Blues plans shoulder growing administrative costs
Blue Cross and Blue Shield plans spent more on activities like underwriting, risk adjustment and provider audits in 2017 than in prior years, pushing the plans' total administrative costs to their highest level since 2013, the height of the expensive buildup to the Affordable Care Act.
A new report from the financial advisory firm Sherlock Company examined 14 Blues plans with a combined 37.1 million members—roughly 35% of all Blues members—and found their administrative costs grew by 5.9% last year, well above 2016's 0.6% growth and 2015's 0.3% decline.
"This was a really interesting year," said Douglas Sherlock, a lead author on the report and the company's president. "It almost felt like it was a directional change in some of the strategic things that they were doing."
Although the report focused mainly on administrative expense trends, it also noted that operating earnings increased from $1.43 to $8.13 per member per month and from 0.5% to 4% of revenues, indicating "considerably healthier" companies last year compared with 2016, Sherlock said.
But Ashish Kaura, a Chicago-based partner of the consulting firm BCG, cautioned against drawing broad conclusions on the report's earnings finding, given the heterogeneity of the various Blues carriers nationwide. The largest, Anthem, has seen a healthy uptick in profits, for example, while Blue Cross and Blue Shield of Michigan is embarking on a profit improvement plan, he said. Anthem plans were not included in Sherlock's report.
"Even though on average they might be higher, my feeling is that these are being driven by a few of the larger Blues," he said.
The data seem to show that Blues are becoming increasingly interested in managing their members' care, Sherlock said. That was seen in increases in rating and underwriting expenses, particularly in risk adjustment, actuarial expenses, medical management and provider audits.
Provider audits don't necessarily translate into denials, Sherlock said.
"A provider audit means, 'Is there something going on here just in the way the reporting is looking? Is there something peculiar in the way providers are behaving?' " he said. "That's a much more focused kind of effort than a claim denial."
As Medicare Advantage membership grows—and with it, reimbursements based on star ratings—Blues plans are finding it increasingly necessary to understand their members' health needs and ensure providers are documenting the right outcomes, Kaura said.
"A lot of this is driven by stars and how providers are responding to stars," he said. "In my mind, that's a good thing. These are the kind of things they ought to be paying attention to."
The plans also spent more on their C-suite executives and associated strategists, both with respect to hiring and compensation, the report found. The plans also increased their outsourcing in that area.
In terms of enrollment, commercial membership declined by a median rate of 4.6% in 2017 over the prior year, while Medicare Advantage increased at a median rate of 7%. Enrollment in administrative services contracts for self-funded plans, which are cheaper to administer, increased by 2.7%.
Sherlock said the ACA encourages employers to offer self-insured policies that allow for flexible benefits and a rating pool that reflects their own workers.
The Blues plans studied for the report also shouldered lower customer service and claims costs in 2017 than in the prior year.
Hema Singh, a credit analyst with S&P Global, said many Blues plans have stabilized since the lower 2015 and 2016 earnings following the implementation of the ACA, when they welcomed sicker than expected members into their policies and didn't price them high enough. Now, there are fewer carriers in the ACA exchanges, which allows them to price more accurately.
"If you are the only player in your market, in a geographic area, you have better control," she said. "You have the data already."
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