New Study Finds Health Plan Administrative Costs Far Lower Than Previous Estimates

August 13, 2009

WASHINGTON – A new report by Sherlock Company found that private health plans' costs to administer benefits represented an average of only 9 percent of premiums across all policies sold.  Sherlock reviewed combined data from 36 Blue Cross and Blue Shield companies and non-Blues health plans participating in performance benchmarking studies in 2008.

Proponents of the creation of a new, government-run plan often erroneously cite inflated estimates of health plan administrative expenses as one reason for the need for such a program.  The report illustrates that private plans' administrative costs are significantly lower than many claim.

"Blue Cross and Blue Shield companies are always looking for ways to become more efficient to help keep consumers' healthcare premiums as affordable as possible," said Scott P. Serota, president and chief executive officer of the Blue Cross and Blue Shield Association.  "Some elements of healthcare reform can help reduce administrative costs, if done right.  For example, state-based health insurance exchanges can make it easier for people to purchase health insurance and simplify administrative functions."

The Sherlock report found that prior estimates that private health plans' administrative costs were two to three times higher than actual costs were based on estimates that were so old that they did not reflect changes in industry practices, including advances in electronic processing that speed payment to providers and reduce costs.

"Prior reports rely on outdated, decades-old estimates from when claims were paper-based and today's electronic processes were in their infancy," said Douglas B. Sherlock, president of the Sherlock Company, which is recognized for its impartial and insightful analyses of health plan administrative costs.  "This report demonstrates that health plan administrative costs have been vastly overstated."

The report also found that private plans perform those administrative functions that Medicare performs at a lower cost.  Private plans are able to perform administrative functions for $12.51 per member per month compared to $13.19 per month for Medicare.  Moreover, private health plans perform additional administrative functions compared to traditional Medicare, including care coordination and wellness programs, which result in better care and lower costs for patients and employers enrolled in private health plans.

The Sherlock report can be found at:  http://www.bcbs.com/issues/uninsured/Sherlock-Report-FINAL.pdf.