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Squeeze out waste


Everyone assumes the waste is caused by payers-think again! Administration might cost a few bucks, but it provides downstream benefits.

Administrative costs-or any outlays that are not specifically tied to medical care-are a political hot button. Insurers defend what they spend on tasks such as case management and disease management as well as investments in technology as necessary spending that results in net savings and improved health. Some critics of the insurance industry characterize administrative costs as nothing more than profits and executive compensation and seek legislation to control how premium dollars are spent.

In fact, 15 states have implemented laws dictating minimum medical loss ratios (MLRs), ranging from 50% to 80%. In 2008, California Governor Arnold Schwarzenegger vetoed a bill that would have forced insurers to maintain an MLR of 85%.


Nonetheless, it was inevitable that scrutiny would intensify on payers and their efforts to reduce costs and minimize wasted resources in the system, and now that it has, they're possibly receiving more blame than is fair.

"When people look at waste in claims processing, for example, they assume [all of the money is being wasted] by insurers, when a lot of it is wasted by providers," says Mark Merlis, a health policy consultant who has written several papers on the topic of healthcare waste. "But in fairness to providers, they have to comply with many different insurers' administrative processes, so we should be doing as much as we can to promote uniform transactions."

Merlis says the more uniformity that can be achieved among payers, the more money the system overall is going to save. Market complexity makes it difficult to identify who is "committing" the waste. Furthermore, cutting waste from one area might simply shift costs to another. For example, in an attempt to fight losses from fraud, payers could investigate more claims in detail, but that will delay payments to providers, damaging relations and potentially resulting in legal action under prompt payment laws.

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