Sherlock Company Publishes Administrative Expense Benchmarks

July 9, 2003

Sherlock Company's recently published benchmarks for health plans report median costs of $22.46 for all comprehensive products. The reporting firms, seventeen Blue Cross Blue Shield Plans, reported expenses which ranged from $15.17 for indemnity and PPO (ASO) to a high of $48.70 for Medicare + Choice. Insured comprehensive products ranged from 7.73% for Medicare + Choice to a high of 15.13% for commercial POS. Account and membership administration comprised the largest component of health plan administrative expenses.

Marketing expenses included Rating and Underwriting, Product Development / Market Research, Sales and Marketing, Commissions and Advertising and Promotion. These expenses represented $5.20 of the total administrative costs. At the 75th percentile, these costs were $6.78 but only $4.61 at the 25th percentile. As indicated in a press release circulated on July 1, commissions paid to brokers comprised $3.03, the lion's share of these expenses.

Medical & Provider Management was composed of Provider Network Management and Services and Medical Management (including Quality Assurance, Wellness Programs and Grievance / Appeals. These expenses had a median value of $2.34. At the 75th percentile, these costs were $2.53, but were as low as $1.87 at the 25th percentile. Expenses for Medical & Provider Management are highly sensitive to the mix of products offered: Managed care products such as HMOs tend to require a higher commitment to this function.

Account & Membership Administration represented $8.64 per member per month of administrative expenses in 2002, the largest share of administrative costs. This category of expenses includes many of the core functions such as Enrollment (including Membership and Billing), Customer Services, Information Systems and Claims (including Encounter Capture and Adjudication). Plans reported 10.54 at the 75th percentile and $7.68 at the 25th percentile. These expenses were more clustered than the other breakouts.

Corporate Services represented the final category. It included investments in HIPAA compliance as well as Finance and Accounting, Actuarial, Corporate Services (including Human Resources, Facilities, Legal and Regulatory, Corporate / Executive and Association Dues and Miscellaneous Business Taxes. These expenses collectively represented $4.85 in administrative expenses. Fewer then 25% exceeded $6.02 or were less than $4.30. These expenses are susceptible to economies of scale, in our view.

Figure 1. Benchmarks for Blue Cross Blue Shield Plans' Administrative Expenses: 2002

Cost Per Member Per Month - By Function, Comprehensive Products

	25th Percentile	75th Percentile	Median	St. Dev. / Mean
Marketing	$4.61	$6.78	$5.20	31.44%
Med. and Provider Mgmt.	$1.87	$2.53	$2.34	26.92%
Acct. & Member. Adm.	$7.68	$10.54	$8.64	18.60%

Corporate Services	$4.30	$6.02	$4.85	33.45%
Total Expenses	$19.06	$23.76	$22.46	18.02%

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
sherlock@sherlockco.com