Healthcare Payments Plumbing - Part 2
How do financial transactions between payers and providers work?
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There was a slight glitch two weeks ago. Sorry if you were unable to read part 1! Here is the post on Administrative transactions from Healthcare Payments Plumbing - Part 1
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Administrative and billing complexity is a $400 billion problem in healthcare. The Council for Affordable Quality Healthcare (CAHQ) publishes an annual report estimating the costs and savings associated with transactions in the healthcare industry. Highly recommend checking it out. This series of posts takes a deeper look at these transactions. In Healthcare payments plumbing - part 1, we looked at the administrative transactions between payers and providers. In part 2, we will look at financial transactions, i.e., the stuff that needs to be in place for money to change hands from payers to providers. Spending money to move money inefficiently is dumb. Let's fix it. (I know … easier said than done)
The operational mechanics of moving money in healthcare are the same as the rest of the economy, with some unique quirks. Let's first look at how money moves in the broader economy.
There are many parallel ways to move money - cash, checks, credit, electronic funds, etc. They exist in parallel because they each have their pros and cons. Each method can vary in speed, security, privacy, cost, convenience, volume, and value of a transaction. The popularity of these methods also varies across consumers and businesses. For the most part, at least on the business side, cash gave way to paper checks, and paper checks gave way to Electronic Funds Transfer (EFT). EFT is an umbrella term that includes - ATMs, Credit Cards, Debit Cards, Virtual Cards, Direct Deposits, Wire Transfers (domestic), SWIFT (international wire transfers), e-Checks (where you take a picture of a check and upload it), and the Automated Clearing House (ACH) network. More recently, cryptocurrency has also emerged as another parallel way to move money.
It is safe to assume that unless you run an illicit business, almost all major B2B financial transactions are on a non-cash basis. The three major non-cash categories are card, check, and ACH. ACH is quickly becoming the de facto mode of electronic funds transfer across the economy. Internet transactions, Direct Deposits, Healthcare Payments, Peer to Peer Money transfers (like Venmo, cash app, etc.) all run on the ACH network. The ACH network is maintained by the non-profit National Automated Clearing House Association (NACHA) and connects over 14,000 financial institutions. The share of ACH by volume and by value is rising rapidly. In 2021, the volume of ACH transactions grew by almost 9% to 29 billion, and value increased by more than 17% to over $72 trillion. ACH has traditionally been the slowest but cheapest way to move money because it is done in batches rather than in real-time. The speed of transactions is improving and in some cases, transfers can even happen on the same day rather than 2-3 days it used to take. The sender's bank aggregates transactions and sends them out at regular intervals during the business day to an ACH operator (Federal Reserve or the Electronic Payments Network), which sorts and submits the transactions to the receiving bank account. The only thing needed is the banks routing number, account number and in some cases, an ACH authorization form. Once it is set up, the money can start flowing without any manual processing.
Back to healthcare
Once an insurance claim has been adjudicated, i.e., after it has gone through the administrative process we looked at in Part 1, the payer (health plan, third party administrator, patients, etc.) will release funds to reimburse the provider for the care delivered. The funds are released by payers via check or EFT. Payments via checks are all too familiar, so we won’t focus on those here. We will mainly discuss ACH/EFT.
Healthcare's third-party payment system sets it apart from the rest of the economy. The Division of Financial Responsibility (DOFR) between different payers (plan sponsor, employer, insurer, patient, etc.) depends on the healthcare benefits design (deductible, co-pay, co-insurance, etc.) - a topic for another post. The lack of clarity on accurate, up-to-date DOFR, combined with the lack of predictability in healthcare services required, makes it difficult for providers to determine payment responsibility at the point of service. Providers have to offer services, accept the liability and look to a third party (insurers) for payment assurance. In fact, payment assurance is the basis of the relationship between payers and providers.
The payers' administrative and financial capabilities impact administrative costs incurred and time to collect revenue for the provider. Change is slow in healthcare, but the "Administrative Simplification" mandate has provided the nudge to a faster transition to electronic payments to lower costs and speed up transactions. Payers have to comply with provider requests for payments via EFT. The most common EFT format for healthcare is via ACH according to HIPAA Transaction Standard: NACHA Corporate Credit or Deposit Entry with Addenda Record (CCD+). Here's a comparison of available payment options for providers and how they stack up against each other.
ACH/EFT adoption is growing over time, but surprisingly many medical and astonishingly large numbers of dental payments are still manual. The choice of payment method has its implications on cost and speed. For instance, checks can take 6 minutes to process, while electronic payments only take 2 minutes per claim. Those minutes add up when you account for the administrative burden of processing payments for hundreds of millions of claims, the medical and dental industry combined could save almost $900 million simply by switching to electronic payments.
However, the inertia to switch to electronic means isn't isolated to claim payments. It's pervasive across administrative and financial workflows. The Council for Affordable Quality Healthcare (CAHQ) Index tracks the adoption of administrative transactions related to verifying insurance coverage, obtaining authorization for care, submitting a claim, attaching supplemental information and sending and receiving payments. The index estimates that the higher costs for processing manual transactions compared to electronic transactions presents a $20 billion cost savings opportunity.
When providers switch from paper to electronic, they get faster payments, improve cash flow, can better manage denials, eliminate the risk of lost checks, and automate data entry and reporting. Providers could save a combined $800 million by adopting electronic workflows for claim payments.
Payers stand to benefit too. When they switch from paper checks to ACH, they can process claims and complete payment cycles faster. They reduce administrative frustrations like phone calls, missing checks, and stop payments. Large plans processing hundreds of millions of claims can save tens of millions of dollars by switching to electronic payments.
Payers are required to offer electronic payments under Administrative Simplification. The sluggishness from providers is because providers need to provide each individual health plan with bank information which can take up a significant amount of upfront time and resources. Standardized forms and databases for EFT enrollment do exist and are helping increase adoption. For example, EnrollHub (shut down in Feb 2022) and EnrollSafe are databases built to make it easier for providers to designate health plans that should receive the provider's banking information in just one place.
To summarize, the relationship between health insurance companies and providers is primarily based on payment assurance. The payment transfer mechanism used by payers and providers has a direct impact on cost and speed of transactions. Electronic payments via ACH have increased the speed and lowered the cost of accepting payments for providers. Still, there are opportunities to improve efficiency of payments by increasing adoption of ACH/EFT amongst providers.
Division of financial responsibility and consumer-driven healthcare is changing dynamics for payment methods. As more healthcare costs are pushed towards consumers, providers are worried about the uncertainty of payment and administrative effort required in collections. In part 3, we will take a look at why providers are exploring alternative methods such as patient-friendly payment portals, discounts for upfront payments, buy now - pay later models, D2C healthcare, etc., to operate during a time of changing payer mix.
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This is an important analysis - Benefits Verification, Prior Auth, and payment transfers are a burden on a lot of practices, and often when we flip it to payors - they see upcoding/billing issues, and offering services without prior auth as some of the thorny points that extend the life of an episode/transaction. A lot of private practices also run on low to no profit margins - ACH transaction fees matter to them and add to that the problem of accounts receivables sitting at 60-90 days which means they often need to borrow money to cover monthly operational costs (a lot more prevalent in rural settings), this can make tech adoption a luxury for them. Would love to hear your perspectives on what policy changes/incentives can drive such an adoption.