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Plans will see the most cost reductions on the medical side of the ledger, but there are still opportunities to reduce administrative waste
Medical Loss Ratio (MLR) requirements, the burgeoning new patient population and the unique functionality necessary to care for these patients has placed an increased emphasis on operational efficiency. The new era of streamlining has many health plans experimenting with strategies to reduce their administrative costs.
"The emphasis on administrative costs has never been more important than it is now with health reform bearing down on us because this final frontier of patients we are about to start serving are some pretty sick people and will have some unique administrative requirements attached to doing business with the government," says John Gorman, executive chairman for the Gorman Health Group, a consulting firm that works with private sector companies who do business with Medicare.
Since 2011, large group insurers have been required under the Patient Protection and Affordable Care Act (PPACA) to meet an MLR of 85%, while those serving the small and individual group market have a requirement of 80%. Despite regulations, some health plans continue to struggle to bring non-medical spending down to meet the threshold. According to the Commonwealth Fund, insurers paid out approximately $1.1 billion in customer rebates in 2011 for not meeting MLRs.
Jeff Bond, president and chief executive officer of Cox HealthPlans, says the medical loss ratio provisions took about 300 basis points of margin out of his company and have made eliminating administrative waste more crucial than ever.
"If your administration costs are out of whack, you'll go bankrupt," Bond says.
Despite the challenging landscape, the insurance industry did make some progress, by reducing overhead costs by $350 million between 2010 and 2011, according to the Commonwealth Fund.
While experts agree that health plans will see the most significant cost reductions by looking at the medical side of the ledger, they say there are still opportunities to reduce additional administrative waste as well.
1 Spend Marketing Dollars Wisely
Sales and marketing budgets are typically a significant portion of administrative cost, and Gorman says they should be one of the first places health plans look when cutting administrative dollars.
"Companies spend millions on television campaigns and newspaper ads and stuff to elevate the brand," he says. "And at the end of the day, if that's not getting someone to act, then it's a failed ad and it's a wasted expense. If you want to trim your [operations], look at your marketing spend and how effective or ineffective it really is."
He believes health plans need to move toward more web-based marketing efforts and says incorporating online enrollment for health coverage can forgo the expense of brokers, call centers and marketing dollars. In fact, private-market exchanges are emerging to do just that.
But some healthcare experts say transitioning from a group-focused market to a more individual market under PPACA, could drive up marketing expense. Joe Parente, an advisory principal in KPMG's healthcare practice, says he doesn't see health plans reducing marketing dollars in a post-reform world, but instead believes they may need invest further and reconsider marketing techniques.
"Part of the challenge that the insurers have today is they don't currently have the consumer data like a consumer company would on individual preferences,” he says. “That's going to be, in my view, the thing that health plans are going to need to build.”
Cox HealthPlans already has a strategy in place to incorporate consumer demographic data into its efforts.
"We're putting in a system where we can actually model the subsidies that people will be exposed to under health reform, and we will be able to do target marketing through market segmentation with those people," he says. "Before health reform came around, we would have never done that."
2 Improve Customer Service
The individual is becoming an increasing presence in the minds of healthcare executives today, and many companies are searching for new ways to keep their customers satisfied. Gorman says improving customer service will not only reduce call center volume and costs but it can also further member retention.
"Typically customer service centers in health plans are dumping grounds for employees you don't know what else to do with, and in today's market and in an era of consumerism and baby boomers swamping the system, service has really got to be completely rethought in the health insurance industry," he says. "It's got to become much more personalized, much more member-centric, much more customizable, and much more proactive."
To do this, Gorman says health plans need to begin by auditing the volume of communications they have with their members. For instance, one insurer sent more than 850 communications to its Medicare members-far too much to be effective.
"When you are talking about Medicare beneficiaries, just that volume alone means you are confusing the hell out of these people and so what do they do? They don't pay their claims on time because it’s too complicated,” he says. “Then they are cluttering up your 800 number with multiple calls trying to get something simple like a disputed claim taken care of.”
Reducing the number of communications not only cuts production costs, but it also gives health plans an opportunity to reassess what the essential communications are for a particular member and what mode of communication would best serve him or her. Tailored messages are key.
According to Gorman, customer service models also need to shift to a more proactive service model. He says one way to do this is by selecting elite customer service representatives who work on a minimal base salary exclusively with a set group of members. These customer service representatives would then be given financial incentives to reach out to members a set number of times a year.
"Every communication that goes out comes from that representative, and the member now knows ‘I don't call the 800 number anymore; I call Kristie or I wait for Kristie to call me next month,’" he says.
3 Automate More Functions Online
The quest to reduce administration costs has many health plans moving to more online platforms, and healthcare experts agree that automating functions can minimize traditionally labor-driven expenses. Consumers have come to expect a certain degree of self-service.
"If you look at a lot of the health plan industry, it's still pretty antiquated around paper-based communications and some of this is due to regulations, etc., but it's not a very sophisticated industry," says Dan Spirek, executive vice president and chief strategy and marketing officer for TriZetto.
Parente says health plans are looking at ways to automate anything that is currently being provided via phone contact, whether it’s incorporating more self-service capabilities for members or increasing the amount of data available to providers.
Overtime, he believes, moving more functionality online will not only reduce costs but will also allow health plans to leverage historic member data to deliver more tailored, customized communication.
"Providing more tailored information is going to be a key opportunity and where technology could do a better job than today's traditional mechanisms of people," he says.
Health plans are also beginning to adopt multi-channel options to provide members with explanation of benefits (EOBs), for example, and are moving the documents online to reduce production and distribution costs. Most consumers are already accustomed to other statements, such as banking summaries or utility bills, being delivered electronically.
