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On the Third Hand: Administrative costs

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On the one hand, even at health insurance companies, no one really defends the idea that spending a higher percentage of the premium dollar on administrative costs is a good thing in and of itself.

Insurers will defend the need to spend what has to be spent to provide intelligent, efficient coverage administration, but it takes someone with a stone cold heart, and a good poker face, to get up and say that shifting money away from checkups and extra nursing care might possibly be a good thing.

But, on the other hand, maybe insurers could possibly make that point. 

The National Association of State Comprehensive Health Insurance Plans (NASCHIP) has published data that might possibly support that idea in batches of the 2011 Pre-existing Condition Insurance Plan (PCIP) program going into a 2011/2012 state-by-state analysis book.

The PCIP program is the ill-fated program that the drafters of the Patient Protection and Affordable Care Act (PPACA) created for people viewed by health insurers as being uninsurable.

States were supposed to be able to run their PCIP programs. But, even though the number of enrollees was much smaller than expected, the claims costs for the average enrollee was something like $30,000 per year, and the program quickly blew through a huge percentage of its money. Earlier this year, federal regulators went from taking a flexible, generous approach to helping states with high costs to requiring them to take a low, fixed sum of money or leave it. Many of the states chose to leave it and handed their PCIP programs over to the federal government.

But, in the good old days of 2011, when the states were still cheerfully blowing through their PCIP funding, per-enrollee claims costs varied widely — and, according to NASCHIP expense data and claims data, there was asn interesting trend: States with high administrative costs seemed to have a relatively low claim-to-premium ratio, and states’ low administrative costs seemed to have a relatively high claim-to-premium ratio.

Example: All states with state-run PCIPs that reported administrative expense data to NASCHIP spent only about 5 percent of their PCIP money on administration and had claims expenses that averaged 182 percent of premiums.

Connecticut spent what looks like a scandalous 18 percent of its total PCIP expenses on administrative costs — and it held claims as percentage of premium to 141 percent.

Along the same lines, 13 percent of North Carolina PCIP spending went to administration, and North Carolina held claims to 113 percent of premiums.

New Mexico, the state with the worst claims performance, had claims equal to 429 percent of premiums and held administrative costs to 4.7 percent of spending. The runner-up, Alaska, held administrative costs to 4.6 percent of PCIP spending while letting claims climb to 371 percent of premiums.

Could it be that PPACA drafters could have made PCIP a lot more sustainable if it had encouraged states to spend heavily on running those complicated plans well, instead of encouraging them to starve administration? 

On the third hand, it is a lot easier to talk about how a dollar spent on administrative costs is a dollar not spent on a dying patient’s painkiller IV, so, maybe expecting to get beyond that kind of over-simplication is unrealistic.

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