How much to administer health insurance?

How much does it cost to administer health or medical insurance? There are many answers and much confusion. Recently a technical paper by Mark Litow of Milliman, Inc. reported his calculations of cost, and his findings were used in the months since by groups and authors from a wide range of viewpoints that suggest they see his findings as credible. Litow reported administrative costs of Medicare/Medicaid were 5.2% and for-profit insurance firms averaged 16.7%. The U.S. spends on health insurance administration about 1/4 of what the U. K. spends on all health care!

In addition the Economic Policy Institute reported a complex study that recommended a Health Plan for America, including much technical information that makes it a thorough suggestion of a system to bring health insurance to the many uninsured and under-insured in America. Its report includes this interesting table that shows the wide range of administrative costs, depending upon the number of people insured, from a family of up to four people for the top line to very large groups.

One explanation for the changing administrative costs is that larger groups take care of much of the administrative cost, while to insure few people the insurer must do all administration. Most of the larger groups are employers who have staff that take care of many administrative details, reducing the job of the insurer.

Another part of the administrative cost of health insurance is that born by the providers of care — physicians, labs, hospitals, and more — which may lose up to a fifth of their reimbursement from insurance in the cost of completing forms for insurance providers. Modern technology could provide major reductions in those costs if wisely and carefully planned and implemented, including all insurance companies using a single claim form and a single set of codes for all items on the form. They could make full use of on-line technology so long as high levels of security protect patient privacy.

Copyright © 2008 John F. Yeaman