Rapid Innovation in the Health Care Payment System?

Jun 15, 2007, 9:24 AM, Posted by Al Shar

The McKinsey Quarterly recently released an article (registration required to view) entitled "Overhauling the U.S. Health Care Payment System." Since their tag line read: "During the next five years, rapid innovation may restructure the value chain of health care payments and change the sector's balance of power," and since in Pioneer we focus on rapid and disruptive innovation, I was intrigued.

In the article, the authors repeat what has been a familiar refrain: the U.S. health care payment system is hugely inefficient and ripe for transformation. They state that the system processes $1.9 trillion a year, that the system consumes about 15 percent of that as compared to about 2 percent for retail transactions and that consumer-driven health care plans will likely drive up this percentage (because of non-payments). One of their suggestions is that intermediating consumer-to-provider payments through credit lines, debit cards with financial institutions potentially becoming the center of this process will introduce efficiencies and savings. Frankly, I'm a little tired of the comparisons between retail commerce and the funding of health care.

I think that, while there's a lot in the article that is worth considering, there are also some significant problems with both the data and the focus. Maybe it's me, because I taught statistics for many years, but I become suspicious when numbers and focus don't jibe. For example, the $1.9 trillion includes, for some undefined reasons, $140 billion from "taxpayers" (their term) to public health and research and $100 billion from foundations. I know that's under $250 billion, but a quarter of a trillion here or there does add up to some real money.

In reality, there seem to be two (perhaps three) distinct cash flows at work. The first is direct payments from consumers to providers; this totals $250 billion and, according to McKinsey, incurs a loss of $40-$60 billion. The second is payments through a payer; this amounts to $1,260 billion with costs of $150 billion. Using these figures, the direct payment overhead is 16-17 percent. For the payment stream that moves through payers, the overhead is 10.5 percent.

In addition, the figures for payments through a payer include a mix of government and private payers with no indication of the difference. I would like to have seen some distinction made here, especially since taxpayers account for almost 60% of the funds handled by payers.

McKinsey does provide some valuable insights about ways of addressing the multitude of problems, but by not differentiating among payment sources, and by not clearly matching solutions with problems, I'm afraid this report will suffer the same fate as previous insightful studies; they allow the authors and some readers to feel a bit superior as nothing much happens.

This commentary originally appeared on the RWJF Pioneering Ideas blog.