Administrative costs

I just saw two interesting (to me at least) things about back end administrative costs for health insurance.  The first is from Dan Gorenstein at Marketplace.  He writes about a ride-along for a major Medicare/Medicaid fraud bust.

The federal government estimates it loses 12 percent of Medicare spending and about 10 percent of Medicaid to fraud and other improper payments.

Last year that totalled more than $70 billion dollars….

I believe fraud does continue to run rampant and remains largely unchecked,” said Harvard Kennedy School Professor Malcolm Sparrow.

Sparrow doubts much will change until controls are put in place that make it harder to exploit the current automated billing system which processes claims, in most cases, by computer with no human involvement.

“These are beautiful targets from a criminal’s perspective,” he said.

“You can test the system and then you can just submit tens of thousands of claims, absolutely sure because it’s automated that they are all going to be paid.”

 Medicare has very low administrative costs.  One measure has their administrative costs under 2%, another has a total administrative spend of roughly 6%.  Part of the way that those costs are kept as low as possible is that Medicare claims payment is extremely automated.  Most claims are never systemically reviewed until long after the check has been cashed.  Automated claims payment is extremely cost efficient.  A claim that is never touched by humans will cost CMS under fifty cents to process.  As soon as a claim is seen by an individual with the simplest verification, the claim costs $5.00 to process.  Complex adjustments and systemic investigation of oddities dramatically increase processing costs.

Since the overwhelming majority of CMS claims are paid without being touched, gaming the system by submitting a set of mildly fraudulent claims to see what set of codes get rejected and what set get paid is fairly simple.  Once a solid claim template is found, it is not hard to run thousands of bogus or at least extremely aggressively coded claims through in a year before anyone may even take a look at oddities.  The system is extremely efficient at paying claims, but not so good at paying only valid claims.  To get better at not paying odd claims without justification means spending more money and hiring a lot more people.  It is fundamentally the same problem the IRS has in that hiring more agents to crack down on fraud and aggressive claims will bring in massive amounts of new revenue at fairly low cost.  But that would mean upping the administrative ratio and hiring more bureaucrats.

Adam Cancryn at SNL Financial has an interesting tidbit on the co-ops after they finished whining about getting taken to the cleaners with risk adjustment.  Some of the co-ops are forming a combined back-end entity:

the co-ops have doubled down on alternative efforts to stabilize their balance sheets. The nonprofits are negotiating the formation of a management services organization that would merge much of their back-office operations, two sources said, cutting down on the individual co-ops’ administrative costs.

Adam and I went back and forth on Twitter to figure out what the cost savings could be.  I think we are both in the ballpark of a couple dollars per member per month at most.  It is not nothing (remember, I’ve been on projects to reduce postage costs by five cents per member per month and the project lead got promoted when we saw six cent PMPM gains) but it is not a huge amount of money.

The co-ops are in a tough position in that they operate in a dozen states and they don’t have scale like an Aetna or a UHC.  Each state has their own regulatory environment and their own network requirements.  Typically insurance companies’ back-end can be split between customer service, actuary, network/provider, product development,  pharmacy, regulatory compliance, data geekery, sales, medical management and claims.  I would think that some of the regulatory compliance and data geekery that supports compliance could be a pooled resource (national accreditation, some state regulatory burdens etc), customer service might have a shared call center in a low cost state, while medical management could share a call center but that is not that effective.  Most of the knowledge needed to run an insurance company is state specific so building a shared back-end sounds great but it is realistically limited.

UPDATE 1: Anon in Comments has a very good point on Medicare fraud:

Medicare does have a very robust fraud prevention unit, they’ve always been able to get money for that. My Big Government Agency that does something with social services supports them with data exchange that’s complex, and always being sliced in different segments for more data mining. We and they do run analyses for different kinds of fraud, every day. But once we find something, we need to prepare a case and follow due process, and for that you often need cooperation from the states and localities where the fraud occurred.

Data mining and looking for the obvious and not so obvious cases can be down fairly cheaply and fairly well.  The issue is the next step.  Once an oddity is detected, human intervention is required.  And that takes a while.  Sometimes the oddity is legit, sometimes it is borderline but not fraudulent, sometimes it is fraud.  Making that determination takes expensive expertise.