Medicare’s lesson for health insurance reform

While claims review is useful to control utilization and to prevent fraud, the system requires the expenditure of remarkably large amounts of money to avoid paying (by the insurance company) and to assure getting paid (by the provider). Providers are squeezed, and patients — even well-insured middle-class patients — are too often denied necessary care.

All have to suffer through a bureaucratic maze.

There is an alternative. In fact, it is already in place for the millions covered by Medicare. Without adopting single-payer or a public plan, we can apply the best elements of Medicare to private insurance. Doing so will impose major change on private insurers, but could ease the bureaucratic burden that seems to increase every year.

Insurers market insurance, collect premiums, and invest premium dollars. On the other hand, insurers must pay claims, and “manage” claims payments by conducting what’s called “claims adjudication” — namely, determining whether a claim is complete, timely, and “covered.” The more paid for claims (what the insurance industry calls “medical loss”) the less is retained as profit.

When insurers had little involvement in coverage decisions, but generally paid claims as submitted, the lack of controls encouraged excessive spending. As insurers tried to control cost, claims adjudication became complex, delayed and demoralizing. By one estimate, physicians spend approximately 14 percent of revenues on billing and insurance functions (hospitals spent 7 to 11 percent; insurers, 8 percent). Combining these amounts for physicians and insurers yields a cost of 22 percent.

Such a high level of transaction costs would not be tolerated in other businesses. Imagine paying $6,600 in administrative costs to purchase a $30,000 car, and doing so every year, on top of the aggravation involved, with the possibility that the price could change if the paperwork is not perfect.

The insurance market has another serious problem: informational asymmetry between buyers of insurance and the insurance plans. There is no readily available, reliable data on insurer “quality as a payer.” Purchasers cannot compare insurers’ errors, payment delays, or the dissatisfaction of beneficiaries or providers. Real competition is hampered.

A claims clearinghouse could alleviate the worst of these problems. It would be one or more private contractors hired by the federal government (probably assigned regionally), similar to the contractors that now operate Medicare. It could be a separate corporation (not controlled by any one insurer, to avoid conflicts of interest), a not-for-profit corporation, or it could operate as a “utility.”

Claims would be submitted to the clearinghouse, not the insurer. The clearinghouse would coordinate coverage sources, allocate the obligations of payers where more than one is responsible, and determine co-payments. Payment would be made electronically.

Beneficiaries would have the right to dispute resolution and independent appeals. Contract renewal could be based on reliability, efficiency and accuracy.

Some may object that this is too radical, or risks higher costs and less choice. We submit that replacing the existing chaotic, user-unfriendly system with private contractors (that might even include the very same insurers, but stripped of their incentive to deny claims) is not radical. Nor does standardizing the payment process result in socialized medicine.

Independent insurers will still compete on price, benefits, quality of network, wellness programs, and so forth.

Reduced transaction costs could have other benefits. For example, greater reliability of payment with less delay and fewer arbitrary denials could reduce provider charges, even while maintaining insurer profitability. Some providers might even be encouraged to sign up with more plans, improving access. Cost-savings could be enormous (even a one percent reduction in administrative cost is worth tens of billions).

While no system of claims adjudication is perfect, this kind of contractor system used by Medicare is efficient. Medicare’s administrative costs were recently calculated to be 5.2 percent, whereas private insurer administrative costs fall between 8.9 percent and 16.7 percent. This does not even capture the benefit of reduced stress on providers and patients, who would interact with only one claims adjudicator, instead of many.

It is far better to pay providers to render care than bureaucrats to find ways to deny claims. Whatever you prefer for the future direction of the healthcare system, the healthcare clearinghouse is a useful, perhaps necessary, precursor.

Kornreich is a partner in the Health Care Department of Proskauer Rose LLP and chairman of the New York State Bar Association’s Health Law Section. Goldfield is a senior counsel in the Health Care Department of Proskauer Rose and an adjunct professor at the Columbia University Mailman School of Public Health.