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4 Excess Administrative Costs
Pages 141-174

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From page 141...
... He puts these costs in the context of a complex payment system, describing three main drivers of BIR costs: complexity, variability, and friction. Using available evidence, he estimates that up to $183 billion of expenditures on BIR activities in the United States may be due to inefficiency.
From page 142...
... He estimates that, if commercial insurers could all adopt the best-practice level of administrative expenses being no more than approximately 7.6 percent of fully insured commercial premiums, up to a $23 billion savings opportunity exists for the commercial market in total administrative expense reduction. As these estimates applied data across the entire commercial marketplace, Naugle cautions that variation in savings could occur across specific individual payers as they each will be variously impacted by their respective marketplace and organizational characteristics.
From page 143...
... For completeness, it includes a similar estimate of BIR costs for private payers. Finally, to facilitate synthesis, the report includes a tabular summary of the five administrative cost estimates presented at the IOM Roundtable on Value & Science-Driven Health Care's workshop titled The Healthcare Imperative in May 2009.
From page 144...
... In addition, to foster a clear overview and synthesis of all administrative cost estimates presented in these proceedings, this report includes a table that systematically summarizes the estimates, identifies and reconciles differences in scope and method, and presents a best estimate for each component of BIR costs. Total BIR costs in each healthcare system setting (e.g., physician practices)
From page 145...
... Thus the estimates of excess BIR costs presented here are upper bounds; we attempt to correct for benchmarking in the summary table. We also considered comparing different U.S.
From page 146...
... ; this is incorporated in the summary table for all the administrative cost estimates presented in this session. Adding each of the individual BIR estimates together, the total upper bound for BIR costs is estimated at $361 billion in 2009.
From page 147...
... Finally, the BIR costs reported here may overlap with excess clinical services. That is, if expensive clinical services are reduced 5 percent through more proactive, patient-centered care, there will also be a drop in BIR costs.
From page 148...
... for private of current Org, applied payers only, private payers to NHE for 2009 vs. Medicare Synthesis $65- $32-35 As above Similar to Use of 70 billion Kahn: all Casalino billion payers and preliminary BIR tasks ratio for physician practices
From page 149...
... NHE, with Assumed 10% None providers billion assumed BIR BIR, based available on physicians and hospital data Synthesis $77 $39 As above As above Use of billion billion Casalino preliminary ratio for physician practices TOTALb $168 183 billion NOTE: BIR = billing-and-insurance related; n/a = not applicable; NHE = national health expenditures; n.s. = not significant; OECD = Organisation for Economic Co-operation and Development.
From page 150...
... Synthesis of Presentations on Excess Administrative Costs Two analyses of BIR costs among private insurers found very similar results. Eric Jensen estimated $63 billion in excess BIR costs at private insurers, as compared with OECD countries (which have a much lower private payer role)
From page 151...
... yields an estimated $77 billion in total BIR costs. Again, applying the preliminary benchmark ratio used by Casalino and colleagues for physicians yields an estimated $9 billion in excess BIR costs for these providers.
From page 152...
... Even though the interaction may be worth doing, waste is still generated from poor performance. In this paper, we provide data on the cost to physician practices of time spent on interactions with health plans, wasteful and not.
From page 153...
... While these estimates do represent interaction costs related to payers, they do not represent total administrative costs for physician practices. They do not include: • The cost of overhead related to these interactions, such as office space or telephone, fax, and computer expenses; • Time spent by the one-third of U.S.
From page 154...
... TABLE 4-4 U.S. Hours per Physician per Week Interacting with Payers  Quality Data: Submitting Authorizations Formularies Claims/Billing Credentialing Contracting Data to Payers Appointments Total Physician 1.0 1.3 0.8 0.06 0.05 0.04 0.5 3.8 Nursing staff 13.1 3.6 3.2 0.02 0 0.01 1.5 21.4 Clerical staff 6.3 0 38.8 2.03 0 0.14 0 47.3 Senior admin 0 0 3.0 0.01 0.13 0.07 0 3.2 Lawyer/accountant 0 0 0 0 0.15 0 0 0.15 NOTE: Includes billing Medicare/Medicaid and time seeking timely patient appointments.
From page 155...
... Second, administrative costs are excessive to the extent that physician practices and payers are inefficient in dealing even with well-structured interactions. For example, if payers provided well-designed electronic access for filing claims, requesting prior authorizations, and so on, but some physician practices do not use computers, or do not know how to use them well, this would generate excessive administrative costs.
From page 156...
... The amount of savings that such standardization would produce is not known, but interviews we conducted with 27 health plan executives and leaders of physician practices as part of our research suggest that it would yield at least 10 percent savings. If so, the annual savings would be $6.7 billion (10 percent of $64.7 billion)
From page 157...
... who are not in office-based practice; • The cost of overhead related to interacting with payers, such as office space or telephone, fax, and computer expenses needed for these interactions; and • Time spent by nurse practitioners or physician assistants. We estimated that including these costs would increase the national annual cost to physician practices of dealing with health plans by $17.4 billion, using the following conservative assumptions and calculations: • Assume that per physician cost of interacting with payers for non office-based physicians is 65 percent lower than for office-based physicians.
