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Insurance Administration Costs Centers Big Dollars
August 2007

Patrick Kirse, CFO, The Watershed

Cost of Payor Paperwork is Far Higher Than in the Rest of the Healthcare Industry

The Watershed Treatment Programs, a 200-bed inpatient provider based in South Florida, is one of the few private treatment centers left that still garners the vast majority of its revenues from commercial insurance payors, about 80 percent, according to company executives.

And, until recently, a very large chunk of those commercial payor dollars came from health insurance giant UnitedHealth. But a couple of years ago, the Watershed began to experience a substantial payments slowdown from UnitedHealth, which was to presage a big dispute between the two that has ultimately resulted in the Watershed filing suit against the insurer.

As the dispute unfolded, the Watershed began to liase with Ingenix, a unit of UnitedHealth which helps UnitedHealth, and many other insurance companies, screen claims from providers. "Ingenix began a series of retroactive reviews of claims that we believe had already been approved," says Patrick Kirse, the Watershed's CFO. "These reviews ultimately be came quite onerous and very expensive."

According to the Watershed's lawsuit, the expenditures associated with the reviews were quite large indeed, with costs from photocopying alone estimated at an astounding $350,000.

The Watershed's recent experience is a prime, albeit extreme, example of the big spending associated with managing relationships with insurance entities within the treatment industry, where insurance administration costs appear to be far greater than in the rest of the healthcare industry.

Data put together in 2001 by SAMHSA, MEDSTAT and the Lewin Group consultants indicate that treatment providers spend about $1 billion a year on insurance administration from commercial payors and government insurance programs like Medicaid and Medicare. That works out to about 15 percent of the $6.7 billion in revenues centers received from these payors. In the overall healthcare industry, administration costs as a percentage of revenues from these payors amounted to just 9 percent.

Executives at centers which do substantial Medicaid and Medicare business, players like Liberty Management CEO Bill Hartigan, point out that administration costs associated with the government insurers are fairly modest. This may mean that the lion's share of administration costs in the treatment industry are being borne by those who do business with the commercial payors, which many in the industry believe imposed onerous utilization review requirements post managed care even as overall payouts to the industry were cut.

And, indeed, the data does indicate that there has been a very large jump in insurance administration costs post managed care for treatment providers. In 1987, just prior to managed care, treatment centers spent only 8.5 percent of revenues from insurance entities on administration, compared to 15 percent in 2001. In other words, the insurance administration burden for treatment providers has almost doubled in the post managed care environment.

John Leipold, COO, Valley Hope AssociationJohn Leipold, COO of non-profit powerhouse Valley Hope Association, knows all about the costs imposed by managed care. Valley Hope, also one of the few providers left that gets the majority of its revenues from commercial payors, had enormous increases in costs with managed care. According to Leipold, those cost increases threatened Valley Hope's low-cost model of treatment and its mission of delivering affordable care to America's middle class.

"Our response was to invest in an IT system that automated insurance paperwork, from the counselor all the way to billing," Leipold says. This year, Valley Hope took its internal IT system commercial and, through its VHAIMCSS software subsidiary, is selling the system to centers. "For those who have big relationships with the payors, our system is ideal because it was built to reduce those costs." PD

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