Insight, analysis & opinion from Joe Paduda


Administrative expenses in health care

Administrative expenses account for 34% of private health care spending in California according to a report authored by University of California-Santa Barbara researchers and noted in California HealthLine. The 34% is comprised of insurance paperwork (21%) and medical records (13%).
Billing expenses amounted to 8% of private health insurance premiums; 11-14% of hospital spending and 14% of physician office expense went to billing as well.
Total private insurer administrative expenses totaled 9.9%; Medicare came in at 4.5%.
The full study, published in Health Affairs, noted :
“Including health plan profits, we estimated that 19.7-21.8 percent of spending on physician and hospital services in California that are paid for through privately insured arrangements is used for billing and insurance-related functions.
This is not “new news”; administrative expenses in the US consume a significant portion of health care expense. However, the study notes that these dollars, which are often labeled as “waste”, are not. Here is a quote from the full study:
“some administrative effort is required and desirable in a well-functioning system. Hospitals are complex organizations, and administrative effort is needed to use inputs efficiently and produce good outcomes. As physician practice moves toward larger medical groups, administrative effort is required to assure that the groups function efficiently. Administrative activities here include the work of the office manager, the receptionist, the billing staff, the information technology experts, and other personnel not directly contributing to the hands-on care of patients.”
Thus, the definition of “administrative expense” is quite broad, encompassing both payer and provider functions. This may be lost in some of the other publicity surrounding reporting of this study.
What does this mean for you?
Lots of opportunity to reduce administrative expense.


What Ryan did say about Aon and other topics

More on Pat Ryan, CEO of Aon Corp., and his comments at the IRMI conference earlier this week.
Ryan spent a fair amount of time commenting on the Spitzer investigations and impact thereof. He noted that the sheer time and resources required to respond to the Attorney General’s inquiries, along with the potential for ongoing negative press, played a large part in Aon’s decision to settle the case.
Ryan also noted that Aon has embraced the concept and reality of transparency, wherein all clients would know exactly what Aon was being paid and by whom for what work. Aon has abandoned the contingent commission revenue model, which has led the company to increase fees to some customers.
His comments on transparency and Aon’s commitment to same were direct, comprehensive, and revealing. Ryan clearly understands that the landscape has changed, that the old ways of doing business are no longer acceptable, and that Aon must operate within the new reality created by Spitzer and other outside forces.
Ryan noted that while the risk managers who are his firm’s main contacts were not concerned about the contingent commissions, their bosses were. Evidently Ryan heard directly from the CEOs and CFOs that they did not like the practice.
He predicted that there will be more, not less, regulation in the future, noting that “we are in the fourth inning”. Here’s hoping we aren’t tied at the end of nine…
What does this mean for you?
While I am frustrated at Ryan’s failure to mention health care costs and medical trend, his comments indicate a keen awareness of the importance of transparency and direct dealing. That is to his and his company’s credit.


State health care reform initiatives

USAToday reported that 19 states are considering some form of state-wide health insurance programs. While there is wide variation in the programs being considered by the legislatures, all seem to be in response to frustration with the lack of movement on the federal level.
Proposals range from Massachusetts’ initiative requiring all citizens to purchase health insurance to Florida’s child health insurance program to a universal health system in Maine. It will come as no surprise that many of these are simply studies by committees, are already dead, or have been referred to committee (and may never see the light of day).
That said, it is notable that many state legislatures and governors, ranging from conservative to moderate to liberal, are pushing for reform.
Many of the proposals deal with coverage for children, a politically popular move that has some basis in existing programs in a number of states.
Another sign that the momentum for reform is growing? I think so.
What does this mean for you?
Watch the bellwether states carefully, as successful initiatives often start there and move into the Federal arena (remember how Tommy Thompson got his publicity) .


What Aon’s Pat Ryan didn’t say

I have just returned from IRMI’s excellent Construction Risk Conference in Las Vegas. Interesting location for a bunch of risk averse people…
One of the keynoters was Pat Ryan, founder and chair of Aon Corp, the big broker. He gave a talk covering a wide range of topics, including Spitzer, contingent commissions, and transparency. What was notable to me was what he did not discuss, or even mention – health care costs.
I find this intriguing for a couple of reasons. First, what is more important today than health care costs? Health care costs are contributing to his clients’ risks in employee benefits, workers comp, auto, general liability etc. And, medical expenses in the property and casualty lines are increasing at a rate substantially faster than in group health (10-12% v. 8.2%). What could be more important, more significant, than health expense inflation?
Second, Aon is making a big push to become the expert in data mining, analytics, and assessment to better predict and manage “risk”; broadly defined. In this context, risk could include flood, wind, politics, etc. Since our focus here is on health care, we’ll stick to that. Unfortunately, Aon’s attempts to date to assess and evaluate medical expense in the workers comp world, at least the public reporting of same, reflect a dangerously superficial understanding of medical expense, providers, practice pattern variation, etc. (note – sources indicate Aon’s understanding is not any better when presented in private meetings..).
If this initiative is so important to Aon, why would it not be part of a speech to 1500 eager listeners, and why would it not incorporate even a mention of what Aon is doing to help customers deal with this to-date-unmanageable problem – health care cost inflation.
If Aon is all about managing risk, it better learn something about medical expenses soon. And the company sure can do a better job in presenting itself as an expert in same.
What does this mean for you?
Watch out for consultants that don’t understand what is really driving your claims costs.


