Signature
ACR = A / D
| Inputs | Definition | Unit |
|---|---|---|
A | Administrative cost of the payer or system over the period, for example claims processing, utilisation review, fraud prevention, broker commissions and overheads for an insurer, or health accounts function HC.7 for a country | currency, for example millions of dollars |
D | Premium revenue, total payer spending or current health expenditure for the same period and in the same currency as A | currency, for example millions of dollars |
ACR | Share of the denominator used for administration over the period | proportion, usually reported as a percentage |
|---|
Function
Administrative cost ratio function for payers and health systems
Maps the administrative cost of a payer or financing system over a period, and a measure of the money it handles over the same period, to the share of that money used for administration rather than claims or care. The general form allows any denominator. The applied formulas fix it as premium revenue, total payer spending or current health expenditure, and set the ratio beside the United States medical loss ratio, its complement and the rebate that follows from it. Notation follows the Administrative Cost Ratio article.
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Implementations
Excel
Administrative cost ratio in one cell
Excel returns the ratio from named cells holding administrative cost and the chosen denominator for the same period. The cell can be formatted as a percentage.
=AdminCost/Denominator
Assumptions
Matching period and boundary for administrative cost and its denominator
A and D cover the same period and the same payer or system, and the numerator follows one stated boundary: whether profit or surplus, quality improvement, care management, broker commissions and marketing are counted as administration, and whether vendor administration has been taken out of claims. Each of these choices moves the ratio.
Payer administration only in a health accounts administrative cost ratio
When A is health accounts function HC.7 and D is current health expenditure, the ratio covers governance and the administration of financing. Administration inside hospitals and practices is counted within the care those providers deliver, and patients' own paperwork is excluded, so the ratio does not measure the total administrative effort of the system.
Worked examples
Administrative cost ratio on premium for the illustrative insurer
The article's hypothetical insurer in the United States individual market spends $60 million on administration and earns $500 million in premium over one year, so 12.0% of premium goes on administration. All figures are illustrative.
A = 60; D = 500; ACR = 0.12
Administrative cost ratio on total spending for the illustrative insurer
The same insurer spends $382 million on claims, $10 million on quality improvement and $60 million on administration, $452 million in all. Administration over total spending is about 0.133 (13.3%), higher than the ratio on premium because the insurer collects more in premium than it spends.
A = 60; D = 452; ACR = 0.133
Administrative cost ratio after the illustrative cut in claims control
The insurer cuts utilisation review and fraud prevention by $5 million, so administration falls to $55 million and the ratio on premium falls to 11.0%. Claims that would otherwise have been stopped add $12 million, so covering the same members costs $7 million more.
A = 55; D = 500; ACR = 0.11
Common errors
Comparing administrative cost ratios built on different denominators
For the article's insurer, administration over premium is 12.0%, administration over total spending is 13.3% and one minus the medical loss ratio is 18.3%. A gap between two figures built on different bases, or between a figure that includes profit and one that does not, says nothing about which payer runs at lower cost.
Reading a lower administrative cost ratio as greater efficiency
In the article's example a $5 million cut in claims control lowers the ratio on premium from 12.0% to 11.0% while claims rise by $12 million. The ratio sets one input against a scale variable: administration that cuts claims by more than it costs raises the ratio, and a rise in provider prices lowers it with no change in administration.
Sources
OECD comparison of administrative spending as a share of health spending
OECD. Tackling Wasteful Spending on Health. Paris: OECD Publishing; 2017. Chapter 6, section 1: administrative spending as a share of health spending across OECD countries, administrative costs of private health insurance schemes as a share of their spending, and Box 6.1 on differences in how countries value the administration of private insurers.
Health accounts boundary of governance and financing administration
OECD, Eurostat, World Health Organization. A System of Health Accounts 2011: Revised Edition. Paris: OECD Publishing; 2017. Chapter 5, function HC.7 (governance and health system and financing administration), including the exclusion of providers' own administrative costs, and Chapter 4 on administration embedded in the care functions.
Canonical Identity
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