Healthcare Claims Processing

The healthcare claims adjudication process in the United States—A picture is worth a thousand words

Health economists analyzing a single payer system don't account for enough of the savings derived from the elimination of our chaotic claims processing methods. These comparative images, one from the US and one from Canada, give us something to think about.

By Henry Broeska- Oct 1, 2019- Irvine, California

We already know that Canada’s healthcare costs across the board are cheaper by half. And we know that Canadians don’t pay personal premiums, co-pays, or anything out of pocket for their basic medical care, and that includes hospitalizations. So how can Canada cover everyone and do it for less? How do they keep their costs so low given that the US sets the standard for engaging the most advanced time-saving technologies to drive efficiencies in business?

One of the most powerful visual aids I can imagine to illustrate the administrative difference between Canada and the US is in the area of individual and employer sponsored health insurance 'claims processing.' Claims processing is the receipt and adjudication of a claim for a medical service filed by the insured against a third-party insurer, often through a clearinghouse. Claims are accepted or rejected by a Payer based on the member’s insurance policy. In the US, over 160 million people have their claims adjudicated by private Payers on behalf of millions of employers’ group plans or through individually-owned plans. 1

The commercialization of health insurance creates an almost endless number of different contractual terms and conditions. Each different company processes claims in its own unique way, usually with its own software system. Millions of claims are transacted daily in the US. Each claim can trigger hundreds of actions based on extensive rules and regulations. Insurance companies and clearinghouses designed to help manage claims process many trillions of these actions each year.

This ponderous variability across multiple stakeholders makes the US claims payment infrastructure the most complex, the most expensive, and the least efficient claims processing system anywhere in the world. It’s also the reason why the US consumes at least twice as much healthcare administration as any other comparable industrialized country.

Fig 1. (below) depicts the Rube Goldberg-esque processing method we've developed in the United States to adjudicate healthcare claims. This image isn't meant entirely to be a lampoon of the system ― it's a true representation of the actual system we use. In fact, the illustration doesn't include nearly enough features; there are layers upon layers of processes and rules that sit below what is shown on top.

Fig 1. US Healthcare Claim System Payment Infrastructure

Claims Processing in the US

No matter how someone is insured, once they enter the Provider’s system their data must be accounted for somehow, and that’s all reflected in the claims process. Every claims processing software system on the market must attempt to accommodate every possible claims scenario. Most Providers (physicians, clinics, hospitals, etc,) need to be able to claim against each Payer, not just the ones in their ‘network.’ Many claims interact with different programs including Medicare, Medicaid, the VA, and the Affordable Care Act. In addition, different states have different rules and different public and private funding sources. The Payers within those programs all have different claims formats. Providers who send in claims on behalf of their insured patients, must format each claim differently depending on their contract with that Payer, the patient's insurance and the applicable state laws.

Over recent years, with the advancement of internet connectivity and electronic technologies (otherwise known as ‘health information technology’ or HIT), health insurance companies have tried to speed-up their floundering adjudication processes through more automation. 2 In an attempt to expedite the adjudication process, insurance companies expanded their administrative divisions and technological capacities by building in-house solutions and/or by contracting with third-parties like Cerner, Epic, or McKesson among others. Each of those companies offer their own different technology services and process solutions related to billing. Ultimately, more proprietary automation has only exacerbated the adjudication challenge because no two companies use common technology solutions.

The Holy Grail for all stakeholders has been ‘real-time adjudication’ (RTA), just like credit cards, but nobody has yet to demonstrate an RTA model for healthcare claims that works effectively. And there’s a good reason why it can’t be done.

As the fragmented administrative processes become more complex each year, they have also become institutionalized. By institutionalized, I mean that each one of those small waypoints connected by an arrow to some other function in the process represents an entire area of industry where dozens of companies, each with thousands of employees compete for dominance only within that silo of specialized function.

For example, let’s isolate just one of those little boxes (circled in red in Fig 1, above). Electronic data interchange, or EDI, is a government-regulated necessity for the secure transfer of health data between multiple organizations. 3 We find many technology companies offering EDI solutions including IBM, SAP, Microsoft, along with a hundred other smaller companies. It’s impossible to do without EDI in US healthcare because of the regulatory need for complex ‘HIPAA compliant’ security. 4 But similarly, it’s impossible to do without all of the other complex, rules-based functions as well. In the current multipayer system, the way it is now is the way it’s going to stayas long as Payers can continue to offload the increasing costs of the system’s inefficiencies to the Providers and the members themselves.