"That's an area where we see a very focused effort around reducing costs," Parente says.
Moving toward more online platforms will only be successful, Parente says, if health plans automate areas where they have the appropriate data necessary to move the functionality online. Members will expect a user-friendly experience.
"A health plan needs to evaluate the quality of information they currently have to make sure that they are not providing bad information online," he says.
Spirek says having infrastructure systems that can support the move is also critical. Many legacy systems aren’t capable of nimble changes.
"Automation to a large extent for a health plan requires the ability to configure rules into a technology, so once you can put a repeatable rule into technology there's no reason obviously to have a human do it," he says. "The challenge is a lot of health plans have older technologies that are not easily configured. They either have to be changed by programmers or IT staff."
4 Invest in Technology
As health insurance plans move toward more automated functions and adopt ways to serve the unique enrollment and eligibility needs of a growing individual market, technology will become even more essential. Healthcare experts say for health plans to operate at optimum efficiency, they may need to invest money upfront to be able to better serve the plan over time.
"If you can't collect the data that the government needs and be able to report it in the format that they want it, you are always going to be leaving money on the table," Gorman says. "So anything that relates to eligibility and enrollment, especially in government programs or subsidized businesses, has to be absolutely state-of-the-art, because that's how you get paid."
Spirek says he believes having the latest workflow engine isn't necessarily essential, but it's more a matter of having technology that can be configured and is able to meet the health plan's needs. With a growing population, plans need to have scalable systems.
"The question is are you getting the performance and business function that you need to be competitive," he says.
5 Outsourcing Information Technology and Business Processing
Increasingly, health plans are outsourcing information technology, business processing and call center responsibilities to third parties to cut costs and improve efficiencies.
"Post-reform, health plans are forced to look at their workforce strategies," Spirek says. "Pre-reform, outsourcing was a discussion that was more or less taboo. A lot of health plans are very significant local employers, and that's just kind of the history of the industry."
He says core system customers are outsourcing their system management to an IT entity, while about half are also outsourcing business processing functions.
"That's a dramatic change from pre-reform," he says, adding that prior to reform close to a quarter of customers were outsourcing system management.
Parente has seen the shift, too, particularly for call center functions, and says outsourcing can provide health plans with a more efficient mix of resources and capabilities. Plus, the fixed costs of outsourcing can help the bottom line.
"I'd say the bulk of these plans are trying to keep their outsourcing arrangements in the United States, and there is a reluctance to go offshore," he says.
But outsourcing isn't without its possible pitfalls. Gorman says relegating a portion of business operations to a third party could create additional, and more costly, concerns.
"It's nice to have one throat to choke on the back office, but when the members are unhappy because the service isn't particularly responsive or the providers are up in arms because they aren't getting their claims paid accurately or on time, those are expenses to the business that you have to consider," he says.
Healthcare experts agree that to ensure efficiency and cost reductions health plans need to structure agreements with third parties upfront that drive better performance. For instance, agree on a price-per-member rate for call center services rather than price-per-minute rates.
"We've seen some cases where agreements have been put in place with the intention to reduce costs and have actually had the opposite effect," Parente says.
Spirek says health plans that outsource the operation of a system but continue to use their own processors need to incorporate very specific language into the service agreement that relates to system up time, system response time and availability parameters.
"If you are going to outsource the actual business function, then certainly there should be the same standards for turn-around time and accuracy, as you would have implemented in your own department," he says.
Cox HealthPlans has chosen not to outsource business process services, but Bond says those health plans who are considering it should ask for references, talk with others using the same company, and only use outsourcing partners they know well.
"It's never going to be perfect," he says. "One of the things you have to realize when you outsource is you do give up some control."
6 Move More Providers into Capitated Arrangements
Increasing the amount of risk providers take on is another way Gorman believes health plans can cut administration expenses.
"Claims are always a function of the degree of capitation a health plan is involved in," Gorman says. "You are only paying a lot of claims if you are not capitating your providers."
By entering into more capitated arrangements, he says, insurers will decrease their claims volume and ultimately reduce the claims department overhead. In addition, administrative functions that get pushed downstream to providers in capitation agreements count toward the MLR and not toward selling, general and administrative expense. Capitation agreements also further align incentives with the provider, he says.
While Parente agrees more capitated arrangements would simplify administrative pieces of a health plan, he cautions that the agreements might not work for everyone.
"The challenge I see with that is it’s very regional-specific, and I think that certain markets are not ready to move into that risk bearing approach," he says.
7 Move to Real Time Systems with Providers
Collaboration between health plans and providers has never been more critical and healthcare experts say improving the efficiency of these relationships can drive down claims costs, reduce call center volume and cut provider expenses.
In the fourth quarter of last year, TriZetto initiated a pilot with BlueCross BlueShield of Tennessee that uses new technology to provide real time connectivity between payer and provider. The system allows providers to check for patient eligibility, patient financial responsibility, referral policies or limits on service. Physicians offices are also able to submit claims in real time, allowing the system to flag any errors at the time of entry to facilitate a clean claim.
"If they use the technology, they can collect exactly what the member owes and basically the patient walks out the door with a receipt. All that ensuing process that is needed today goes away," Spirek says.
Bond says he sees significant value in real time eligibility systems. Currently, he says about half of Cox HealthPlans' service calls come from physician's offices who want to know whether patients are eligible for service, what the out-of pocket expense are for services, or when claims will be paid. Eliminating these calls could represent real cost savings for plans and providers.
Jared Gross, vice president of healthcare economics at HealthNow New York, says he sees the value for claims departments.
"The provider offices in turn might not need to spend as much time just getting their bills paid," he says.
Jill Sederstrom is a freelance writer based in Kansas City