Wal-Mart’s impact on Medicaid and local economies

Wal-Mart’s impact on health care costs, wages, employment and other indices will be the subject of a conference in Washington DC today. According to an article in Bloomberg, when the nation’s largest employer opens a store, it significantly impacts the local economy, with notable effects on Medicaid enrollment and expenses, the cost of staples (e.g. detergent, food), and wages. (Thanks to Peter Rousmaniere for the heads-up)
As one might expect, there is good and bad news to come. On the positive side, purchasers of goods from Wal-Mart get more for their money. On the negative side, wages drop both locally and in the areas that source the company’s goods; and governmental health care costs increase.
Here is an excerpt from the article.
” Another conference participant, Michael Hicks, an economist at the Air Force Institute of Technology at Wright-Patterson Air Force Base in Dayton, Ohio, studied Wal-Mart’s effect on government anti-poverty programs and found that Wal-Mart increased Medicaid costs an average of $898 per worker.
Medicaid Spending
Hicks found that a 1 percent increase in Wal-Mart’s market share in a state is accompanied by a 1.5 percent increase in Medicaid spending. Wal-Mart insures fewer than half its employees, many of whom cannot afford to pay for their own health insurance. Hicks found that government aid to needy families decreased by 3.3 percent with every 1 percent increase in Wal-Mart’s market share


Krugman on national health insurance

Paul Krugman, one of the Op-Ed writers appearing in the New York Times, has an interesting take on a solution to the national health insurance crisis (free subscription required). Those who follow Krugman will not be surprised that he is in favor of a national health insurance program. But put aside the ideological constraints and consider the rationale. Here are a few of his points.
1. Life expectancy and infant mortality in the US is lower than in Canada, Britain, Germany, and many other countries.
2. Health care expenditures in the US are 40% higher than the next most expensive country and twice what they are in the UK.
3. Access to elective procedures is better for some in the US compared to some other countries, and worse for others (e.g. the uninsured).
What Krugman misses is the impact of health care on productivity and functionality. He talks about outcomes in terms of life expectancy, and the impact on health maintenance of deductibles and copays, but has yet to make the connection between those issues and what matters to business; revenue and profit per employee.
He also does not opine on his preferred form of national health insurance; single payer as in the UK or multiple insurers as in Switzerland; or funding; tax-based v. employer v. individual v. combination. In my view, that’s smart. Once we figure out that we need a form of mandatory health insurance, then we can argue over the funding of same. But first we need to agree that health insurance should be mandatory.
My bet is within 3-5 years that will indeed be the consensus of American business, a goal of most in the middle class, and growing in popularity among elected officials. The myth is we can’t afford health care coverage for all; the reality is we are paying for health care for the uninsured every day in the form of higher premiums, higher taxes, and reduced productivity and higher Medicaid and Medicare costs.
What does this mean for you?
The sooner we can reach consensus that some form of national health care coverage is the goal, the better for US business, providers, and the middle class.


China’s workers compensation

Peter Barth presented an interesting overview of China’s occupational insurance situation at WCRI’s annual meeting yesterday. According to Dr. Barth, China passed a comprehensive workers comp law that took effect January 2004. WC is voluntary in the world’s most populous country, although employers that do not subscribe to the insurance program are required to pay the same indemnity benefits available through the program.
The employment situation in China is somewhat unique; a large percentage of the employed population works for government or military-owned firms; about half of the 800 million potential workers are in agriculture, and a large percentage of the remainder is employed by either small firms or foreign and domestic joint ventures. To date, 75 million are coverd by the state fund, which has a goal of 140 million by 2010.
Here are a few other highlights.
– the standard for an injury or illness is consistent with the US’; arising out of or in the course of employment
– premiums are in three bands, ranging from 0.5% of premium to 1.5%, with 2.0% for the worst case
– experience rating is in place, but a maximum of one point can be assessed for the worst risks
While the occupational health situation in China has been the subject of much negative attention, the inception of this state fund may well be the start of significant improvement. Much needed improvement.


WCRI UPDATE on Medical utilization in workers compensation back cases

Medical utilization trends were the subject of a presentation this morning. Here are some of the highlights which are based on research on back and neck injuries…
– use of MRI increased 11-14 points for non-specific back pain cases from 1998 – 2003.
– 40 pct of these cases had MRIs in 2003.
– the surgery rate for disc problems was stable over that period, although there was a shift in location with more performed in outpatient settings
– the typical back case received 4-7 more physical medicine visits over the 5 year period, driven almost entirely by trends in CA and TX


Report from the WCRI conference

Here are a few highlights from today’s WCRI conference
– medical cost growth from 01/02 to 03/04 was in the 8-12 pct. range, driven primarily by increased utilization
– there is a strong correlation between utilization and disability duration, with a 10 pct change in utilization associated with a 4 pct change in duration.
– early returns from CA indicate the recent reforms are having a significant impact on medical costs with a particularly large drop in physical medicine expenses (around 50 pct)
– a study by CWCI ( indicates that relatively few physicians’ treatment of claimants are consistent with ACOEM treatment guidelines. This particularly interesting as the new regulations state ACOEM’S guidelines are viewed as presumptively correct: they take precedence over the treating physician when there is a disagreement. The full study is available on CWCI’s site.
– MA and FL, two states with historically low physician fee schedules have disproportionally more complex office visits than the median state. This is consistent with other studies which indicate low fee schedules are associated with billing practices featuring a higher proportion of higher value services.


I’m posting this from the WCRI Annual conference in Boston. For those who have yet to attend, this is perhaps the best short conference on WC on the calendar.
Topics this year include workers’ satisfaction survey results and the correlation with costs and outcomes: pharmacy in WC (driven by the 3 new WCRI members who are PBMs): a session on medical guidelines with an excellent presentation by CWCI’s Alex Swedlow on early results of CA’s reform measures (and other topics) and more to come tomorrow.

Joe Paduda is the principal of Health Strategy Associates



A national consulting firm specializing in managed care for workers’ compensation, group health and auto, and health care cost containment. We serve insurers, employers and health care providers.



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