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Over the past five years, health plans have performed surprisingly well despite rising medical costs. Net margins increased, pulled up by a hike in premiums. Capital reserves rose, thanks to better investment returns. And the growth of administrative costs slowed relative to the increases in medical costs.

But today, this formula seems played out. Although enrollment in fully insured managed care plans grew by 4.9 percent in the U.S. between January and July 2007 alone, plan members and employers are pushing back against premium hikes. The investment environment is suddenly deeply uncertain. And administrative costs are forecast to grow over the next few years.

Seeking to raise margins, many health plans are investing in capabilities that will bring new value to their member base in the form of new services. At the same time, on the cost side, plans continue to extend and build competency in medical cost-control and cost-management programs. Finally, a number of plans are renewing efforts to take control of their administrative and operating costs.

We believe this last move is particularly significant, because over the past few years many plans have experienced the same major problems—an ironic byproduct of the industry’s general success:

• Business complexity in both the front office and the back office has grown. Health plans now need to support a larger number of product and service offerings and face increasing regulatory demands.
  
• The bar keeps rising in the effort to develop new capabilities. Informatics, disease programs, and electronic records all demand attention, and they all need to be funded somehow.
  
• Budget cuts have not delivered sustained results. Costs keep creeping back, and plans appear to be caught in an endless cycle.

Many plan executives say that these problems are now at the top of their agenda. But many are unsure about the right way to rectify these problems. Although the specifics of the solution will vary by company, most demand some variation of what Booz Allen Hamilton calls an administrative cost transformation (ACT).

Booz Allen's Curt Bailey, Thom Bales, and Narayan Nallicheri are the authors of "Time to A.C.T. — Administrative Cost Transformation for Health Plans."

study posted April 17, 2008

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