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Medicare Advantage Plan Administrative Costs

By September 18, 2019Commentary

A Sherlock & Co. report provides a fair amount of detail on trends in Medicare Advantage plan administrative costs.   (Sherlock & Co Brief)   The source of the data was detailed information provided by about 11 plans to the company.  As of earlier this year around 22.7 million people were in Medicare Advantage plans.  The total administrative costs related to these plans rose by 6.4% in 2018; after rising 5.3% in 2017, less than 1% in 2016, declining over 3% in 2015 and declining 6.7% in 2014.  So the trend over the last few years has been for steady acceleration in growth of administrative costs.  Account and membership services, one of the largest components of administrative expense, showed a similar rise in 2018 of 7%.   Medical and provider management costs rose 7.3%, while sales and marketing grew by only .5%.  Corporate services had the largest rate of increase, at 10.1%.  Only sales and marketing showed slower growth than in the prior year.  Actuarial services was the fastest growing sub-component of corporate services.  Information technology was the largest sub-component for account and member management.  The slower rise in sales and marketing costs was driven by less outsourcing.  In general, staffing ratios were higher and compensation and other labor costs are the primary category of administrative expenses.  The median plan had 54 FTEs per 10,000 MA members.  The median compensation per FTE was $93,000; so these are well-paying jobs, which will all go away under Medicare-for-all.  Actual total per member per month administrative expenses are $101.49 at the median, with a range of $82.16 at the 25th percentile to $112.03 at the 75th percentile.  These costs are double the costs for a commercial health insurance product line and triple the costs for a Medicaid managed care plan.  But as a percent of premium, the median Medicare Advantage plan administrative expense is 10.3%, compared to 11.1% for commercial health insurance and 7.2% for Medicaid.  Caution should be used in thinking these numbers are broadly representative, since the sample cannot include any of the larger Medicare Advantage plan companies, which should have significant scale advantages that lower administrative costs.  But it is interesting to note that the plans are spending a lot of money on administration.  Some of that is driven by the complex government regulations relating to how the plans operate, but some relates to the complexity of the patients.

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