Oregon Takes Lead in Insurance Cost Scrutiny

Health insurers will soon have to report every administrative cost from furniture to moving expenses
By: 
David Rosenfeld

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July 23, 2009 -- When Oregon regulators analyze insurance premiums next year, they’ll take a closer look at administrative costs than nearly any health insurance regulator in United States history.

 
Teresa Miller, who was recently named administrator of Oregon's  Insurance Division, understands the significance. She took pages of legislation passed this year, House Bill 2009, which dealt with administrative costs to a conference in June of the National Association of Insurance Commissioners.
 
And her colleagues were impressed. “I changed my airline ticket for the conference,” Miller said. “We’ve been talking about this for a couple of years now. I said, ‘Here’s the legislation we just passed.’ And they were very excited.”
 
The Division is now in the rule-making phase of what could become the country’s most progressive look at waste in health insurance.
 
The issue is somewhat arcane, but crucial to understanding one of the health insurance industry’s biggest justifications for millions of dollars in administrative costs, what’s known as medical-loss ratio -- the percent of premium dollars insurers spend on medical expenses. The remainder goes for administration or counts toward profit.
 
Oregon insurers spend on average 90 percent of premium revenue on medical costs. In other words, 7 cents per dollar is spent on administration, leaving about 3 percent average profit per year.
 
The figures seem to say insurers are doing a good job, keeping administrative expenses at a reasonable rate. The only problem is this: Over this same time period, premiums have skyrocketed more than 10 percent every year because of factors unrelated to administrative burden.
 
Miller says the framework is flawed: The way regulators and insurers have justified administrative costs for all these years is wrong.
 
“Why would administrative costs stick to premiums?” she said. “They shouldn’t. The cost drivers just aren’t the same. It doesn’t make any sense to attach administrative expenses to the rest of the rate filing that’s going to go up at medical inflation rates.”
 
Miller doesn’t want to give the impression state regulators haven’t considered administrative costs before. “We have. Just not in this way.”
 
Aided by recommendations from the Oregon Health Fund Board, Miller fought to take a detailed look at insurers’ costs, down to how much they spend on office supplies. And they got it.
 
The goal is to keep increases in administrative costs to no more than the Consumer Price Index, typically 3 to 4 percent per year, as a separate measure aside from premiums.
 
Administrative expenses will be broken down into the following categories over the next five years: advertising, commissions, dues, employee benefits, housekeeping, marketing, office supplies, postage, rent, salaries, taxes and utilities.
 
Missing from that equation is utilization, according to Mike Becker, a lobbyist for Regence BlueCross BlueShield.
 
But in terms of hospital admissions, inpatient days, and outpatient visits, from 1999 to 2007, Oregon’s utilization rates have remained relatively even, based on figures compiled by the Kaiser Family Foundation.
 
"This is not about healthcare reform,” Becker told the House Health Care Committee earlier this year. “This is about untested experiments. Nowhere in the country has this degree of rate regulation been applied."
 
From 1996 to 2006, average health insurance premiums in Oregon nearly tripled, from $371 per month for a family to $968. Over the same period, health insurance enrollment remained about the same.

If increased utilization is not to blame, then insurers must be dealing with more members, but that isn't true either.

Regence, the state’s largest insurer with 750,000 members – down from 1 million through most of the decade – showed administrative costs fluctuated dramatically without relation to enrollment, based on financial data submitted to the state.

In 2004, Regence spent $141 million on administrative costs with 985,000 members. Enrollment remained relatively the same over the next three years, but administrative costs dropped $23 million, rose $45 million, then jumped $20 million.

Regence lost 250,000 members in 2008, yet administrative costs returned to the same level as when the health insurer had more than 1 million members.

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Take Action

To get involved in the rulemaking process occuring November or December in Salem, contact Sue Monson at 503-647-7272. Ask about administrative rule number 836 called Health Insurance Public Review and Confidentiality of Filing Documents.
 
See related story about an ongoing rate review dispute over Regence.
 
To review health insurance rate filings click here.
 
See related stories on insurers' financials here and here, as well as full reports by state regulators here.
 
To request an external review (anyone can do it) contact an insurance advocate toll free at 1-888-877-4894 or e-mail: cp.ins@state.or.us.
 
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