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Private insurers cannot simply adopt Medicare efficiencies

February 9, 2021

Topics: Quote of the Day

By Robert P. Kocher, M.D.
JAMA, February 2, 2021

The US health care system is famous for its expense and its waste.

The US health care system is administratively complex by design. Inherently, a multipayer system offering many variations of benefits, paying for care in a fragmented delivery system, and using a multitude of different payment models is administratively complex. Each health plan incurs cost to build sales and marketing function, deliver customer service, possess actuarial and benefit design functions, form a health care network, credential physicians and other health care practitioners, develop payment rules, set up payment operations, and ensure regulatory compliance.

Medicare achieves lower administrative expenses because it has no sales and marketing expenses, no network expenses, standardized benefit design, and simpler payment processes.

Essentially, administrators for payers and health care centers are trying to accomplish a relatively straightforward goal: ensure that a patient is eligible for care based on their insurance and benefit design, the patient receives care from qualified clinicians, the care is appropriate and of high quality, and the correct amount is collected from the patient and paid to the clinicians. Completing this process requires an extraordinary amount of labor. Hospitals employ up to 1 full-time person per bed to support billing. In total, nearly 4 full-time employees per physician work on administrative tasks, and this ratio is increasing.

Both payers and health care organizations have incentive to keep adding more people and creating new processes to gain temporary economic advantage. Payers add more prior authorization steps, increase first-pass claims denials, and use payments as a tool to collect additional data points on claims for short-term medical loss ratio gains. Health care organizations work with electronic health records to add decision support to guide clinicians to more highly paid diagnosis codes; hire scribes, coders, and chart reviewers to find more items to bill; and work with third parties to get more procedures authorized and denials overturned for short-term revenue gains.

Because the US health care system is so fragmented, there is not a clearly dominant entity to set administrative standards and force adoption. The federal government is the largest payer, but its market power is not concentrated because its payments flow through hundreds of different programs, including 50 unique Medicaid programs, Medicare, hundreds of Medicare Advantage plans, ACA insurance exchanges, federal employee health benefits, the military health system, Veterans Affairs, and the Indian Health Service. Each of these programs has governance over its administrative rules. Some programs, such as Covered California, use their local market power to force standardization of administrative elements, such as benefit design. The private sector alternatives lack either geographic reach or local market scale. The largest private sector entities are the payers United Healthcare and Anthem. However, neither of these companies are positioned to be administrative standard setters. United Healthcare lacks local market scale because it usually only accounts for 10% to 20% of patients for clinicians. Anthem lacks geographic scale because it only operates in 23 states. Only the Medicare system operates in all states and is accepted by nearly all health care organizations, which means changes to Medicare’s administrative rules are adopted nearly universally. Medicare is also a large payer, through the Medicare Advantage program, to the largest commercial payers, which could enhance Medicare’s ability to serve as an administrative standard setter. This makes Medicare the only participant with the market power to set administrative standards.

The federal government can use regulatory authority to reduce administrative costs. The opportunity today is both larger than in 2010 when the ACA targeted administrative simplification and more readily capturable as a result of improvements in information technology. The authority derived from the ACA should be used to implement the third wave of administrative simplification regulations, which requires autoadjudication of claims and prior authorizations and, as a by-product, creates long-awaited payment system and electronic health record interoperability. The Trump administration launched the Patients Over Paperwork program to reduce administrative burden. This program has simplified documentation for office visits and reduced reporting burden for many programs, and claims to have saved health care organizations an estimated $6.6 billion and 42 million hours of labor through 2021. More opportunity likely exists to rationalize the more than 1700 metrics that Medicare collects, which is estimated to incur $15.4 billion in annual data collection and reporting costs. There are additional opportunities that technology such as artificial intelligence may be capable of addressing, including a national clinician credentialing system; risk adjustment relying on data science models instead of physicians coding hierarchical condition categories; and identifying fraud, waste, and abuse.

Dr Kocher reported being a partner at the venture capital firm Venrock, where he invests in health care technology and services business, serving as a board member for Premera and Devoted Health.



By Don McCanne, M.D.

This article acknowledges the tremendous administrative waste in the U.S. health system and concedes that it is administratively complex by design, employing a multipayer system, each with its separate, complex administrative functions, serving a fragmented delivery system.

The author concedes the efficiency of the Medicare system, but then proposes to apply Medicare functions to the private insurance industry, leaving the source of the administrative complexity intact.

This compulsion to search for private sector solutions to what should be a government function, in this case health care financing, has perpetuated our costly but inefficient health care financing system. The author, Dr. Robert Kocher, is a partner in Venrock, a venture capital firm, which states on its website, “Our collaboration – engagement, network, passion and experience – gives entrepreneurs the unfair advantage needed to win, and win big.” Does this translate into giving the private insurance sector an unfair advantage so that it can win big?

We do need to do something about the profound administrative waste, and Medicare does have some lessons to offer, but considering that the system is complex by design, that means that we need to change the design. What we need is a single payer, improved Medicare for All. Providing the private insurance sector some Medicare tweaks simply will not do.

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About the Commentator, Don McCanne

Don McCanne is a retired family practitioner who dedicated the 2nd phase of his career to speaking and writing extensively on single payer and related issues. He served as Physicians for a National Health Program president in 2002 and 2003, then as Senior Health Policy Fellow. For two decades, Don wrote "Quote of the Day", a daily health policy update which inspired HJM.

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