The next wave of change for US healthcare payments
What are the prospects for an overhaul of the US health care payments system? The recent passage of comprehensive health insurance legislation only adds to the pressure for transforming the system that manages medical bills, claims, and payments. We foresee big changes in coming years, with billions of dollars of value at stake.
The June 2007 McKinsey Quarterly article “Overhauling the US health care payment system”1 argued that the greater “electronification” of health care transactions, 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. But we believe that major change in the payments landscape is inevitable because of fundamental industry dynamics, such as the proliferation and increasing complexity of health care transactions, the increasingly prominent role of the consumer in payments, and the rising importance of medical and financial risk management for providers. And the pace of change will only accelerate with the rolling out of the new health care law, as more individuals become insured and begin to generate more health-related transactions and industry participants face greater pressure to reduce administrative costs.
We acknowledge that there has been progress in improving the health care payment system. There has been a steady conversion to electronic-data formats, thanks to the adoption of standards across different transaction types compliant with the HIPAA2 (for example, claims submissions, eligibility checks, and remittance advice), along with the more widespread use of electronic formats and transaction-processing clearinghouses. We estimate that by 2012, about 80 percent of the projected eight billion core US health care transactions will be in electronic formats, excluding lab and pharmacy, which are already largely electronic.
Also, we have observed movement toward developing technical solutions to health care payments problems. There are numerous innovative approaches on the market aimed at improving the transparency and efficiency of payments, with companies offering products such as online bill-paying solutions, patient liability–estimation tools, point-of-sale consumer payments processing, and structured financing solutions. In addition, large health care IT players (for example, GE and McKesson) and a range of financial institutions (JPMorgan Chase and PNC Bank, for instance) continue to make significant investments in health care payments processing, while large payers and providers explore ways to partner to solve payments issues.
The transition to electronic formats, as well as technological innovation, has laid the groundwork for the more fundamental restructuring of health care payments outlined in the 2007 article. But there is still much work to be done: the system remains highly fragmented and inefficient, consuming a disproportionate share of dollars compared with payments systems in other industries. Unlike scale utility approaches that have emerged in financial services or telecommunications, innovative solutions in health care 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 latest estimates, putting enormous strain on provider economics. We will see more progress in coming years as industry participants address three major challenges.
This originally appeared in McKinsey Quarterly