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Medicaid Health Plan Administrative Costs

By October 19, 2010Commentary

Sherlock & Company does helpful analyses of various aspects of the managed care industry.  A recent publication examines administrative costs in Medicaid plans.   (Sherlock Report) About 58 million people are  covered by Medicaid, half of those children.  About 70% of those people receive services through a managed care plan.  Medicaid expansions will ultimately be responsible for much of the new coverage in the reform law, adding as many as 16 million people to the rolls.  The survey included ten plans with about 4 million members.   From 2008 to 2009, most categories of administrative expense declined for these plans.  Overall these costs were about 7% of premium in 2009 compared to 8% in 2008.

The administrative spending on a fully adjusted basis actually declined by about 5.8% per member per month in 2009 as compared to a 2.7% drop in 2008.  Provider and medical management services had increased about 9% in 2008 but declined 5% in 2009.  Account and member administration declined 13% after falling 6% in 2008.  Sales and marketing fell about 8.6%.  There was a fairly wide range in spending across plans as a pmpm, but that may be a function of plan size.  Greater automation might explain some of the declines, but IT spending was down.  The drop in medical management costs should be somewhat worrisome since spending less there may show up in higher medical expenses.  The reduction in marketing expense would be interesting to understand better, since it suggests plans may be less interested in adding members or that they are finding it easier to attract and enroll them.

It is obviously helpful to the overall effort to reduce health spending if the administrative costs relating to the payment for health care services can be kept as low as possible.  For states and the federal government financing Medicaid, one reason to use health plans to service that program’s members is that it transfers the administrative expense and health cost risk to an outside entity.  If the payments for those plans get too low, there is a chance that service could worsen.  Some administrative expense also has potential value in lowering longer-term costs, such as wellness and care management programs.  Insisting on extremely low administrative expenses may damage the overall care received by Medicaid beneficiaries.

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