Medicare Advantage

Administrative Costs in Medicare Advantage Are 12.6% of Premium Revenue

Reprinted from MEDICARE ADVANTAGE NEWS, biweekly news and analysis on the Medicare (and Medicaid) managed care programs.

The median administrative cost for a typical plan that focuses heavily on Medicare Advantage (MA) is $37.30 per member per month (PMPM) to operate all of its MA products, or 12.6% of premium equivalents, according to a recent analysis by Sherlock Co.

In the firm's report distributed Oct. 15, MA plans in the 25th percentile report costs of $32.36 PMPM, or 10.3% of premium, while MA plans in the 75th percentile report costs of $78.04, or 15.9% of premium. The firm notes that cost figures exclude capital costs and taxes.

Doug Sherlock, the firm's president, cautions that new cost figures for MA plans are not directly comparable to the firm's previously released cost data, including figures of $42.73 PMPM in median MA administrative costs and 6.75% of premiums contained in its April 2006 report. Because the universe of participating plans is different. He says the recently released report is based on 2006 data collected in 2007. Gwynedd, Pa.-based Sherlock Co. provides operational benchmarking and financial services for health plans.

"This is what we think is broadly representative of what it costs to run these [MA] plans," Sherlock tells MAN. "This is the experience of the typical plan doing this work." The data are not applicable to "pure-play" MA plans, which would have much higher administrative costs than the MA-focused plans (that have other operations as well) outlined in the report, he says, noting that MA products in general will yield 3.5 times the revenue of commercial products.

SNP Admin. Cost Is Nearly Three Times Higher

Sherlock's report puts the MA administrative cost data into the context of rapidly rising enrollment and increasing specialization for MA plans. Indeed, Sherlock's recent analysis finds that the median administrative cost of running an MA Special Needs Plan (SNP) is $109.81 PMPM, which is nearly three times the cost of operation for MA plans in general.

The report breaks down administrative costs for MA plans into separate functional areas. Among its findings, as stated in the October 2007 edition of the firm's Plan Management Navigator newsletter, is that marketing costs, on average, account for $10.36 PMPM of the $37.30 PMPM in total administrative expenses for MA plans. That is slightly below the $10.77 PMPM in median costs for account and member administration. (This latter category covers such core functions as enrollment, including membership and billing, customer services, information services, and claims, including the capture of encounter data and adjudication.)

In addition, the Sherlock report finds that corporate services (including privacy compliance, and financial, actuarial, human resource and legal services), is running $8.93 PMPM, while plans are typically spending $7.50 PMPM for provider and medical management.

Pat Dunks, a principal and consulting actuary with the Milwaukee office of Milliman, Inc., says the Sherlock report is "not an unreasonable analysis." He says that MA cost figures in the report for various administrative functional areas "all look higher than I'd expect," but notes that the report is based on what plans told Sherlock Co.

Dunks speculated that startup plans may be part of the reason for higher-than-expected cost figures. But Sherlock says no startups are included. In fact, Sherlock says that in one case a plan participating in the study began offering a new SNP as of January 2006; the SNP had high startup costs and few members, resulting in administrative costs of about $1,000 PMPM. "But we threw those numbers out," he says.

Sherlock cites a total of 46 plans participating in the firm's 2007 benchmarking studies. From those, the firm selected six plans focusing heavily on MA, with combined revenues of $4.2 billion, for the MA analysis. He notes that 47.9% of revenues for all six companies, and 25% of membership, are derived from MA, "so it steers the ship."

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