Healthcare Finance

Why U.S. policy needs to focus on pruning the healthcare transaction thicket

April 27, 2024 8:02 am

Despite its huge disruptive impact, the Change Healthcare cyberattack seems to be fading from the headlines even as the after-effects of this disruption linger. What remains, however, is the unsettling awareness not only that the U.S. healthcare payment “system” is not secure, but also that the hospitals and physicians’ offices we all rely on when we become ill remain at risk of further damaging attacks.

The nearly $5 trillion U.S. healthcare payment system, of which Change Healthcare is a part, is a monument to mistrust. It is a 24/7 inescapable panopticon — a complex surveillance structure where every movement however minute can be tracked and recorded from a central location — powered by AI algorithms and fueled by paranoia and insecurity.a Neither physician nor patient can move a muscle without feeding it information, time or dollars. Physicians spend as much time justifying their decisions as they do caring for us — a major reason many are quitting medicine well short of a full career. b

Transaction mania

One statistic from the still-unresolved Change Healthcare disaster has really stood out for us. Prior to the attack, Change Healthcare was processing 15 billion “transactions” annually, covering perhaps about one-third of all healthcare spending — about $1.5 trillion. If that estimate is true, that means there are about 130 healthcare payment transactions per year for every man, woman and child in the United States.

It is imperative that we get a handle on these myriad transactions to save our healthcare system from implosion. The central health policy question of the next decade ought to be: How do we cut back this thicket of transactions and free physicians and patients to work with one another?c

Only about 40% of these transactions are claims for payment. The rest are arcane items that most Americans would not recognize, such as prior authorization requests, eligibility verifications and explanations of benefits, to name just a few. Almost all of them require some form of manual human input — from patients, from clinicians and from revenue cycle staff.

It takes too much time and costs too much money for healthcare providers to get paid. Estimates for the overall yearly cost of billing and insurance-related (BIR) administrative expense vary, but it may be as high as $496 billion, according to a report by the Center from American Progress (CAP).d

Physicians spend 27% of their total cost on revenue cycle and, by one estimate, spend nearly $83,000 per physician on billing and justifying care decisions.e Hospitals get most of the blame for the high cost of healthcare.

The previously cited CAP report estimated that 21% of total hospital expenses are for “administration” and 41% of that — equaling 9% of total expense — is BIR costs. The authors know of one academic health center that was spending 13% of its total cost on revenue cycle expense using two separate systems — one for the faculty physicians and one for the hospital itself — generating two bills for each medical encounter.

Elusive simplification

The U.S. healthcare financing system cannot do “simple” to save its life. The complexity and expense of healthcare payment is a direct consequence of the highly fragmented financing system. The nation has multiple overlapping healthcare programs addressing different constituencies — people over the age of 65, people living in poverty, veterans, active military service personnel, Native Americans, workers in firms large and small and, thanks to the Affordable Care Act, people who fell between the cracks of all those different systems. Each of these programs has its own rules, benefits structures, payment rates, documentation requirements, data systems and data interfaces.

Then there are the health plans that cover most of those groups. A few countries like Canada have a single payer — in Canada’s case, the provincial government. In our nation, there are more than 1,100 health insurance plans, each of which has its own rules for eligibility and medical necessity, its own networks and provider contracts and rate structures.f

The CEO of one of the larger national health insurers once told us “We aren’t one health plan; we are 55,000 health plans, one for each of our corporate customers, large and small.”

And then, finally, there are the intermediaries, like Change Healthcare, that are technology vendors to the plans and providers and manage the flow of transactions that lead, eventually, to physicians, hospitals and pharmacists getting paid. We have learned recently how porous and vulnerable all this plumbing and wiring is.

Pruning the thicket

There are conceptually elegant simplifications that do not pass the “feasibility test.”

The single-payer approach is one of them. It would abolish the 1,100 health plans and have one government-run health plan that covers all those entitled groups. America has a political system where corporations like health plans, pharmaceutical companies and vendors are considered people whose copious political spending is considered constitutionally protected “speech.” We have politically powerful constituencies, such as people 65 and older and veterans, who are wary of any significant alteration of their “own” healthcare entitlement. For these reasons, the single-payer approach is not likely to happen any time soon.