With so much technology and cost attributed to the billing process, you’d think that Payers would have gotten pretty good at it by now. But the billing process causes real pain for Americans. Chief among complaints are: incorrect bills, surprise charges, costs not covered by their plans, and erroneously denied claims. Bill corrections often take so long to fix that outstanding balances—for money not owed, mind you—have already been handed off to collection agencies and members’ credit ratings been damaged as a result. Sometimes patients don’t even know they are in debt collection until they search their credit score. And unpaid medical bills lead to other problems that can impact health. Patients requiring care often don’t get seen by their doctors for reasons related to non-payment of bills.

"If the rule you followed brought you to this, of what use was the rule?” ― Cormac McCarthy

Incredibly in the US, there is no universal, standard claims format. Some are still even paper-based. Payers struggle with providing the correct contracts to each Provider, and Providers struggle with each different claims format. Mistakes with the first claims submission in some systems are as common as 'clean claims.' Some unethical Payers deliberately make their claims process as difficult as possible, further complicating the process. 5 A mistake at any level kicks the claim out and the process starts over again. Oftentimes, valid claims, once rejected, are not re-submitted for a variety of reasons. Days, weeks, and months may be added to the revenue cycle for Providers due to delayed payments (and unpaid debt has ballooned across every Provider sector since 2015). In many cases, up to 80% of premium costs are spent dealing with claims, not medical care. It's really the convolution of so many variables that makes claims processing in the US an administrative nightmare ― and very close to the chaos it appears to be.

Henry J. Aaron, the noted American health economist described the system: “I look at the US healthcare system and see an administration monstrosity, a truly bizarre mélange of thousands of payers with payment systems that differ for no socially beneficial reason, as well as staggeringly complex public systems with mind-boggling administered prices and other rules expressing distinctions that can only be regarded as weird.” 6

The US stands alone in this Dystopic model of administrative inefficiency, which is reflected in almost any healthcare-related statistic you care to name. About a third of each dollar spent on healthcare in the US goes to supporting the waste, fraud and abuse in the system—over a trillion dollars each year.

The obscene amount of revenue generated by each company continues to fund unrelenting attacks on proposed changes to the status quo, even though consumer problems related to the billing process are legion. As insurance companies look to deny more health benefits in aid of profits, their influence on government policy has already produced more unreliable and unsafe insurance products through institutionalized deception (ie: high-deductible, low coverage insurance policies, otherwise known as ‘junk insurance policies’). 7 With deductibles, out-of-pocket expenses, and co-payments increasing each year, more patients are facing costs that they can’t afford. But causing their customers to suffer isn’t a problem taken seriously by the insurance companies—addicted to profits and outrageous C-Suite salaries, there’s no way around it. 8 Their lobbying and control of lawmakers with campaign re-election financing perpetuates their narrow, special interest to the unending detriment of the American public’s social, economic, and healthcare needs.

Claims Processing in Canada

"Masters in our own house we must be, but our house is the whole of Canada.”—Pierre E. Trudeau

For comparison, I’ve created the same claim adjudication flow for a healthcare system like Canada’s (represented by Fig 2), where every person is covered. Keep in mind that claims for exactly the same medical tests and procedures occur in Canada as the US. On their authority as accredited Providers, Canadian physicians make claims submitted electronically to the provincial health Payer. Adjudication between Provider and Payer happens much the same way as it does in the US. But that’s where the similarity ends because there’s only one plan and one Payerno redundant middlemen. There is no use for a third-party insurer and all of those acronyms that have become institutionally entrenched in the United States. Canadians don’t know what EDI, HRAs, HSAs, HMOs, PPOs, or ACOs are. In Canada, there's only need for one secure interface between Provider and Payer. To put it into American terms, Canadians are all members of the same plan with the same coverage. The single Payer represents the Insurer, who is dedicated to providing all services to every citizen on an equitable basis.

