Health Admin Cost Increasing Slower Than Premiums

February 25, 2003 ( - The administrative costs of a health plan are rising at a slower pace than health care premiums, accounting for only 7.8% of total premium increase in the past four years.

Health plan administrative costs rose by an average of 4.6% annually from 1998 to 2002, compared to the steeper 7.4% average annual increase in health care premiums during the same period.   With the cost of premiums rising faster than that of administrative costs, the average administrative cost as a percentage of premium fell from 12.9% in 1998 to 11.6% in 2002, consulting firm Milliman USA said in a report prepared for the Blue Cross and Blue Shield Association.

The report concluded that the administrative cost increases accounted for only 7.8% of the total increase in health care premiums during the past four years.

Administratively Speaking

Total administrative cost is comprised of three cost components:

  • number of full-time equivalents including overtime and temporary workers in an organization dedicated to administrative operations
  • salary and benefits incurred for each full-time equivalent
  • total amount of direct costs (e.g. – telephone, supplies, rent, consultants, incentives etc.) and indirect costs (depreciation and amortization of fixed costs) incurred by the administrative operation.

The Annual Milliman Compensation Study shows that from 1998 to 2002, salaries for health plans and insurance companies rose at an annualized rate of 2.4%. This data, coupled with total payroll costs increasing at an annualized rate of 3.1%, led Milliman to the conclusion that approximately 60% of the total administrative cost increase is directly attributable to changes to salary and staffing changes, with the majority of the increase attributable to salary increases.

Milliman’s analysis found growth in spending on enrollment and billing, customer service, medical management, information technology, and finance and underwriting, while spending on provider services and contracting, claims, general administration, sales and marketing, and other health care services declined over the five-year period studied.

Blue Cross and Blue Shield further examined how its members spent premiums, compared to the industry.   In 2001 the industry as a whole recorded 85.7% of commercial premiums went to pay medical claims, 11.6% went to pay administrative costs, and 2.7% went to profits, it said. Comparatively, Blue Cross and Blue Shield plans in the same year showed, 86.5% of commercial premiums went to pay medical claims, 11% went to administrative costs, and 2.5% went to profits.

HIPAA Factor

In the area of staffing, Milliman studied trends among 10 major administrative functions commonly found in health plans and insurance companies. Their analysis found staffing ratios for this function decreased steadily from 1998 through 2000 and then stabilized, and actually grew somewhat, during 2001.

The result is a modest 2.1% compound annual decrease for the study period as a whole. Milliman attributes the higher staffing levels in 2001 and 2002 to several factors including:

  • increased emphasis on prompt payment requirements
  • temporary reductions in claims processing productivity due to the wide scale implementation of new claims processing systems to meet HIPAA requirements
  • increased capture of claim data elements in order to meet HIPAA requirements.

A full version of the Milliman report can be found at