A.M. Best Special Report: Administrative Costs Outpace Revenues for Provider-Owned and Affiliated Health Plans.

OLDWICK, N.J. -- Administrative expenses grew faster than revenues over the past five years for provider owned and affiliated health plans, according to a new special report from A.M. Best Co.

These plans increased total administrative spending in aggregate 54.7% over the past five years from $2.32 billion in 2001 to $3.59 billion at year-end 2005. Comparatively, revenues increased in aggregate 46.6% from $23 billion to $33.8 billion over the same period.

The rate of growth varied significantly over the years, with a jump of more than 11% in expenses in 2004. That year shows a clear jump in spending in the "outsourced services including EDP" category. This category's percentage of total administrative expenses increased almost 3%, while the next largest increase was 0.55% in "salaries, wages & other benefits."

Expenses for HIPAA preparedness likely were one of the main reasons for a jump in administrative spending in 2004, while revenues grew at a steadier pace.

The administrative expense ratio has also increased over the past five years, following the overall trend and contributing to compression of this segment's underwriting margin. The average administrative expense ratio increased from 11.63% of revenues in 2001 to 12.28% at year-end 2005. A.M. Best does not expect the administrative expense ration to increase significantly in the medium term, following mid-year 2006 results.

Top-quartile companies in the industry have an administrative expense ratio of about 8%. For the most efficient carriers, this has remained relatively stable, going from 8.74% in 2001 to 8.56% in 2005. Companies at the less efficient end of the spectrum support administrative expense ratios of about 15%.

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Founded in 1899, A.M. Best Company is a full-service credit rating organization dedicated to serving the financial services industries, including the banking and insurance sectors. For more information, visit www.ambest.com.