To make a claim for a service provided to a patient, a doctor or his office staff simply enters the provincial tariff codes 9 into a secure electronic database hosted by the Payer. For Providers, there is only one set of prices for each province based on a fee-for-service payment structure. These prices are maintained for years with an annual inflation factor added. For patients, there is nothing to do; no paperwork, no bills. Everyone receives the same comprehensive coverage through their provincial plan based on a system that covers all basic medical services. Because the provincial plan pays, no Canadian has ever been denied care or accumulated personal debt for a medical reason.

One Canadian clinic administrator can take care of all of the billing for a group of 10 to 20 doctors along with performing additional office tasks. That's a far cry from the US where it takes 7 administrators to handle the paperwork burden for every 10 physicians. 10 The administration function is made easier because there’s no such thing as pre-authorization on the front end and the adjudication process for claims is infinitely simpler. Depending on area of practice, 95-100% of claims are paid by the provincial Payer every 15 days. That’s the length of the revenue cycle in Canada—two weeks. The flow chart for the Canadian healthcare system looks like Fig. 2. It's clean, simple, and precise, with no need for any of the billion dollar technology features and onerous government regulations that must be applied to the same adjudication process in the US. And fraud? The system is so simple that fraud in the Canadian healthcare system is unheard of.

The comparisons that expose our differences

The medical billing process is a major driver of healthcare spending in the US. Technology has streamlined many other consumer/industrial sectors; everything from banking, to online purchasing, to media distribution, to ride sharing. But that’s not true for the healthcare claims process. The complexity of the process with its multiplicity of plans and contracts, medical codes, share of government and private funding, multiple accounts to draw from for the same claim, inconsistent deductibles and reimbursement levels, even within the same plan, make it impractical to apply algorithms. Algorithms are computations that deal with finite numbers of precisely defined successive states, eventually producing a final outcome. Algorithms have made consumer-facing companies like Amazon, Facebook, Snapchat, and Uber successful. But health insurance claims are more like snowflakes—no two are exactly the same, making algorithms that depend on ‘sameness’ difficult to adapt. No matter how many feedback loops you build into the process, there continue to be so many computational failures along the algorithmic flow that real humans must intervene every so often to resolve problems and move the claim forward. But human touches are expensive and time consuming—and make the fantasy of real-time adjudication a false choice.

"Change the rule and you will get a new number.” ― W. Edwards Deming

The administrative comparisons between Canada and the US are starkly revealing. It takes about 8 billing clerks to enter billing data for a large ~900-bed Canadian hospital. Contrast that to Duke University where their 957-bed hospital requires the employment of 1,600 billing clerks and an additional unknown number of billing consultants. 11

In a well-known comparative study, administrative overhead accounted for 11.7% of private plan healthcare expenditures in the US, compared to 1.9% for provincially administered plans in Canada. 12 Hospital administration costs in Canada are around 11% of total operational costs while in the US they are closer to 26%. And medical inflation rates in the US are running at over twice the inflation rate of Canada and other OECD countries.

In the topsy-turvy scenario that's playing out, healthcare stakeholders have placed higher value on a good revenue cycle strategy than the delivery of healthcare itself.

Meanwhile, back here in America, all healthcare stakeholders are hiring more low-level clerks and administrators to manage the choke-points. In this scenario there is no need for more physicians who would only generate more paperwork best to curtail the care to lessen the admin burden, and raise prices to pay for the new hires. In the topsy-turvy scenario that's playing out, healthcare stakeholders have placed higher value on a good revenue cycle strategy than the delivery of healthcare itself. The result? Higher healthcare premiums, higher co-pays, more high-deductible plans, a high rate of inflation that guarantees significantly higher insurance plan costs each year, and far less coverage than ever before. The other result that’s perversely and indefensibly higher is insurance company profitability. It doesn't matter that the insurers have failed spectacularly in their mission to provide affordable plans to Americans. It only means that ‘whoever has the gold makes the rules.’

Fig. 4 Growth in Physicians and Administrators US Healthcare System 1970-2017

Cleaving the Gordian Knot

The Canadians have created a plan benefit design that is comprehensive and their laws have given provincial governments the regulatory teeth to make it work. They understand that the more players who are allowed to represent more variable and alterable plans, the more administrative problems it creates for Providers and patients alike. The more Payers and plans what we like to call ‘choice,’ in America the greater the reduction in cost-effectiveness. Although opponents of 'socialized medicine' typecast it as 'Americans under the thumb of Big Government,' it's impossible to conceive of a system that's more bureaucratic, wasteful and corrupt than what we have now.

