Maintain competitive cost structure in uncertain economic times

July 1, 2008

Regardless of an insurer's composition - public or private, large or small, geographically diverse or regionally focused - reducing non-labor general and administrative (G&A) expenses can contribute greatly to margin improvement.

Regardless of an insurer's composition - public or private, large or small, geographically diverse or regionally focused - reducing non-labor general and administrative (G&A) expenses can contribute greatly to margin improvement. While administrative costs constitute a much smaller percentage of total expenses than medical costs, by improving the G&A ratio by 0.5%, an organization can accomplish the same impact to EBITDA as a 10% increase in membership.

The G&A ratio is commonly used to compare payers to their peers in the market. However, when used alone, it can be misleading or can be used to substantiate market standing. For example, when payers are above their peer average ratio, the natural tendency is to make rationalizations to defend their position. Conversely, when payers are below the average, the comparison can be a comforting indication that the organization is doing well. This, in turn, can lead to complacency or a suboptimal prioritization of improvement opportunities. Ratios and other comparative tools are a great starting point for self-evaluation.

While ratios and aggregate level information can be useful, the best way to determine opportunities for improvement is to let a payer's specific situation dictate whether costs can be reduced. If a payer needs to be more competitive in the market, either due to increased competition or to offset rising costs, then that factor alone should be driving opportunities.

When evaluating and prioritizing cost reduction opportunities, several clues indicate where cost reduction opportunities exist. Payers can classify these signals as high level or detailed account observations.

High level observations:

Gather these observations through internet research, discussions with sales representatives, meetings with industry peers, and finance reports. General questions include:

Detailed account observations

High performing organizations typically have this information available for analysis.

After a payer completes a high level and detailed analysis, the answers can serve as the basis for supporting savings targets. However, a payer also must balance the business case findings with the specific requirements of the organization. For example, if a payer needs to be more competitive in the market, due to increased competition or to offset rising costs, then that factor should be incorporated into the savings targets and strategy.