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Administrative Expense Benchmarks For Health Plans Published by Sherlock Company

August 2002

Detailed financial benchmarks for health plan administrative expenses will be shortly published by Sherlock Company. The Sherlock Expense Evaluation Reports (SEER) are unique in their timeliness, detail and breadth of their universes. This is the fourth year that Sherlock Company has compiled these studies.

The benchmarks are intended to facilitate comparisons and to assist in the management of health plan administrative expenses. They can be useful to operational and financial managers of health plans, consultants and third-party vendors as well as to Boards and persons charged with corporate finance responsibilities, including strategic planners and investment bankers.

The SEER studies are composed of universes of publicly traded companies and Blue Cross Blue Shield Plans. In aggregate, the surveyed Blue Cross Blue Shield Plans serve 26 million members, or approximately 33% of all people served by Blue Cross Blue Shield Plans. The public company edition includes results from plans serving 16 million members, comprising 30% of all insured members of publicly traded health plans. Combined, these reports analyze the administrative expenses of health plans serving approximately 24% of all commercially insured Americans. Data compiled in SEER is provided by companies who elect to participate and, in return, receive copies of the analysis for their internal cost management.

Besides the fact that the study is being used by the companies submitting information, the survey process contained additional procedures to promote the accuracy of the responses. The survey contained strong definitions, supported by ongoing clarifying discussions with each of the participants. Also, the survey process was highly participatory, ensuring acceptance and compliance. Most of the participants had participated previously so that their responses may have benefited from a practice effect. Finally, submissions were scanned for anomalies and, when found, were investigated.

All administrative expenses are for the year ended December 31, 2001. Expenses are segmented into approximately forty functional/ departmental classifications and ten product lines. Expenses are reported per-member-per-month and as a percent of revenue. Health insurance products include HMO, Point-of-Service, Indemnity and PPO, Medicare HMO, Medicaid HMO, Medicare Supplemental and Dental Product lines. The commercial lines are each subdivided into ASO and Insured segments. An additional section addresses individual products.

Selected results for the Blue Cross Blue Shield Edition of SEER are summarized below.

Figure 1. Benchmarks for Blue Cross Blue Shield Plans' Administrative Expenses: 2001
Cost Per Member Per Month - By Function, All Products

25th Percentile 75th Percentile Mean Range Range / Mean
Marketing $3.01 $5.92 $4.64 $6.65 143.5%
Med. and Provider Mgmt. $1.42 $2.24 $1.93 $2.29 118.3%
Acct. & Member. Adm. $6.79 $10.26 $8.69 $8.12 93.5%
Corporate Services $2.61 $5.20 $4.12 $6.88 167.2%
Theoretical Total $7.70 $23.62 $19.37 $23.94 123.6%
Actual Total $11.93 $21.00 $19.20 $18.85 98.2%

Figure 2. Benchmarks for Blue Cross Blue Shield Plans' Administrative Expenses: 2001 Costs Per Member Per Month - By Product Line

Low High Mean Range Range / Mean
Commercial HMO/POS
Insured $16.76 $34.93 $25.00 $18.17 72.7%
ASO $12.97 $25.17 $18.49 $12.20 66.0%
Commercial HMO/POS
Insured $15.73 $43.61 $26.80 $27.88 104.1%
ASO $12.94 $28.48 $18.57 $15.55 83.7%
Indemnity & PPO
Insured $11.28 $30.98 $22.62 $19.70 87.1%
ASO $10.12 $19.55 $14.86 $9.43 63.5%
Medicare + Choice $28.37 $52.51 $41.81 $24.15 57.8%
Medicaid $16.86 $27.08 $21.00 $10.23 48.9%
Medicare Supplemental $8.57 $28.39 $16.77 $19.82 118.2%
Stand-alone Dental $1.85 $4.67 $3.28 $2.82 85.8%

Figure 3. Benchmarks for Blue Cross Blue Shield Plans' Administrative Expenses: 2001
Costs as a Percent of Revenue - By Product Line

Low High Mean Range Range / Mean
Commercial HMO/POS
Insured 9.80% 20.40% 14.60% 10.60% 72.61%
ASO 78.87% 148.91% 106.03% 70.03% 66.05%
Commercial HMO/POS
Insured 7.44% 23.40% 15.19% 15.96% 105.10%
ASO 75.72% 161.72% 116.55% 86.01% 73.79%
Indemnity & PPO
Insured 8.51% 16.90% 12.35% 8.39% 67.93%
ASO 67.84% 131.07% 104.43% 63.23% 60.54%
Medicare 5.50% 10.23% 7.82% 4.73% 60.57%
Medicaid 10.39% 20.44% 14.92% 10.05% 67.34%
Medicare Supplemental 7.06% 20.42% 12.25% 13.36% 109.1%
Stand-alone Dental 6.34% 20.52% 14.27% 14.18% 99.38%

Companion volumes of operational metrics, including staffing ratios, employee compensation analyses, and numerous productivity measures are expected to be published in coming weeks.

Additional information concerning the 2002 Sherlock Expense Evaluation Reports is available by contacting Sherlock Company.

Contact:
Douglas B. Sherlock, CFA
Sherlock Company
215-628-2289

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