According to a Harvard study, we put up with $60 billion in overpayments (Americans being charged and paying more than they should have been billed) Annual care for the uninsured and under-insured generates $85 billion in uncompensated costs covered by us, the taxpayers. 13 There are $272 billion in medical billing fraud each year. 14 That means the American system 'absorbs' more in unrecoverable costs due to fraud each year than the entire Canadian healthcare system costs to run! (absorbs = recovered out higher premiums we all pay) There are also $262 billion in medical claims that are denied, leaving patients to scramble to either get the denial decision reversed or find an alternate means of financing their care. 15 Physicians give away $125 billion in free services for rejected claims each year. 13 Uncompensated care provided by American hospitals is over $38 billion per year. 16

Attempts to reclaim these losses add untold billions in administrative costs, not to mention the millions of hours of unpaid time spent by patient families attempting to get the medical care they need. In fact, every pointless and unnecessary cost in the system is recovered on the backs of the American consumer – you and me. That’s because insurers don’t endure the cost; they simply recoup losses by increasing premiums, raising deductibles and decreasing coverage.

Through all of this, it's key to remember that the number of uninsured Canadians is zero, and the personal debt accumulated for insured medical care is zero. Because the provincial plan pays, no Canadian has ever been denied care. Canada can offer this to everyone because they've wrestled their costs to the ground. Canada and Scotland have the lowest hospital administration costs in the world. 17 There is much to be said about the simplicity and practicality of viewing healthcare as a right, and not a commodity.

If we truly believe that the private sector can deliver cheaper healthcare more efficiently than the public sector, then all Americans deserve an explanation from both industry and lawmakers as to how private healthcare that costs twice as much as it does in countries with so-called ‘socialized medicine’ is benefiting us as taxpayers.

So let’s do some quick math for comparison. Canada's healthcare administration costs are roughly 15% of the total they spend on healthcare. Studies have shown that in the US, administration costs are at least 30% of the total of $3.6 trillion, or about $1.1 trillion. I’m not sure if we realize how much that is. The United States generates more waste in delivering healthcare than the GNP of over 90% of the countries on earth. For no good reason, and for no return, we are spending what the country of Australia produces in goods and services each year.

If instituting a single payer system like Canada’s would bring it down by half, why isn’t that something we would strive for? The Physicians for National Health Program (PNHP) figure of $590 billion in total savings per year if we switched to a single payer system would bring it down to 20%. That’s still high but we could eventually get it down to optimum levels consistent with global norms.

The Canadian healthcare system is not perfect. Compromises in the face of aging populations must be made until funding and capacities are realigned. Although Canadians worry about how to finance their healthcare system (news flash: every country does), they do a good job of providing care to everyone who needs it for less than half of what we pay here. They do it by prioritizing care for those who need it most, prudently managing the claims process and making sure that expenditures are kept within budget forecasts.

Conclusion

If a picture is worth a thousand words, then the two comparative process diagrams I’ve illustrated surely provide an eloquent answer to our healthcare problems. But the gains found by eliminating the tortuous claims process only occurs by moving to a simpler system. It’s time to take a serious look at how other countries deliver healthcare for half of what we pay before the harm the current system inflicts upon the country becomes an unrecoverable condition.

Talking Points:

1) Health insurance companies contribute directly to high healthcare costs in the United States by driving up prices and generating ever more administrative waste.

2) In the context of American healthcare as it is today, the word ‘choice’ is a doublespeak euphemism for barrier, denial, and unaffordable cost.

3) If everyone in a healthcare system was entitled to equal access to the same comprehensive services for a standard of healthcare based on best practices, the adjudication of a claim would look like Canada's.

4) The administrative simplicity of the single payer model does not waste financial resources that are more appropriately used for patient care.

5) There is no opportunity for fraud to exist in a well-managed single payer system.

6) There is much to be said about the simplicity and practicality of viewing healthcare as a right, and not a commodity.

7) "Socialized medicine" is not a negative result of healthcare reform. Public healthcare systems exist only to provide the people they serve with the greatest value in health services. Insurance companies are in business to increase their revenues and are therefore in a conflict of interest with the public good.

