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Smaller Provider-Sponsored Health Plans have Lower Administrative Costs than Blues and Public, According to Sherlock Company

September 16, 2004

Philadelphia, September 16, 2004. A comparison between the administrative expenses of Provider-Sponsored plans and larger Blue Cross Blue Shield and Public plans indicates that Provider-Sponsored plans run leaner.  On average, Provider-Sponsored plans have administrative expenses of $18.64, 76% of their larger peers costs of $24.37. The lower costs are apparent when analyzed by product or by major functional area.

Provider-Sponsored plans have a cost advantage in products that comprise 88.4% of their members and 61.9% of the Blue-Public membership.  They have lower costs in 3 of the 5 products also served by Blue and Public plans.

The functional areas of Provider-Sponsored plans also tend to be relatively low cost.

Marketing Costs. Marketing costs of Provider-Sponsored plans are 77.8% of Blue -Public plans. Provider-Sponsored plans may benefit from brand recognition derived from their sponsor.

Medical and Provider Management. The higher expenses of Provider-Sponsored plans, at 103.3% of the Blue-Public firms, may stem from their concentration on more closed panel products.

Account and Membership Administration. Surprisingly, Provider-Sponsored plans have lower costs in such core functions as customer services, claims, IS, and enrollment, which in aggregate are 58.4% of levels in Blue-Public plans.

Corporate Services.  Provider-Sponsored plans’ expenses are 104.4% higher than for Blue-Public plans, possibly due to economies of scale.
There are a number of possible explanations for this apparent greater efficiency. We considered one possible factor, that the provider-sponsored plans were subsidized by their sponsoring providers, unlikely for organizational, tax and practical reasons.
Another possible explanation is that Provider-Sponsored plans benefit from their high degree of focus on a small number of products.   While plausible, the statistical support for this theory is mixed.
An additional explanation is that the Provider-Sponsored plans face intense internal competition for capital. Investments in health plan information systems must compete against revenue-producing hospital capacity. In fact, IS costs per employee is approximately $18,000 per year in Provider-Sponsored plans, only 60.0% of Blue-Public firms.

This analysis is based on the Sherlock Expense Evaluation Reports, including Blue Cross Blue Shield Plans, Public Companies and Provider-Sponsored Plans, using 2003 data. The 34 firms included serve 48.5 million members.

Douglas B. Sherlock, CFA
Sherlock Company

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