High labor costs, increased plan-provider interactions for claims denials, increased vendor management, and regulatory changes have all contributed to these growing administrative costs.

Labor makes up a large portion of health plans' administrative costs. Currently, around 60% of a health plan's non-medical costs are labor-related.²

An increased reliance on third-party vendors has also raised health plans' administrative costs. On average, payers work with two to seven vendors, with an average cost of $250,000 per vendor. ⁵ According to a HealthEdge survey of 100 health plan leaders, the top challenges of working with third-party vendors are high costs, lack of innovation and upgrades, and limited savings and value.⁶

As the new administration continues to make regulatory changes in healthcare, health plans face an uncertain political environment. Based on where federal and state policies land, plans will have to change their current workflows, incurring greater administrative costs.

At the same time, medical costs have also risen, especially due to recent spikes in utilization from patients seeking care they originally delayed during the pandemic.⁷ This utilization increase has impacted health plans' finances, with quarterly medical loss ratios growing to over 85% for many large insurers.

High administrative costs can also impact an organization's outlook and strategy.² Excess administrative expenses can prevent organizations from focusing on strategic and operational priorities that could improve payer efficiency, boost growth, and enhance benefits for customers.

Although many factors impacting health plans' finances are outside of their control — including growing utilization rates, lower reimbursement, and an uncertain policy environment — plans can directly address administrative costs.

How to effectively manage administrative costs

Health plans have several potential areas where they can reduce administrative costs, including product sales/rationalization, enrollment and billing, call center management, claims processing, customer service, and regulatory and contractual compliance and risk adjustment.

Of these areas, claims processing, billing, and customer service have the largest cost reduction opportunities. One simple example is in fulfillment costs — plans should go through their mailings and think about what is legally mandatory and what could be cut.

To manage administrative costs, plans should take these five steps:

1. Go paperless. Digitizing member and provider fulfillment and communications can reduce manual work, create faster turnaround times, decrease the use of prints/postage, a create a more consistent experience for consumers.
2. Transform operations with smart AI. Health plans that leverage AI and intelligent automation can transform their daily plan operations. Using these technologies helps drive labor efficiency and top-of-license work while powering re-engineered business processes and resource allocation.
3. Integrate compliance. By embedding proactive compliance controls and audit readiness into core workflows, organizations can reduce their regulatory risk and penalties. This can also improve an organization's financial positioning and helps them prepare to comply with new and ongoing requirements.
4. Operate with scale. Health plans should eliminate structural inefficiencies in their roles, workflows, and enabling technologies. Reducing bloat and redundancies helps adjust operational capacity to business demand, and redesigning organizational structures allows plans to flexibly scale without proportional cost increases.
5. Evaluate partnerships. Health plans should work to maximize their vendor contract value and accountability. Doing so will rationalize third-party spend, eliminate waste, and strengthen partner relationships to support organizational performance.

Results

These strategies have helped organizations achieve significant results, including:

• A 30% to 40% increase in efficiency through benefit digitization and contract intelligence generative AI initiatives
• An estimated five-year savings of $65 million to $80 million through an AI-enabled services partnership across six AI/automation tracks
• An estimated five-year savings of $3.7 billion through organizational redesign to drive operational excellence
• An estimated in-year savings of $20 million through a payment integrity vendor assessment

Although these strategies are aimed at reducing administrative costs, they can also lead to broader benefits for health plans, including more accurate payment, increased workforce efficiency, and an improved member experience.

Final thoughts

Addressing administrative costs continues to be a high priority for health plans, having a significant impact on payers, providers, members, and patients. By reducing administrative costs, health plans can better support their growth agendas and overall operations, improve your customer experience, and uphold their value.