References

1. America’s Health Insurance Plans, “Membership", ahip.org. accessed June 11, 2019. https://www.ahip.org/about-us/membership/

2. Wikipedia contributors. "Health information technology." Wikipedia, The Free Encyclopedia. Wikipedia, The Free Encyclopedia, 24 Sep. 2019. accessed Sept. 30, 2019.https://en.wikipedia.org/wiki/Health_information_technology

3. OpenText Corp. “EDI Basics” 2019 accessed Sept 30, 2019. https://www.edibasics.com/edi-resources/document-standards/hipaa/

4. Institute of Medicine (US) Committee on Health Research and the Privacy of Health Information: The HIPAA Privacy Rule; Nass SJ, Levit LA, Gostin LO, editors. Beyond the HIPAA Privacy Rule: Enhancing Privacy, Improving Health Through Research. Washington (DC): National Academies Press (US); 2009. Glossary. Available from: https://www.ncbi.nlm.nih.gov/books/NBK9572/

5. American Association for Justice. 2019. “Tricks of the Trade: How insurance companies deny, delay, confuse and refuse” (Accessed Sept 30, 2019) https://www.justice.org/sites/default/files/file-uploads/InsuranceTactics.pdf

6. H.J. Aaron, “The Cost of Health Care Administration in the United States and Canada—Questionable Answers to a Questionable Question,” New England Journal of Medicine 349 , no. 8 ( 2003 ): 801 –303. https://www.nejm.org/doi/pdf/10.1056/NEJMe030091

7. Albrecht L. “New health insurance options are a lot cheaper—there’s just one problem” Market Watch. June 28, 2018, https://www.marketwatch.com/story/new-health-insurance-options-are-a-lot-cheaper-theres-just-one-problem-2018-06-27

8. Livingston, S. “Health insurer CEOs score big paychecks despite public scrutiny”. Modern Healthcare. April 22, 2019. https://www.modernhealthcare.com/insurance/health-insurer-ceos-score-big-paychecks-despite-public-scrutiny

9. Manitoba Physician’s Manual. Published April 1, 2019 Issued by the Manitoba Minister of Health. https://www.gov.mb.ca/health/documents/physmanual.pdf

10. Sakowski JA, et al. “Peering Into the Black Box: Billing and Insurance Activities In A Medical Group” Health Affairs. Vol. 28. Published 2009, https://www.healthaffairs.org/doi/full/10.1377/hlthaff.28.4.w544

11. Reinhardt U. Where does the health insurance premium dollar go? JAMA Forum. June 13, 2017. http://jamanetwork.com/journals/jama/fullarticle/2631518. Accessed July 23, 2019. https://newsatjama.jama.com/2017/04/25/jama-forum-where-does-the-health-insurance-premium-dollar-go/

12. Woolhandler, Steffie , Terry Campbell , and David U. Himmelstein, Costs of Health Care Administration in the United States and Canada, New England Journal of Medicine 349, June 2003.: 768, 775. https://www.nejm.org/doi/full/10.1056/NEJMsa022033

13. Andreason S. Medical practices facing woeful collection rates. Feb 2017. Bravado Health News. https://www.bravadohealth.com/2017/02/13/medical-practices-facing-woeful-collection-rates/

14. Kesselheim AS, Studdert DM. Whistleblower-Initiated Enforcement Actions against Health Care Fraud and Abuse in the United States, 1996 to 2005. Ann Intern Med. 2008;149:342–349. doi: 10.7326/0003-4819-149-5-200809020-00009. https://annals.org/aim/article-abstract/742547/whistleblower-initiated-enforcement-actions-against-health-care-fraud-abuse-united

15. Change Healthcare. Change Healthcare Analysis: $262 Billion in Healthcare Claims Initially Denied in 2016. June, 2017. https://www.changehealthcare.com/press-room/press-releases/detail/262-billion-in-healthcare-claims-initially-denied-2016

16. America Hospital Association Uncompensated Care Fact Sheet. Dec 2017. American Hospital Association. https://www.aha.org/system/files/2018-01/2017-uncompensated-care-factsheet.pdf

17. Himmelstein D., A Comparison of Hospital Administrative Costs in Eight Nations: U.S. Costs Exceed All Others by Far. The Commonwealth Fund. Sept 2014. https://www.commonwealthfund.org/publications/journal-article/2014/sep/comparison-hospital-administrative-costs-eight-nations-us