Harvard University’s David Cutler has proposed a dramatic alternative structural simplification which has some conceptual appeal.g He suggests that the nation keep the 1,100 plans and separate entitled groups but consolidate all those payment intermediaries into a single publicly chartered clearinghouse like the Automated Clearing House (ACH) system for banking, with a single set of rules for coverage, medical necessity and payment.

There are two problems with the proposal.

One is data security for the $5 trillion payment system in an era of state-sponsored cyberterrorism. The nation’s recent bad cyber-experience with a $1.5 trillion pipeline argues against having an even larger single point of failure.

The other is that those payment intermediaries are also a system of social control operating on behalf of the insurers. ACH isn’t telling businesses that they can’t buy a car, they are paying too much for it or the car is a lemon. How much of this social control are employers and health plans willing to part with?

How we can prune transactions

Whatever we do, we need to somehow reduce the number of U.S. healthcare transactions, which is a complex consideration. Here are just a few practical steps we can take:

  • As a policy goal, strive to cut the number of transactions by a minimum of 50%, starting with the most toxic and labor-intensive transactions like prior authorization, a large fraction of which are still paper-driven. (A 2021 report, for example, noted that only about 21% of prior authorizations were adjudicated electronically.)h
  • Advocate for a single set of business rules and data requirements, which would apply to all 1,100 health plans and to care systems and clinical specialties and all programs that receive or rely upon federal funding.
  • Apply prior authorization only to the highest cost-interventions (e.g., complex surgeries, high-cost cancer chemotherapy regimens, immunotherapies).
  • Give an easy pass to institutions or practitioners with histories of responsible conduct, so they may skip the prior authorization process altogether.
  • Compel plans to reimburse providers for the cost of providing all that information. Estimates are that surgical case documentation requires $215 in clinician time per case.i

There are other things we could do as well, such as consolidate transactions. We could stop paying primary care physicians for each visit, test and procedure and simply pay them a monthly stipend covering routine care for each of their regular patients (including virtual visits). We could expand the DRG envelope to the pre- and post- hospital care patients with more complex problems. Or as many health systems devoutly wish, we could delegate the risk for an entire year’s worth of care for a patient from health plans to responsible health systems (e.g., “delegated risk capitation).”

Or we could do nothing and wait for the next attack and the next, perhaps even more destructive interruption in care system cash flow. The huge risk is that we run out of caregivers interested in practicing under the panopticon’s unblinking gaze long before we run out of money.

 We need to create a new simplicity — and a heightened level of data security for healthcare transactions — and cut the absurdly high costs of healthcare. Less whining and blaming. More action. 


a. Goldsmith, J., “Who to blame for health costs: The poisoned chalice of ‘moral hazard,’” The Health Care Blog, Feb. 8, 2024; and Ross, C., and Herman, B., “Denied by AI: How Medicare Advantage plans use algorithms to cut off care for seniors in need,” STAT, March 13, 2024.
b. Tai-Seale, M., et al., “Electronic health record logs indicate that physicians split time evenly between seeing patients and desktop medicine,” Health Affairs, April 1, 2017; and Henry, T.A., “Medicine’s great resignation? 1 in 5 doctors plan exit in 2 years,” AMA, Jan. 18, 2022.
c. Gilbert, D., et al., “Health-care hack spreads pain across hospitals and doctors nationwide,” The Washington Post, March 3, 2024.
d. Gee, E., and Spiro, T., “Excess administrative costs burden the U.S. health care system,” CAP, April 8, 2019.
e. Morra, D., et al., “US physician practices versus Canadians: Spending nearly four times as much money interacting with payers,” Health Affairs, Aug. 30, 2011.
f. National Association for Insurance Commissioners, U.S. Health Insurance Industry Analysis Report, 2021 annual results.
g. Cutler, D.M., Reducing administrative cost in US health care, policy proposal, The Hamilton Project, March 10, 2020.
h. Sahni, N.R., et al., Administrative simplification: How to save a quarter-trillion dollars in US healthcare, McKinsey & Company, October 2021.
i. Richman, B.D., et al., “Billing and insurance-related administrative costs: A cross-national analysis,” Health Affairs, August 2022.


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