Minnesota health plans saw 11 percent rise in overhead

The cost of running health plans in Minnesota increased at a faster pace during 2015, raising questions about whether the state is on the cusp of an expensive new trend.

Insurers spent a total of $1.69 billion on administrative expenses in 2015, up 11 percent from $1.52 billion the previous year, according to an April report from the Minnesota Department of Health.

Over the past 10 years, administrative costs at health plans have expanded as more people have found health insurance, including coverage gains through the federal Affordable Care Act (ACA).

But expanded coverage apparently isn't the only factor. Administrative costs have been growing on a per-person basis, the report finds, and on that basis in 2015 were at their highest point in a decade.

"The big question is: Is 2015 the beginning of a trend?" asked Stefan Gildemeister, the state's health economist. "Or is it just an outlier that may have to do with a delayed response of the health insurance industry to ACA requirements?"

Insurers pointed to numbers in the report showing that administrative spending actually has decreased as a share of all expenses. A decade ago, administrative costs accounted for 8.4 percent of all health plan spending, they point out, whereas the comparable figure in 2015 was 7.6 percent.

"Administrative spending has been and remains a small part of total costs, and is still lower as a percentage of total costs than it was 10 years ago," said Jim Schowalter, chief executive of the Minnesota Council of Health Plans, a trade group for insurers. "It's not driving health spending, obviously, but it's still there."

The health department report said the 7.6 percent figure in 2015 was noteworthy, because it follows a five-year period where the range held relatively steady between 7.1 percent and 7.3 percent. Complete data for 2015 is the most recent year that's currently available. Gildemeister noted the study can't pinpoint what drives spending changes.

Health insurers say a number of one-time or short-term factors were at play in 2015. Eagan-based Blue Cross and Blue Shield of Minnesota, for example, says administrative spending grew as it spent $170 million on moving to a new technology system for paying claims, enrolling subscribers and managing care.

Other health plans argue their administrative expenses actually declined on a per-enrollee basis. The ACA was a factor, insurers say, but it was one of many.

"The ACA doesn't drive everything," Schowalter said. "There are all these other pieces going on."

The health department report tallies administrative costs for a variety of business activities from claims processing and setting up provider networks to marketing. It does not include insurance company profits or taxes.

Administrative expense is a touchy subject for health plans, which tend to cast premium increases as a reflection of the underlying cost of health care — not their overhead costs.

Even so, administrative costs are important because "it goes into the overhead and the pricing of the insurance," said Mark Hall, director of the health law and policy program at Wake Forest University.

Administrative expense varies depending on a health insurer's mix of business. It costs less to sell coverage to large employer groups, Hall said, whereas administrative expense is higher with one-on-one sales to individuals.

Health insurers always will have a few percentage points of expense, he said, in handling claims to make sure medical bills are legitimate and paid on a timely basis. There are basic customer service functions that cost money as well. Administrative expenses include efforts to root out fraud and negotiate contracts with doctors and hospitals for lower reimbursement rates.

With a competitive health insurance market, insurers spend money on marketing to distinguish themselves. Some people would prefer a single-payer system that would eliminate this aspect of administrative costs, Hall said, while other consumers like a choice of health plans.

The health department report looks at administrative expense for dozens of health insurers that do business in Minnesota. Collectively, the health plans provided coverage in 2015 for more than 5.1 million people. On a per capita basis, administrative expense was $328 during the year, according to the report.

Four Minnesota-based health insurers accounted for most of the expense tabulated in the report, which fits with their large presence in the market.

In 2015, Blue Cross says it was moving to a new "operating model platform" from a company called HM Health Solutions, which is a subsidiary of the Blue Cross health insurance company based in Pittsburgh. Other Blue Cross insurers share the platform, as well, said Jim McManus, a spokesman for Blue Cross of Minnesota.

"Expenses for the new platform are planned to take place over a three-year period, through the 2018 filing year," McManus said via e-mail. He called the spending a "strategic investment in a more efficient and modern technology platform."

Minnetonka-based Medica reported more administrative cost via contributions to a related foundation and research institute. The insurer also saw a shift in business mix to coverage that brings higher administrative cost, including state public health insurance programs.

In 2015, the HMO spent money to add and train staff in preparation for a large expansion of its public program enrollment in 2016. Medica effectively pulled the plug on the expansion by November 2016, notifying the state that it would stop managing care for most in the Medicaid and MinnesotaCare programs as of May 1.

"For 2016, the costs will show moderate increases, primarily due again to the mix of business," the insurer said in a statement.

Minneapolis-based UCare also saw administrative costs in 2015 for a similar reason — the health insurer had to prepare for a dramatic downsizing of its role in state public programs, including cutting 245 jobs.

But UCare said administrative costs declined overall on a per-enrollee basis. The insurer said in a statement: "While UCare's increase was not significant, members benefit from our investments in information systems to be more efficient at processing transactions."

Bloomington-based HealthPartners said its administrative expense increased due to an increase in enrollees. Between 2014 and 2015, the insurer saw enrollment grow by 6 percent and total expenditures grow by 10 percent, the health plan said, yet administrative expense was up just 4 percent.

"Our administrative costs remain among the lowest in the country," HealthPartners said in a statement.

Hall of Wake Forest said he didn't see anything in the Minnesota report suggesting that administrative expenses are particularly high in the state. In general, the ACA has exerted downward pressure on administrative costs, he said, by regulating the share of premium revenue that insurers must spend on medical care vs. administration and profit.

The 2015 increase in administrative costs in Minnesota is far from a crisis, Hall said, but "it's the first notable uptick in a while, so I think it's a reason to take a look and pay attention."