Revisiting healthcare payments: An industry still in need of overhaul

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In an article, “Overhauling the US Health Care Payment System,” published in June 2007, we argued that greater electronification, the growing adoption of standards, and increasing innovation by cross-industry entrants would lead to a major restructuring of the US health care payments value chain. Two and half years later, we are still waiting for that massive overhaul.1

But we do see progress. There has been a steady conversion to electronic formats thanks to the adoption of standards across different HIPAA-compliant transaction types (for example, claims submissions, eligibility checks, remittance advice) and the increasing use of transactionprocessing clearinghouses for facilitating transfers and electronic formats by physician practices. We estimate that by 2012, about 80 percent of the projected 8 billion in core US health care transactions will be in electronic formats, excluding lab and pharmacy, which are already largely electronic.

Progress has also been made in developing technical solutions to wholesale and retail health care payment problems. There are numerous small-scale experiments under way to improve the transparency and efficiency of payments and innovative companies are offering approaches such as online bill paying solutions, patient liability estimation tools, “hotel model” point-of-sale consumer payment processing, and structured finance solutions. In addition, large health care IT players (for example, McKesson and GE), and a range of financial institutions (JPMorgan Chase, PNC Bank) continue to make significant investments in health care payment processing while large payors and providers are exploring ways to partner to solve payments issues.

The transition to electronic formats and technological innovation has laid the groundwork for the more fundamental restructuring of health care payments we outlined in our 2007 article. But an overhaul still awaits. The system remains highly fragmented and inefficient, consuming a disproportionate share of health care dollars compared with payment systems in other industries. Unlike scale utility solutions that have emerged in financial services or telecom, innovative solutions have failed to take hold at scale either because of misaligned incentives among stakeholders or because few players have the local market position to drive adoption across a fragmented provider community. And consumer bad debt continues to rise, resulting in more than $65 billion in uncollected revenues in 2010, according to our estimates.

So what are the prospects for an overhaul of the payments system in the next two to three years? Health care reform could accelerate the pace of change, especially administrative simplification provisions that are likely to be on the table even if a comprehensive package goes nowhere. Yet even without reform of any kind, we foresee big changes in the coming years, with billions of dollar of value remaining at stake.

This originally appeared in McKinsey Quarterly

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  1. See “Overhauling the U.S. healthcare payment system,” The McKinsey Quarterly, June 2007.