How do changes in short-term growth rates affect your plan's costs?
This calculator is for short-term changes in growth rates and discussed in our Plan Management Navigator. Use this calculator if you want to model how significant and sudden short-term fluctuations in membership can temporarily impact costs. We also have a long-term scale calculator. The background section below has a discussion on the differences.
To use the calculator, first enter your plan's current or typical membership growth rate in the first line. Then enter what you forecast the growth rate to be in the next year.
| Current Membership Growth Rate | |
| Expected Membership Growth Rate |
Next enter your plan's PMPM values for whichever clusters of functions you want to see the effect of scale. If you only want to look at total costs, you can skip the clusters. The cost value after the effect of scale will be shown after you press the calculate button.
| Cluster | Base PMPM Costs | Universe | New PMPM Costs |
|---|---|---|---|
| Sales and Marketing | Combined | ||
| Medical and Provider Management | Combined | ||
| Account and Membership Administration | Combined | ||
| Corporate Services | Combined | ||
| Total | Combined | ||
Long-Term and Short-Term Scale Compared
Economies of scale describe the relationship between volume, unit prices, variable costs and fixed costs. Participants in an industry with minimal variable costs and high fixed costs are subject to economies of scale since, at a given price and contribution margin (revenues less direct expenses), additional volume yields sharply increased profits because most of the costs are fixed.
The possibility of economies of scale is important in health insurance since it bears on strategic initiatives such as business combinations, outsourcing and organic changes in membership growth. These initiatives often require long-term commitments, so their returns, shaped by scale, should be assessed over extended periods.
Additionally, the period in which performance is measured is an important consideration. This is because nearly all costs are variable over twenty years, nearly all costs are fixed over one day. For health plans, approximately one-half of costs are staffing, which can be “right-sized” relatively rapidly, though not instantly.
In the November 2024 edition of Plan Management Navigator, seen here, we demonstrated that functions comprising a range of approximately 2% to 37% of health plan administrative expenses, depending on the universe, exhibited economies of scale in 2023. A doubling of the size of the health plan would lead to those costs subject to economies of scale that are 58% to 90% of the pre-doubling PMPM costs. Note, while we used the phrase "doubling the size of the health plan" to describe this effect, it is a comparison between the costs of various plans serving different members at a single point in time. Notwithstanding the expression “doubling”, this single point in time analysis (or what we consider “long-term”) ignores the effect of growth on costs.
Conversely, this Navigator explores short-term economies of scale. Specifically, we examine membership growth rates within individual plans over two consecutive annual periods, independent of plan size. It directly addresses the question, “What happens if a health plan’s size doubles?” Significant and sudden short-term fluctuations in membership can temporarily impact costs. For these organizations, short-term scale benefits can provide the organization critical time to integrate operations and achieve long-term efficiency gains.
Long and short-term are not necessarily aligned. A health plan could display economies of scale during the short-term but not over the long term. Health plans’ limits on its ability to manage for actual (versus estimated) volumes can mean that costs variable over the intermediate term can behave like fixed costs in the short term.
In summary, the point in time approach used in the economies of scale study in the November 2024 Plan Management Navigator is long term since it does not take time into account but is focused on differences at a point in time. This Navigator’s approach, which measures the effect of changes in membership growth on rates of changes in cost growth is short term since we are measuring performance of the same plans over a one year period.
Reflects Year Ended 2023 data. Updated on November 13, 2024.
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