US healthcare payments: Remedies for an ailing system
The nature of U.S. healthcare payments is in flux. This industry, which handles transactions worth some $2 trillion a year (Exhibit 1), has outgrown its traditional model and is now a major source of inefficiency and a barrier to innovation within the healthcare system.
So what seems to be the trouble? Despite recent advances in standardization and automation, healthcare payment processing remains highly inefficient thanks to industry fragmentation, complex payment terms, and extensive manual processing. As a result, about $300 billion a year – 15 cents of every dollar spent on healthcare – is lost on claims processing, payments, billing and revenue cycle management, and bad debt.
The industry’s infrastructure is also hindering innovation. The shift to a more consumer- centric healthcare model is changing the relationship between consumers, providers, and payors – a challenge that other countries with emerging private healthcare markets will also have to address. As consumers struggle to manage larger out-of-pocket liabilities and bad debt grows, providers are experiencing lower revenues and struggling to re-equip their business processes to better manage payments from consumers. In turn, providers’ lower revenue yields threaten payors’ contracted-provider discounts. These trends look set to continue even with the regulatory uncertainty around federal-level healthcare reforms, as employers shift cost to employees after years of high medical inflation.
Solutions to many of these challenges already exist. Numerous experiments are under way in the market to improve transparency and develop new capabilities within the healthcare payments infrastructure, and innovative companies are offering well-developed technical approaches. Yet adoption has been slow. Despite industry consolidation, few players have the market density to move the market in a new direction.
Nevertheless, we believe the momentum behind the consumer-centric model will soon reach a tipping point, and more and more players will be willing to adopt new solutions. In a sector where hundreds of billions of dollars of value are at stake, we foresee big changes in the coming years.
This originally appeared in McKinsey on Payments