From page 158...
... .7 Then a crude calculation of the cost of the time spent interacting with payers by nurse practitioners and physician assistants and staff working with them can be calculated as [the number of NPs + the number of PAs] multiplied by the ratio of time spent interacting with pay ers by NPs/PAs compared to physicians multiplied by the ratio of NP/PA income compared to physicians multiplied by the per physician annual cost of interacting with payers (from Table 4-1)
From page 159...
... Even though administrative processes are required to ensure fair payment for services and reduce fraud, excessive complexity in administrative processes engendered by numerous, opaque, changing, and convoluted payment rules come at significant cost. The Massachusetts General Physicians Organization studied the excessive administrative burden on physicians and modeled the costs of the current system versus a uniform and transparent set of payment rules similar to Medicare's.
From page 160...
... The impact of excessive administrative complexity on physicians can 900 800 # of Revenue Cycle F TEs per $ Billion Revenue 700 Median 600 Benchmark 500 MGPO 400 300 200 100 0 Industrial Distribution Industries Services Consumer FPSC Products All FIGURE 4-1 Physician billing staffing compared to other industries. NOTE: FPSC = Faculty Practice Solution Center; FTE = full-time equivalent; MGPO = Massachusetts General Physicians Organization.
From page 161...
... In addition, excessive administrative complexity generated costs related to successful appeals and unrealized revenue due to rejected claims that would have been paid under our alternative single transparent rule set and processing requirements. In fiscal year (FY)
From page 162...
... The physician time estimated at 4 hours per week accounts for $28.4 million of the estimated burden while the practices' administrative staff and TABLE 4-6 Administrative Complexity Burden in the PO's Professional Billing Office Cost of Admin. Estimated Extra Complexity Extra Staff FTE's as % PBO Cost Centers/Functions $(000,000s)
From page 163...
... This is the result of applying the ratio of the cost of administrative complexity for the MGPO of 11.9 percent to the value of private health insurance payments for physicians and clinical services of $221 billion, based on the 2006 National Health Expenditure Projections 2007-2017, Office of the Actuary in the Centers for Medicare & Medicaid Services (CMS, 2007)
From page 164...
... SOURCE: Prepublication data prepared by the authors for research funded by the Robert Wood Johnson Foundation. list of opportunities to pursue common policies and procedures leading to lower cost.
From page 165...
... Second, we focused on excessive administrative complexity in fee-for-service payments. We recognize that with undermanaged care the payment rules may be purposefully more restrictive so our results may not be directly generalized to capitated and other managed care arrangements.
From page 166...
... healthcare reform discussion, significant attention has been paid to identifying opportunities to reduce administrative expenses. Every stakeholder in the health insurance system incurs some administrative expense -- payers, providers, purchasers, and even patients.
From page 167...
... health insurance marketplace; • Estimated the distribution of commercial premiums between self insured and fully insured products; • Estimated total administrative expense associated with fully in sured commercial products; • Estimated total administrative expense for fully insured commercial products assuming a shift from current expense levels to a best practice level; • Calculated the savings opportunity for fully insured commercial products as the difference between the current administrative ex pense level and the estimated best-practice expense level; • Estimated the marginal expense reduction opportunity for self insured business as a percentage of the marginal expense-reduction opportunity for fully insured business; and
From page 168...
... and the insurer's risk margin on the claims cost. In our experience, fully insured products tend to generate a greater amount of administrative expense than self-insured products.
From page 169...
... According to these proprietary benchmarks, median payer administrative expense for fully insured commercial products, expressed as a percentage of fully insured commercial premiums, was 11.3 percent. Note that this definition of administrative expense is inclusive of external broker commissions, but excludes premium taxes.
From page 170...
... . Administrative Expense Reduction Opportunity Fully insured commercial business Using the administrative estimates developed in the two prior sections, we calculated the total administrative expense reduction opportunity for fully insured commercial products as the difference between the 2008 median and the best practice: $13.9 billion ($42.4 billion-$28.5 billion)
From page 171...
... • The savings estimates provided herein are only for commercial products. Additional savings may be achieved in noncommercial products (e.g., Medicare, Medicaid, TRICARE)
From page 172...
... Eliminating manual transactions for claim submission, claim status inquiries, eligibility verification, claim payment, and remittance advices will substantially reduce both payer and provider administrative expenses. Simplify the Sales Process Today approximately 30 percent of payer administrative cost is driven by sales and marketing activities.
From page 173...
... We also believe that material administrative expense reduction can be achieved without harming competition among insurers, and without reducing provider reimbursement levels or diminishing quality and service to purchasers and patients. Such initiatives will, however, require coordination among all stakeholders, and implementation of carefully considered strategies adopted by all payers, to reduce complexity and eliminate administrative variation.
From page 174...
... 2009. What does it cost physician practices to interact with health insurance plans?


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