory Board's 2013 Accountable Payment Survey, the adoption rate for value-based contracts rose from 14% in 2011 to 35% in 2013-an increase of 21% in just two years. In the same time, the adoption rate of bundled payments grew from 16% to 27%. Questions linger as to whether value-based contracting will work broadly across the industry. There was a trend in the 1990s to move providers to risk-based contracts. Despite some long-term success stories, generally, the move failed, and the industry reverted to fee-for-service payment systems. If the industry cannot find ways to make value-based arrangements work this time, the federal government is likely to intercede again. MCOs must take an active role in ensuring that the value-based provider organizations are successful.

The managed care industry has worked to reduce administrative costs for decades and, for legacy operations such as claims and enrollment, significant efficiencies have been achieved. For example, claims auto adjudication rates in the 50% range were fairly common in the 1990s. Today, it is more common to see rates above 80%. Although increased use of technology has brought down the expense associated with legacy operations, administrative expense continues to rise and remains an area of concern for the industry.


If there have been productivity gains in legacy operations, why do challenges remain in managing administrative expense? Certainly, investing in new products (e.g., Medicare, Medicaid, and Duals) accounts for administrative expense pressures, but a good portion of the pressure comes from the new capabilities that are being implemented to support emerging requirements for member and provider engagement. The steps that MCOs are taking to improve healthcare outcomes and to manage medical expense are putting pressure on the administrative expense side of the equation.


To manage administrative expense now, MCOs must look beyond the traditional process design and automation techniques used to drive efficiencies in legacy operations. Techniques that MCOs can leverage to drive efficiencies in the current environment include:

  • Build on a solid base. In many cases, new capabilities are being built on top of legacy operational foundations. Although the legacy foundations might be efficient in supporting the operations they were originally built for, they are not always positioned to take on new and different types of work. Take steps to ensure that the operating environment on which new capabilities are being built is mature and can support the weight of new functions.
  • Assess effectiveness, not just efficiency. Review services from the perspective of the "customers" (for example, the members and providers). Are the services meeting their needs? Are they being delivered via the customer's preferred channel, be it phone, Internet, or some other way? Are all of the required functions available? Are functions being provided that aren't valued?  Stakeholder expectations are evolving, and MCOs should ensure that their services are evolving too.
  • Implement a service management framework. Confirm that service providers and consumers (internal and external) alike are aligned on what services are required, what service levels are expected, and how effectively those services are being delivered. An effective service management framework establishes a data-driven, fact-based method for determining who should be providing services, how much consumers are willing to pay for services, what service levels customers expect and which services should be discontinued.
  • Build mature operations. Many times, organizations must rapidly build out capabilities to meet the timeframe demands of new market requirements. This is often accomplished in crisis mode, with little thought given to the long-term efficacy of the operations. The reality is there will always be requirements that must be met quickly, and the corresponding operations will typically be inefficient in startup mode. The key is to minimize the startup period and to ensure that the operations are matured over time. Make sure that you have a spec to build to, one that constitutes a mature, comprehensive operating environment. Start measuring operations effectiveness immediately. When we talk with operations executives who are in startup mode, they often convey a sense of flying blind. If you begin by measuring and reporting key metrics-even manually-those measures will identify where operations must be matured as the startup period transitions to ongoing operations.

The growth of the individual market, Medicaid expansion, and an aging population (Medicare) all present the healthcare industry with significant opportunities. However, to be successful, MCOs must develop new capabilities to engage members and providers to manage overall healthcare costs and improve outcomes. Successful MCOs are becoming proactive, solving the puzzle of building and deploying new capabilities, and simultaneously managing administrative expense. Is your organization taking these steps?


I welcome your thoughts on this topic. Please drop me a line at

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Tuesday, July 22 @ 2:00pm EST
Dave Chennisi, Nolan Practice Director

All provider organizations engaged in Value Based Contracting and newly forming ACOs would be wise to reflect on the history of Provider Organizations that have tried to accept and manage risk. There are clear examples of both effective strategies for such organizations and ineffective strategies. Existing (or traditional) Payers are positioned with marketable capabilities which can be brought to bear on these organizations that complement the strengths of both sets of players (ACOs and Payers).


Nolan's healthcare practice director, Dave Chennisi, will draw on both industry data and anecdotes to illustrate the parallels between the two time periods (while also noting some of the differences). Dave will draw conclusions about what applicable prior strategies were effective and which were less so. If you are looking for opportunities available now to both ACOs and more traditional Payers, register today!
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