For small and mid-sized health plans, inefficient claim operations can be the largest driver of administrative cost and operational risk. Across the healthcare industry, administrative expenses account for roughly 10–11% of premium revenue, and profitability remains thin despite revenue growth.1
Why? Much administrative waste arises from outdated payer claim processing, with several persistent breakdowns that quietly erode margins, slow cash flow, and damage provider relationships.
Here are the top five areas that could be impacting your business.
Breakdown #1: Overreliance on Manual Processing
Manual claim intake, adjudication, and follow-up still dominate payer claim processing workflows, and the costs are staggering. Transaction costs average $12–$19 per claim and can reach $40 for complex claim, with rework further increasing costs.2 Smaller health plans face greater challenges due to limited staffing, as each human touchpoint slows down processing. Manual operations are no longer sustainable – error rates are higher, adjudication cycles are longer, staff burdens compound, and overall costs will continue to rise.
Breakdown #2: Fragmented Data and Disconnected Systems
Poor interoperability across claim, EDI, provider, and other systems is a major contributor to rising costs, inefficiency, and risk. Administrative costs account for roughly 25% of total healthcare spending, with a significant portion caused by disconnected systems.3 These expenses could be eliminated through administrative simplification, standardization, and better system integration. Siloed data causes processing delays and complicates cost management, compliance, and scalability.
Breakdown #3: Poor Claim Submission Quality and Rising Denials
Incomplete or inaccurate claim submissions contribute to industry denial rates of 10%–15%,4 with basic data-entry errors being a key factor in initial denials. Each denied claim triggers a cascade of consequences – rework, delayed cash flow, and heightened provider frustration. For small and mid-sized health plans, where provider experience is a competitive differentiator, persistent friction in the claim process can erode network satisfaction and impact retention in highly competitive markets.
Breakdown #4: Lack of Operational Resilience
Dependence on a single clearinghouse or minimally connected infrastructure creates significant operational and financial vulnerability for health plans. When a major outage occurs, claim submission and payment cycles can halt immediately, triggering cash flow disruptions that ripple across the organization.
The 2024 Change Healthcare outage underscored this risk, impacting a clearinghouse responsible for processing up to 50% of U.S. medical claims and disrupting payments industry-wide.5 In many cases, providers lost the ability to submit claims altogether, while payers faced immediate revenue interruptions and operational strain. In times of disruption, the absence of redundancy and diverse connectivity exposes smaller plans to increased financial and reputational risk.
Breakdown #5: Escalating Compliance and Regulatory Pressure
New regulatory mandates, such as CMS interoperability and prior authorization requirements, are adding significant complexity to health plan operations. These evolving rules require expanded, seamless data exchange, increasing the risk of audits and non-compliance penalties when processes fall short. At the same time, administrative costs across the industry exceed $80 billion annually,6 underscoring the growing burden of compliance and the need for better data exchange. For small and mid-sized health plans, upgrading operations can be more challenging. Limited IT and compliance resources make it difficult to adapt quickly, turning regulatory changes into a costly, resource-intensive strain on already constrained operations.
Why These Breakdowns Hurt Small Plans More
Many small and mid-sized health plans face structural disadvantages:
- Higher relative administrative cost burden
- Fewer staff to absorb rework and inefficiencies
- Greater sensitivity to disruption
- Limited IT resources and expertise to manage upgrades and compliance
Historically, smaller plans have consistently experienced higher administrative expense ratios than larger counterparts. What might be a manageable inefficiency for a large national payer becomes a material financial risk for a smaller plan.
What High-Performing Small and Midsize Health Plans Do Differently
Leading health plans are tackling these challenges by modernizing their claim operations. They approach automation of payer claim processing as a strategic investment to reduce costs, accelerate cash flow, improve provider satisfaction, and strengthen resilience in today’s margin-constrained market.
Interested in learning more?
SSI takes a consultative approach, partnering with health plans of all sizes to assess current operations and provide guidance to improve operational efficiency.
Contact us for a free assessment of your internal operations.
1. National Association of Insurance Commissioners. Health insurance industry: 2024 mid-year report (2024)
2. Sahni, Nikhil R., et al. “Active Steps to Reduce Administrative Spending Associated With Financial Transactions in US Health Care.” Health Affairs Scholar, vol. 1, no. 5. (Oct. 2023)
3. Sahni, Nikhil R., et al. “Administrative Simplification: How to Save a Quarter-Trillion Dollars in US Healthcare.” McKinsey & Company. (Oct. 2021)
4. Lagasse, Jeff. “Claim denials on the rise, complicating revenue collection, survey finds.” Healthcare Finance News. (Sep. 2024)
5. Siddiqui, Zeba. “Analysis: UnitedHealth could take months to fully recover from hack.” Reuters, Yahoo Finance. (Mar. 2024)
6. CAQH. “New CAQH Report Reveals Significant Differences in Administrative Costs.” CAQH, (Apr. 2024)
