Administrative costs shrink significantly

April 1, 2012

In the era of escalating healthcare costs, the private market has managed to reduce baseline admin costs

IN THE ERA OF ESCALATING healthcare costs, a new report by McKinsey & Company manages to find the glass half full, particularly in relation to administration costs in the private market.

"A lot of people fixate on the absolute spending level of healthcare," says David Knott, a director in McKinsey's Healthcare Systems & Services Practice and the co-author of the report. "There was an interesting story in year-on-year comparisons."

WHERE THE MONEY GOES

That good news/bad news scenario pervades McKinsey's findings. Positives are almost always offset by corresponding negatives. For example, shifting sites of care from inpatient to outpatient settings saved Americans on the order of $100 billion in 2009 alone, the report estimates. However, increased utilization of outpatient services propelled spending growth in the category by 6.2% year-on-year between 2006 and 2009.

Similarly, the health administration and insurance spending initially appears to be a bright spot on the spending landscape.

At $163 billion, administrative and insurance costs increased overall at an annual rate of just 1.6% between 2006 and 2009. That compares with an annual rate of increase of 7.4% during the preceding three-year period. While some of those savings undoubtedly come from enhanced efficiencies, the reduction in the number of people with private health insurance accounted for much of the administrative and insurance savings as did lower than expected utilization levels, Knott says.

Meanwhile, the trend in Medicare administration cost growth dropped significantly between the two time frames, from a rate of 35.1% to 13.2%. According to McKinsey, between 2006 and 2009, administrative spending on Medicare Advantage increased by 17.8% annually. The report notes that the administrative spending might not increase total expenditures if medical spending was reduced.

Whether or not the report represents a blip on the radar or a sustainable shift in trend, remains to be seen. The pace of the economic recovery; the manner in which reform is implemented-including accountable care organizations, medical homes and insurance exchanges-and the consequences of ongoing industry consolidation all cloud future predictions.

Still, the report shows that well-focused, concerted initiatives-such as the push for greater utilization of generic drugs and the use of tiered formularies-can have a profound impact on bending the cost curve, says Knott.

-Shelly Reese

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