The War on Administrative Costs

Commenter R. J. Lehmann says:

Actually, the single biggest change among the details of the proposal that have been revealed thus far is the change in the minimum medical loss ratio from 85% to 90%. 85% would be a tough hurdle for most companies, because generally speaking, a 15% administrative ratio (your costs for marketing, technology, regulatory compliance, fraud monitoring, staff salaries, etc.) is industry standard. But there are a few insurers with administrative ratios in the low single digits, and they would stand benefit competitively -- add your administrative ratio + 85%, substract from 100%, and that's your margin.

90%, on the other hand, just won't happen. Nobody, for-profit or non-profit, puts up administrative ratios below 10%.

I'm all for efficiency, but the obsession with administrative cost ratios is getting completely out of hand--not just in health care, but also in charities.  Sure, there are bloated bureaucracies that cost too much--but there are also good managers that save money.  The percentage of income devoted to administration is not a very good guide to which kind you have encountered--after all, the more effective managers are at reducing other expenses, the more administration will grow as a percentage of total expenditure.  In this vein, while slashing administrative costs is one way to deal with demands for a lower overhead percentage, another way is to inflate your other costs.

It's gotten to the point where no one wants to fund overhead in charities--they want their money to go to "useful purposes".  But even the leanest charity cannot operate without staff, offices, computers, and so forth, and starving those for resources is not "useful work".  

Similarly, the correct loss ratio for insurance companies is not 100%, any more than Google would be a more effective company if it fired everyone at headquarters and spent every penny on programmers and servers.  This kind of mindless ratcheting is like those fine fellows who think that if one splash of cologne is alluring, eight splashes must be even sexier.

Then he gets all surprised when the targets of his attention slowly choke to death.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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