Conclusions on Tactical Expenses
This is a very brief summary of our analysis of "Best-in-Class" Independent/Provider-Sponsored (IPS) plans compared to "Peer" plans.
Best-in-Class Plans had Tactical expenses that were lower by $9.56 PMPM, or lower by 30%. By "Tactical", we mean all health plan expenses except Sales and Marketing and Medical Management. These two are excluded from "Tactical" expenses because they are strategic and are properly subject to management discretion – there is no right or wrong level.
Their mean costs were $22.75 compared to $32.31 for the Peer Plans. The Best-in-Class Staffing Ratio was mainly responsible for their lower tactical costs. Their staffing ratio was 31% less, which was associated with $6.89 of the $9.56 PMPM difference.
Best-in-Class plans' Staffing Costs per FTE were about $101,000, lower than the Peer plans' Staffing Costs of $122,000, reflecting both lower average wages and lower fringe benefits. The lower Staffing Costs per FTE were associated with $2.67 of the $9.56 PMPM difference.
It appears that Best-in-Class plans operate in a culture of conservative administrative expenses since every cluster of tactical expenses was lower for Best-in-Class plans.
Low Information Systems costs were responsible for about a third of the overall Tactical difference. The Corporate Services cluster was responsible for about a quarter, and the Account and Membership Administration cluster also contributed significantly.
Strategic Expenses were also Generally Lower
For Strategic expenses, Best-in-Class plans had higher costs in the Sales and Marketing cluster, but lower Medical Management costs.
The Sales and Marketing cluster of expenses was higher by 7% for Best-in-Class plans. External Broker Commissions was entirely responsible for that favorability, by $0.29 PMPM.
Higher costs for the Sales and Marketing cluster may have slowed the decline in membership for Best-in-Class plans. Compared to CY 2023, enrollment for Best-in-Class plans was down 1% in CY 2024 versus down 8% for Peer plans.
Best-in-Class plans had Medical Management costs that were lower by 40%. All sub-functions of Medical Management were lower.
Median gross profit margin for insured products was 12% for Best-in-Class plans and 6% for Peer plans. (Gross profit margin equals Total Revenue less Administrative Expense less Medical Loss divided by Total Revenue.)
Possible Extraneous Characteristics
We considered six characteristics of the sets of IPS plans that could contribute to improved performance in Best-in-Class plans but that managers can do little to change.
Economies of Scale
Economies of scale may have played a role. The median membership size for Best-in-Class plans was 88% greater than the Peer group.
However, based on results of Sherlock Company's 2025 Scale Study for IPS plans, only 53% of Tactical administrative expenses are subject to economies of scale. Therefore, only about $5.10 of the $9.56 PMPM difference could be attributable to economies of scale, leaving $4.46 attributable to improved execution.
Cost of Living
Local costs of living differences were unlikely to have conferred an advantage on the Best-in-Class plans: the mean wage rate in the service areas was $2 per hour higher for the Best-in-Class plans than for the Peer plans.
Outsourcing Differences
Outsourcing may have contributed to favorable comparisons. In general, Best-in-Class plans had higher average and median outsourced costs, reflecting less internal staff and more contracted services. However, Best-in-Class plans' total tactical costs were lower than Peer plans' sum of Staff Costs and Outsourced Costs, suggesting that outsourcing alone did not explain the difference.
Product Mix Differences
Our values were adjusted so that product mix could not impact comparisons: product mix was adjusted to eliminate its effect on both the numerator (costs) and the denominator (membership) of the PMPM expense ratio.
Exposure to Individual Market
We believe the greater exposure to the higher cost Individual market segment has little impact on the relative performance of Best-in-Class plans. Both sets had individual products as about 5% of total membership.
Strategic Investments
The strategic investments (Sales and Marketing and Medical Management) could not have affected Tactical comparisons because we explicitly excluded these investments from Tactical analysis.
Methodology
First, we separated Tactical from Strategic expenses in each Plans. "Tactical" costs are costs of Comprehensive products (including Medical Management of those products) plus costs allocable to supporting the Comprehensive products. We excluded Sales and Marketing and Medical Management since those are strategic choices of each plan.
We then ranked the plans to identify those whose expenses are Best-in-Class. We define "Best-in-Class" plans as those whose tactical expenses are in the bottom (best) quintile of the population, and "Peer" plans as those in the second best quintile. We excluded plans in the top three quintiles from the analysis.
Because each of the plans included in the dataset and in each of the subsets differ in product mix, we employed a composite approach that neutralizes product mix, a complex topic that we address in a separate section.
After that reweighting, we then isolated and measure the specific contributing functional cost differences to overall Tactical cost differentials: Staffing Costs per FTE and Staffing Ratios.
Since Total Costs per FTE and PMPM costs together imply a mix-adjusted staffing ratio, we were also able to infer the effect of staffing ratios: excess staffing ratio is the difference between the Peer staffing ratio and Best-in-Class staffing ratio.
Our approach may enable health plans to identify areas where their performance can emulate those of Best-in-Class. Notwithstanding such plans' better operational performance, they may perform worse in other respects such as medical loss ratios, profitability, membership gains, or service quality.