Due to a new limit on administrative overhead being imposed on health insurers, the low cost of overseas medical care may now work against health insurance companies including it as part of their health coverage. But if larger overseas medical facilities are able to take on some of the administrative cost themselves, it may be possible to limit the impact of this provision and — to the extent others are not — gain an advantage over their competitors.

The new health care law adds a new Section 2718 to the Public Health Service Act setting out that health insurance companies, starting in September 2010 and through the end of 2013, will be required to refund all enrollees the amount by which premium revenue expended for non-claims costs exceeds 20% for group policies and 25% for individual policies.

If anything, administering an overseas medical program would be more costly than handling domestic claims. But if the administration costs are identical on a per-procedure basis, the ratio of administrative costs to claims-payments begins to curtail the potential savings.

As an example, if a cardiac procedure in the U.S. costs $40,000 for the procedure and $10,000 to process, the insurer is then at the limit of its administrative overhead and would owe no refund to policy holders. If, however, that patient can be sent to India for a procedure costing just $20,000, the ratio of administrative costs change substantially. Instead of an acceptable $5,000 in administrative overhead (i.e., 20%), with no administrative savings by the insurer, it now has to bear 33% overhead (i.e., $10K overhead on a $20K procedure).

At the margin, fully $5,000 of the $20,000 in savings would have to be refunded to policy holders. While the health insurer would save money overall, the cost advantage of taking the procedure overseas is dramatically limited by this provision. Indeed, individual states would be allowed to set the percentage of allowable administrative overhead at less than 20%.

The federal regulations will indicate how this provision is implemented, but to maintain their competitive advantage, overseas medical tourism providers should begin to consider how to take on more of the administrative functions now operated by insurers. But to the extent the federal regulations allow it, insurers will almost certainly look to limit their exposure to this penalty reimbursement clause. A smart insurance company will look for ways to outsource administrative costs along with the medical procedures themselves. A savvy medical tourism provider looking to keep their competitive advantage will do what they can to assist them.